Order against EY affiliate: Big Five protest, accuse ICAI of “bias”

Large firms argue that over 100 domestic audit firms have international affiliations but the institute is going after just the big names. (Reuters)

A week after the Institute of Chartered Accountants of India’s (ICAI’s) action against S.R. Batliboi & Co (SRBC) and its network firms, large audit firms have accusing it for being “biased towards the mid-, small-sized audit firms and individual auditors.”

Speaking to FE, the large firms have also raised questions on the sanctity of the ICAI’s orders given that the members who are passing orders against the Big Four are “directly competing with them.”

“The council at ICAI is elected by members. Historically, the partners of the large audit firms don’t enter the election process. There’s a large crowd of members within ICAI – outside of the Big Five firms – who play a crucial role in electing the council. It’s therefore important for the ICAI council to keep the small and mid-sized practitioners happy,” said a partner at top audit firm on condition of anonymity.

When contacted, an ICAI spokesperson said the institute would refrain from commenting on the matter, as “disciplinary committee is an independent body.”

Large firms argue that over 100 domestic audit firms have international affiliations but the institute is going after just the big names. They also point out that international affiliations are important to build capacity. It helps the domestic and international firms in building common tools, technology platforms, training modules and governance structure, they say. “The cost of services in such cases is shared between network firms in the proportion of their sizes. But we don’t share profits,” said audit head at another large audit firm, again asking not to be identified.

In fact, a partner at the large audit firm also said that this issue was settled by the ministry of corporate affairs (MCA) in its 2018 report where the government gave a “clean chit” to the audit firms with international affiliations.

The three large audit firms that FE spoke with have all accused ICAI of having differential behaviour for large and mid-sized firms. For instance, when ICAI passed the order against SRBC, an affiliate firm of EY India, and its network firms, it penalised the retired partner Raj Kumar Agrawal with a fine of Rs 5 lakh and removed him from the institute’s register of members for three years. In comparison, when the institute passed a similar order against Sharp and Tannan, the penalty levied on managing partner Shreedhar Kunte was just Rs 1 lakh with removal from the register of members for just 45 days. “The discrimination is clear. ICAI used to have international networking guidelines but they have withdrawn them,” said senior partner of another audit firm.

Experts said that the core issue revolves around the independence of domestic firms within the larger network of the Big Four firms. For instance, in the ICAI’s latest order, it said that the visiting cards of SRBC staff contain information which “signify virtual address relating to Ernst & Young (international entity) and the email ID used by the respondents depicted their close association with the international entity.

The respondent firms have failed to point out as to how they were able to maintain their independence when the domain that was being used belonged to the multinational entity. Hence, the committee viewed that the said practice was adopted by the respondent firms to reap benefits of affiliation with EYG for influencing the prospective clients/public at large, which was a professional misconduct…” said the ICAI order.

“Just because we are part of a global network doesn’t mean that we are controlled by anyone outside of India. Their control is only limited to ensure that audit quality standards are maintained across the network firms. Networking is the need of the hour. It helps us in generating better fees. ICAI has thus far refused to listen to any arguments presented by the large firms,” said a senior partner quoted above.

Several domestic affiliates of Big Four have already obtained stay orders from various High Courts against the disciplinary action from ICAI.

The issue of ICAI versus Big Four goes back to 2009 when ICAI’s high-powered committee issued a report against Big Four audit firms. This was followed by a judgement from apex court in 2018 which directed the government to form a committee to regulate the actions of multinational accounting firms (MAF).