RBI directive on auditors to benefit second-tier firms

The Reserve Bank of India’s (RBI's) recent diktat, that statutory auditors in private and foreign banks should be repeated only after the mandatory rest period of six years, opens up an opportunity for firms outside the famed Big Four — PricewaterhouseCoopers, Deloitte, KPMG and EY. 

The Big Four conduct audits of most of the large banks. Public sector banks are out of this ambit, as their audits are done by empaneled members, and a multiple number of these auditors go through the books. 
 

On July 27, the RBI said some private and foreign banks have not been following the rotation period in letter and spirit. In some cases, the same auditors were seen coming back to the bank after the mandatory rest period of two years. The central bank said such a practice establishes a “comfortable relationship that may lead to compromise in strict adherence to audit principles". And, therefore, the mandatory rest period was extended from two years to a minimum of six years. 

Auditors of firms outside the big four say the central bank’s ruling should allow these firms, who are otherwise engaged in auditing mid-size or smaller private banks, to get a chance at auditing the big banks. But, it would still be a distant target for smaller audit firms. 

“This opens up the opportunity for large firms other than the big four,” said the banking vertical head of a large audit firm. The global audit firm has a fairly large operation in India but does auditing for mid-size banks.  The firm stands a chance now to audit one of the big banks. 

According to Abizer Diwanji, head at financial services of EY, the RBI directive may take some business away from larger firms, but smaller firms were unlikely to benefit much.

“The scaled-up firms may benefit from this. In banks' branches, audits are things of the past. Most of the audits are done from the head office itself and for that you need to have good technical knowledge. Besides, you have to be proficient in cybersecurity audit, etc. to really get a chance to do bank audit. Not all firms are equipped to do that,” said Diwanji.

Typically, for every statutory audit of mid-size to large banks, an audit firm gets Rs 50 lakh to Rs 1.5 crore. 

Bank audits are sophisticated and require sifting through a huge amount of data. That would mean even smaller banks won’t appoint small audit firms. Therefore, the sphere of business would extend beyond the large firms, but by only so much, said auditors. Firms such as Grant Thornton and BDS could emerge as gainers by this measure, they say.