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FDI policy lacuna worries auditors

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The government’s intent to promote domestic audit firms through the recently announced FDI policy faces fresh controversy due to fine print lacuna. The current definition may just lead to more business for multinationals, say industry trackers.

The government statement reads, “… Whenever the foreign investor wishes to specify a particular auditor/audit firm having international network for the Indian investee company, then audit of such investee companies should be carried out as joint audit, wherein one of the auditors should not be part of the same network.”

However, this could mean that a multinational may appoint PricewaterhouseCoopers (PwC) as one auditor and opt for EY as another.

“While the government’s intent seems to be that domestic audit firms also benefit, this is not articulated now,” said Vinayak Padwal, partner, Sharp and Tannan, a domestic professional services firm. “We hope this would be ratified in detailed documents. Domestic firms must be involved in joint audits, as too much concentration in hands of a few audit firms puts the whole India growth story at risk, if something were to go wrong with one firm.”

Many domestic firms have been pushing for some impetus from the government for a level playing field.

They claim that the multinationals including the big four — EY, PwC, Deloitte and KPMG — along with Grant Thornton and BDO, have disproportionate size of the total audit pie.

Many, however, claim they are Indian firms for all practical purposes. Some are merely part of the network but in several instances, multinationals tend to invest money in the Indian practice.

The FDI policy could also be in line with the European Union (EU) policies, say experts. “It seems to be that the intent is to address the concern on choice of auditor and where restrictions are imposed by foreign investors.

EU banned such restrictions some time ago. India appears to address this in a different but smart way — where choice of auditor is specified by a foreign investor the need to also appoint another joint auditor,” said Vishesh C Chandiok, national managing partner, Grant Thornton India LLP.

Many foreign private equity firms and multinationals tend to put caveats in their contracts where their India practice is mandated to choose one of the top multinational audit firms. This, say some experts, is against interest of Indian firms. This point, however, is addressed.

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