The recent news which upheld the audit quality is the suspension of the auditor of Big Four Firm. The auditor expresses the financial position of a company at a given date. The skills of Indian chartered accountants get trained in a challenging environment. Big four Companies collaborate the Indian talents with foreign expert teams. The competition in the auditing sector is hyper-competitive. The Big four companies have their training division to enhance the quality. NFRA impose the material difference in the auditing process. NFRA says that the Big Four Companies need to disclose the auditor selection process. This blog talks about the quality of the auditing process. Competition in the market is related to the cost and quality of service. Auditors learn by experience and professional ethics. Fair competition is a good sign of development.
Why was the auditor sued for professional misconduct?
The financial statement of 2011 and 2010 consist of the details of grants which brought forward the issue. The statement shows accrual expenses of $39, 30,000/- and $1, 80,000/-. From 2009 to 2011, the service charge was as 120, 32,56,658. The service history says that it is not fact. The actual amount of service is 1, 50,33,7651. The material proof and representations made the committee remove the name of CA. Jayantha Bhattacharya from the register for one year.
Difference between Big four Companies and independent audit firms:
In India, there are 2,300 independent auditors. Large companies choose Big Four Companies as audit partners. The domination of Big Fours led the way to poor competition. The regulators around the world encourage competition and a fair approach. In 1980 there were eight audit Companies named Big Eight. These companies have faced failures, and the number came down to the big four. Seventy-five per cent of the Indian Companies use the Big Four auditing network.
Big Four Companies provide service in transaction advisory, actuarial, risk advisory, audit, legal services and corporate finance. The market share of Deloitte is 30 per cent, EY is 24 per cent, PWC is 27 per cent, and KPMG is 19 per cent. The Big Four Company Deloitte is the number one company in India. The operations of this company deal with 150 countries around the globe. In India, the operations are with eleven Companies. The Indian employees of Deloitte range as 15000. The second domination is from PWC. The global operations are with 157 countries. The local operations are from 27 offices in India. EY holds the third position. The global customers employ 50000 employees. The market share and revenue decide the competition among Indian companies. Big Fours can partner with more clients every year than independent auditors. The international network of Big Four helps for the geographical mobility of business.
The auditor selection of the big corporates is decided in the global centres. If the auditor of Microsoft is Deloitte, the same auditors take care of auditing in Indian branches. In the auditing industry, the brand image differentiates the different companies. The Big four Companies provide services that are different from each other. PWC gives importance to accounting and statutory audit, work-life balance, and stable culture. Deloitte specialises in the advisory domain and government projects. EY focuses on internal audit, transaction services and taxation. KPMG emphasises IT advisory, telecom sector, and work-life balance. Independent audit firms provide attestation services, internal audit, tax services, management consultation and additional services.
Why do auditor independence and rotation matter?
The public interest and auditor independence contend the rotation of auditor. The following points elucidate the standards of quality in auditing:
• Accountability of mistakes for five years improves the reporting techniques. Reporting knowledge is the skill that auditors learn through experience.
• The auditors understand the misstatement and focus on the reporting without conflict of interest. It takes five years of tenure to understand the nature of business and reporting models for an auditor.
• Auditor rotation help with time management. It is difficult to complete the audit on time without experience. So, auditors with five years of experience complete the audit on time.
• Financial services, banks and insurance companies have different accounting systems and reporting systems. The time allotted to these Companies increase the audit fees. The audit fee is the cost for the risk, skill, time and responsibility of the auditor. Auditor rotation increases the audit fees. Audit fee determinants contribute to the audit fee negotiation.
• Smaller audit firms need to get trained for the rotation. The time management and delivery system educate the professionalism of the smaller audit firms. Big Fours have exposure to timely delivery.
• The client relationship should remain uninterrupted with auditor rotation. The fresh perspective of the auditor improves the learning curve of the auditor. Client relationship and learning process make the auditing as successful.
• One study states that longer tenure creates constraints in management decisions. The earnings quality is related to firm age, industry growth, size, cash flows, and auditor type. Auditor rotation has an impact on the earnings quality of an auditor.
• Wang and Tuttle’s 2009 research states that less tenure leads to reduced cooperation among clients and auditors. Auditor rotation increases self-protection and motivation for the auditors. Control mechanisms help for the quality audit.
Chartered accountant firm and limited liability partnership firm can apply for the empanelment with CAG through WWW.cae.cag.gov.in. The documents needed and the procedure is explained on the website. The audit of PSUs and listed Companies require experience. Price water house Coopers and Ernst & Young have faced cases of audit failure. The auditor considers the viewpoint of the client to maintain a good relationship. So, the learning attitude of the auditor and client relationship move in an opposite direction. It is essential to maintain the independence and quality of a conscious learning environment. The auditor change takes place after 180 days of the fiscal year. After the board meeting, annual report and audit report, the auditor change take place in the Companies. This timely resignation helped for a smooth process. Auditor rotation, auditor independence and auditor professional learning are inter-connected terms. DebashisMitra, president of ICAI, mentioned that from April 1st, 2022, the CA firms engaged in auditing publicly-listed Companies need to undergo peer review. Peer review is the process of checking the work of one professional by the other professional engaged in the same profession. This process improves the audit quality.