Regulatory scrutiny of audit firms may put tech industry in a spot

As the big four global audit firms and their affiliates face regulatory heat in the country owing to alleged auditing lapses, domestic IT services companies may have to brace for disruption in case any restriction is imposed on these audit firms.

Currently, Deloitte, EY and KPMG with their associates work as statutory auditors of most of the top league domestic IT services firms. KPMG affiliate BSR & Associates for instance works as the statutory auditor for market leader Tata Consultancy Services (TCS). The audit firm, which got the mandate in 2017, will continue as its auditor till financial year 2022.

Infosys counts Deloitte Haskins & Sells as its current auditor, which has been appointed in FY17.

Deloitte works as statutory auditor for IT major Wipro apart from mid-tier IT services firm, Mindtree. 

For Noida-based HCL Technologies (HCLT), Batliboi & Co, which is an EY affiliate firm, used to be the auditor till the last fiscal. With the completion of its tenure, HCLT has notified that the company would consider appointment of BSR & Associates as its statutory auditor in its next annual general meeting.

With such deep engagement levels, industry experts said that any adverse ruling on these top firms by regulator could hamper the operations of domestic IT firms.

“It is definitely a matter of concern as at the end of the day, all the big fours today would be auditing about 65 per cent of top 500 companies in India. Therefore, this is something, the corporate India should have an eye on,” said Amit Tandon, managing director of corporate governance and proxy advisory firm IiAS. 

“We have to see what kind of strictures will be imposed by the regulators in some of the recent cases.”

Owing to many alleged auditing lapses, the regulators have either imposed restrictions on the audit firms or are seeking to do so. 

For instance, Ministry of Corporate Affairs have sought approval to ban Deloitte Haskins & Sells, and BSR & Co for five years in connection with the Infrastructure Leasing & Financial Services (IL&FS) case. Similarly, the Reserve Bank of India has recently banned SR Batliboi & Co from auditing commercial banks for one year starting April, 2019.

The markets regulator had also banned PwC for two years starting 2018, owing to lapses in the Satyam Computer Services Case.

“Compared to financial services and related sectors, IT services industry is much more transparent. So, such scrutiny will not have any impact on the domestic software services firm," said V Balakrishnan, chairman of Exfinity Venture Partners & former chief financial officer and board member of Infosys. "In case of ban, the regulator will provide transition period to the company for adjusting to the disruption.”