Joint audit offers multiple advices for the same fee: Raghu Aiyar

Interview with CEO & senior partner, KS Aiyar & Co

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Recently a group of Indian audit firms, led by KS Aiyar & Co, arguably the oldest chartered accountancy firm in the country, pitched for making the practice of joint audit mandatory. Raghu Aiyar, CEO & senior partner, KS Aiyar & Co, explains to Sudipto Dey how joint audit could help in curbing the growing influence of multinational audit firms in the country. Edited excerpts:

What is joint audit?

Joint audit is an eminent tradition that has stood the test of time. It is systematically visualised in Indian auditing standards. This includes allocation of work between joint auditors, their responsibilities, escalation of major issues (only) for joint discussion, and the opportunity to disagree by a separate report if one of the two or more auditors fails. The mechanics of joint audit are well set in not just the standards, but also in practice. Needless to say, joint audit is useful for larger companies.

How many countries have adopted this practice?

The joint audit approach has been tried and tested in several countries. This includes France, northern Europe, and our own public sector undertakings and nationalised banks, among others. Good governance is a natural by-product of the joint audit practice. Large corporations and their shareholders stand to gain.

Could you be more specific on the benefits of joint audit?

Firstly, two minds are always better than one. Audit is based on judgment, it is an opinion. Audit is not an accounting exercise. Businesses need auditors who are balanced. Two or more views provide better perspective. Moreover, joint audit has a built-in safeguard - it mitigates systemic risks. The objective of "rotation of firms" is accomplished directly, through a simple mechanism. Also, joint audits are more cost efficient. Joint audit doesn't double the cost while doubling the advice. Fees are a function of time. Work is divided. Fees under joint audit are substantially static. Joint audit defeats dangerous and corrosive anti-competitive concentration of work which is against India's national interest.

How will bringing in joint audit help in mitigating the adverse impact of audit concentration?

This is a burning issue for the Indian audit firms (IAFs) and joint audit is the solution proposed by IAFs. The multinational audit firms (MAFs) in India have cornered audit revenues in excess of Rs 5,000 crore. The number of IAFs with more than 12 listed audits has reduced to only 20. Even these firms are unviable and weak. They are neither cross-subsidised by consulting, nor flush with foreign direct investment, nor do they enjoy a surrogate global brand power. All these issues were identified in two reports of the Institute of Chartered Accountants of India (in 2003 and 2011) as illegal. The total revenue of the top 20 IAFs is perhaps under Rs 200 crore. IAFs are therefore on the verge of being wiped out. Undercutting (of fees) by the MAFs is rampant ever since it came to be considered "ethical" a few years back. Adding to this, MAFs plan to make ingresses into IAFs' client base with the upcoming practice of firm rotation. Joint audit, with the requirement of at least one IAF when the other is an MAF, redistributes work amongst hundreds of local and regional Indian audit firms which get oxygen for survival.

Why are MAFs resisting this proposal?

The reasons are quite obvious - joint audit takes a swipe at their fee. It provides an eminent, long-term alternative to the MAF monopoly.

If joint audit is made mandatory, would IAFs be open to sharing their clients with MAFs?

If a firm meets the requirements of the rule calling for mandatory joint audit, it would be equally applicable to all clients, be it of IAFs or MAFs.

How do you respond to the criticism that IAFs have not invested enough in systems and processes to build up scale?

The IAFs have been stressed financially since the entry of the MAFs through the consulting route and surrogate branding. There has been pressure on the IAFs of losing their best clients, best partners and best staff to the global MAFs who enjoy deep pockets. When the house is on fire, there is very little bandwidth - financially, and even less headroom, to do the rest. Given a level-playing field, IAFs can perform better than MAFs while maintaining the high standards they are known for.