ICAI to Look into Foreign Audit Advertising

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Op/Ed Commentary: Chris Devonshire-Ellis

Feb 17 – The Institute of Chartered Accountants of India plans to investigate surrogate advertising practices of international firms with a presence in India and awards given by them for entrepreneurial excellence and the promotions for such events.

The new president of the institute, Mr. Amarjit Chopra, has indicated that foreign firms would be investigated for such practices. The issue highlights the difficulties of developing the audit profession in India to both attract more talent and to develop the practice to be able to deal competently with international accounting standards. Currently, only partnership firms registered with the ICAI are allowed to undertake audits in India. Some of these firms have tied up with international entities such as the Big Four audit firms to be part of their global network. The international firms have presence in India mainly through private companies, which undertake consulting and advisory activities.

However, when international firms organize award functions on entrepreneurial excellence, the local audit firms associated with them also get some promotion for their audit capabilities – this goes against the interest of the smaller audit firms here. Consequently, the audit profession has reached a tipping point where it is in the best interests of the smaller practices to prevent the growth of larger firms. This situation is also encouraged by the regulatory regime concerning audit firms in India, which limits the numbers of partners, and does not permit professionals qualified in more than more discipline – say for example law – to practice in both fields.

India’s audit profession is therefore highly politicized with smaller firms effectively keeping the profession capable only at a small local level. This is a growing problem as Indian businesses move to international markets and foreign businesses move to India. Smaller firms simply do not have the resources to cope with the increasing complexities of international standards. A case in point is the Satyam scandal, in which a major listed company was found to have committed fraud with accounting malpractice on a massive scale. India simply did not possess the audit talent necessary to deal with such complexities or ability to challenge the company’s directors.

“For certain people (in India), profession is not a profession. It is a business,” says Mr. Chopra. “An Indian firm is not allowed to give any form of ads. However, some one can come here and take up surrogate practices – give ads for entrepreneurial awards also. We are definitely going to look into those aspects,”

He feels that the government also needs to look into such practices and take an appropriate view. “All those firms that claim they are part of an international network are not willing to part with their agreement,” he says. “ You float a private limited company having directors who are partners in a firm and you take the internal audit and in the main firm, you do the statutory audit. If those are the best practices, then God save us. They document independence the most. As corporate governance cannot be achieved by a corporate governance report itself, independence cannot be achieved by mere documentation.”

Mr. Chopra’s decision to look into such practices may well leave the smaller firms satisfied that for the time being, the development of larger firms with more resources may have been postponed. However, the detail lies in his words concerning taking views from government. If India is truly to develop its professional services to embrace international standards and competencies, then it needs to break the tyranny of smaller firms politicizing the issue, open up the sectors, and create a playing field where the very best and brightest can contribute to an industry that currently remains far behind the needs of India’s largest domestic companies.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and is responsible for the firm’s activities in India, where the practice maintains five offices and advises on foreign direct investment legal and tax structures into the country. He may be contacted at india@dezshira.com.