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ICAI proposal may hit audit firms here
January, 28th 2009

Indian audit firms, that informally work as the audit arms of big foreign accounting firms, may soon have to sever their foreign affiliations, if accounting and auditing rule maker ICAI has its way.

In what could be a fall-out of the Satyam account fabrication episode, the Institute of Chartered Accountants of India (ICAI) has started pitching for restraining all foreign firms from associating with domestic firms that do statutory audits
in India.

Since foreign accounting firms cannot do audit work in India because the country has not yet opened up this sector to foreign firms under WTO discussions, they tie up with a local audit firm to offer this service to their clients. Another reason for the tie-up is that an audit firm that advises a client, cannot do statutory audit for the same client due to conflict of interest issues.

The ICAIs proposal, if vetted by the government, may create a major turn-around in the operations of the so-called Big Four league of audit consultancy firms in India a group which comprises Ernst and Young, KPMG, Deloitte and Price WaterhouseCoopers (PwC). Even as the Big Four league does not do audit in their names, ICAI wants to put an end to such business associations. What cannot be done directly, should not be done indirectly, said Ved Jain, president of ICAI.

Mr Jains concern, which too stems from the WTO perspective, restricts foreign accounting firms from doing audit work in India. These firms, which are officially entitled to do management consultancy work in India, have tied-up with locally registered firms to do audit in the latters name. Management consultancy is a very loosely used term, and often involves auditing work, said Mr Jain.

If ICAIs view is accepted by the government, foreign consultancy firms like Ernst & Young, KPMG and Deloitte may lose their audit associations here. In India, Ernst & Young has tied-up with SR Batliboi & Co, KPMG with BSR & Co and Deloitte with CC Choksi & Co as their audit affiliate. Price Waterhouse is the Indian audit arm of its global parent PwC, and all its employees are Indians.

An audit partner with one of the Big Four audit firms said on condition of anonymity that under the present set up, foreign consultancies can share in common with its Indian affiliate, 20% of its partners. Experts said that this move is highly detrimental for the independence of the auditors.

They said while management consultants are required to safeguard the interests of their clients, auditors job is to certify financial statements as a true and fair account of the companys health. However, ICAIs move to seek a bar on foreign consultancy firms doing audit through their Indian dummy faces, is not going to be an easy task, a government official, who asked not to be named, said.

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