The centre has brought in changes in the foreign direct investment (FDI) policy with respect to audit firms, a move aimed at strengthening corporate governance in firms with foreign investment, and indirectly promoting local audit firms.
As per the FDI policy changes cleared by the cabinet on Wednesday, a foreign investor cannot have an Indian firm, in which it has invested, audited by a company of their choice, unless it is a joint audit with an independent auditor.
This means that the second auditor cannot be part of the global network of the first auditor. The existing foreign investment policy does not have any stipulation about the appointment of auditors by Indian companies that receive foreign investments.
“It has been decided to provide in the FDI policy that wherever 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,” the press statement said on Wednesday.
Analysts point out that this change in policy, while improving corporate governance standards, will boost the business prospects of local chartered accountant firms at the expense of large global audit firms that have a large presence in the Indian audit space as well.
Deloitte, KPMG, PwC and EY are some of the large global firms that have a significant presence in the Indian audit space through their affiliates.
“A company is unlikely to appoint two of the four large big 4 firms as an auditor. So, in most probability, the second auditor will be a local CA firm. In these times, there is no place for protectionism,” said a partner at one of the big four firms, who did not wish to be identified.
These changes will come into effect after they are notified by the department of industrial policy and promotion through a press note.
“By suggesting joint audit in companies with foreign investment, the intention of the government perhaps is to add an extra layer of good governance. Joint audit is a well established practice in India,” said Kamlesh Vikamsey, former president of accounting rules maker Institute of Chartered Accountants of India. Vikamsey also said the move to have joint audit in such firms could eventually help Indian audit firms.