Central government has recently altered the existing Foreign Direct Investment (FDI) policy in relation to audit firms with a directive that audit process of any transaction contemplated between Indian entities and foreign investors for FDI to be conducted by auditors of the parties’ joint selection, if the foreign party insists on a particular audit firm of its choice from an international network.
The underlying intent of the directive is to reinforce the corporate governance standards of the Indian firms associated with foreign investor for FDI and to create a path for domestic audit firms to get involved more in the audit of Indian firms associated with foreign investors.
The directive certainly confines foreign investors and Indian firms’ ability to engage auditor of their selection to conduct audit except a joint audit with independent auditor(s). The directive further ensures that joint audit will be conducted by international audit firm and domestic audit firm.
The directive will certainly slow down the dominance of big four firms (Deloitte, KPMG, Ernst & Young and PricewaterCoopers) in the domestic circuit as it is highly improbably from practical point of view to engage two auditors from big four firms for a specific transaction as engagement of big four firms is quite expensive and they are contemporaries in their line of business.
The provision of joint audit will certainly boost the high probability of Indian audit firm’s involvement in the audit process of any transaction contemplated by any Indian firm and foreign investor.
Another dimension for the issuance of the directive is to make stronger the corporate governance standards of Indian Corporate system as audit will be joint activity of international firm and Indian firm leaving no place for bias in audit process.
Experts welcomed the directive and opinioned that it will certainly take the corporate governance standards to different level by ensuring that companies employ good corporate governance practices to sustain a transparent corporate system.
It is hoped that with the serious implementation of the directive will make certain that the audit process will be conducted by audit firms in a translucent way to reflect the existing financial state of companies by ensuring audit firms won’t get influenced by the financial benefits offered by bigger corporations - strengthen the corporate governance standards in the country – set the stage for Indian audit firms to build a brand and reputation of their own in international arena and reduce the domination of Big four firms in Indian circuit.
Research inputs by Paruchuri Baswanth Mohan
About the author :
Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at firstname.lastname@example.org.