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The big 4

Their collective size is equivalent to that of a mid-level Indian corporation. Yet, the big four auditing firms— EY, PwC, KPMG, Deloitte Tuche Thmatsu— have a crucial role in policing the bookkeepers of India Inc.

     Print Edition: February 22, 2009

The Big 4 has a crucial role in policing the bookkeepers of India Inc. A peek into their operations, which go beyond audit.

EY
One-Man Army
The largest of the Big Four in India uses a clever mix of publicity and networking to go all out to get business.

Technically, EY doesn’t audit in India, since it does not have a licence. But one of its Indian member firms, S.R. Batliboi & Company, is auditing for 95 years now. Sohrab Rustom Batliboi founded it in 1914 in Kolkata. By 1939, it was auditing the Birla Group and—on G.D. Birla’s recommendation— the Congress Party. Around WW II, the firm started auditing the Indian arm of the Standard Vacuum Oil Company (now Exxon). In 1950, it hooked up with Arthur Young, the company’s global auditor.

Today, EY is the largest professional services firm in India that’s been growing at a cumulative average rate of 45 per cent for the past four years. EY doesn’t boast of stalwart auditors such as Deloitte’s Y.H. Malegam, but its Country Managing Partner, the mild-mannered 40-year old Rajiv Memani, is a surprisingly compulsive networker and aggressive business-builder. It is said that EY in India is a one-man show. Without wearing his wealth or power on his sleeve, Memani (and before him his father, Kashi Memani) has leveraged

EY’s wide global linkages and advertising muscle to steer EY to a top scales for audit fees are the envy of rivals; the firm makes no concessions, be it a two-employee India set-up of a Fortune 500 corporation or a full-blown operation. Yet, even the much aggrieved smaller Indian accounting firms that have labelled EY’s entry into the Indian audit space “unethical” are struck by its insistence on quality and meticulous and up-to-date procedures. Another Big Four firm is said to be adopting EY’s strategy of verticals for audits and other services for super-specialty in infrastructure and manufacturing.

Rajiv Memani, Managing Partner: Reputation is more important than clients
Rajiv Memani
Factfile

Estimated revenues for 2008:
Rs 1,050 crore

Estimated audit: non-audit ratio: N.A.

No. of partners: 146

No. of employees: 4,550

No. of accountants: 2,000

Biggest clients: Bharti Airtel, ABB, Kotak Mahindra Bank, Axis Bank, ACC, Cairn India, Fortis Healthcare, Whirlpool, Tata Teleservices, Aditya Birla Nuvo

Indian affiliates: S.R. Batliboi & Company/ S. R Batliboi & Associates for audits

Acquisitions in India: Arthur Andersen in 2002; P.D. Desai & Co in 2008 and S.V. Ghatalia & Associates in 2008

Company and industry sources


So far, EY has remained untouched by controversy. It is, however, the auditor to the Ramalinga Raju family firms, Maytas Properties and Maytas Infrastructure. What caused more heartburn is EY’s valuation of Maytas Properties, at the behest of a law firm retained by its promoters, for meeting a certain Reserve Bank of India regulation. The valuation was apparently misused by the Rajus for their proposed acquisition of the Maytas firms by Satyam. But this pales in comparison to what the Rajus did to PwC.

Puja Mehra

PwC
Riding Pillion on the Tiger?

Along with the Rajus, PwC is in for a torrid time in the wake of l’affaire Satyam. That may undo the effort of over 100 years.

Davos to Delhi aren’t all that far apart these days, what with scores of India Inc. honchos making their presence felt at the World Economic Forum. Yet, last fortnight when Samuel A. DiPiazza Jr, CEO, Pricewaterhouse-Coopers International, rushed from the Swiss Alps to warmer climes, it had to be important. It was. DiPiazza met up with Prem Chand Gupta, Minister for Corporate Affairs, in the wake of PwC India’s operations facing the flak for being unable to detect a mega-financial fraud at Satyam Computer. DiPiazza’s visit was around the time PwC suspended two of its partners who worked on Satyam’s accounts.

Few know exactly what happened at that meeting, but it’s easy to speculate. PwC would have to make a case of that the fraud was sophisticated enough to fool the Big Four firm. PwC is no babe in the woods when it comes to audit— and India. The second-largest Indian accounting firm has been in India for over 100 years, having been established as an audit firm by two Englishmen way back during the pre-Independence days. A firm with perhaps the largest audit portfolio, it is registered in India as a company and offers taxation and consultancy services, too; the audit work is done by three firms: Price Waterhouse, Price Waterhouse & Co. and Lovelock & Lewes.

Jairaj Purandare, Executive Director: A storm to weather
Jairaj Purandare
Factfile

Estimated revenues for 2008: Rs 900 crore

Estimated audit: non-audit ratio: Audit is less than 33%

No. of partners: N.A.

No. of employees: 5,000-plus

No. of accountants: N.A.

Biggest clients: Reliance Power, HCL Tech, Maruti, Reliance

Infra Indian affiliates: Price Waterhouse, Price Waterhouse & Co, Lovelock & Lewes and RSM & Co., Dalal & Shah

Acquisitions in India: RSM and ECS, in 2008

Company and industry sources


PwC had a large software services presence in the nineties in India till its global consulting business was sold to IBM. However, the firm has re-built its consultancy business all over again in the last five years under PwC Pvt Ltd. Jairaj Purandare, Executive Director & Head of Markets and Industries at PwC, says: “Consulting is growing by leaps and bounds. We work in the social sector, governments, risk assessments, due diligence, transactions and a lot of other areas.”

PwC has grown inorganically in the recent past. It acquired ECS, the consulting company of Eicher Goodearth, as recently as in December 2008 and before that picked up RSM from the Ambit Group, for its taxation business;RSM was merged into PwC. PwC also does some software services work for PwC Global from India. Though the largest audit firm in the country, as a part of the overall pie it is the smallest, with taxation coming up at second spot after consulting.

Nobody is willing to talk about Satyam at PwC—or the ‘S’ word as it is referred to internally. But PwC, in India, and globally where it has been named in class action suits along with the Rajus, has a huge storm to weather in the days ahead.

—Suman Layak

KPMG
Young and restless
The youngest of the Big Four, KPMG in India is big on fraud—investigating it, that is.

An insider at one of India’s top accounting firms wryly remarks that the Big Four as a concept is non-existent in India. There are only the Big Two, he quips (EY and Pwc). If you go by sheer revenues and number of employers, KPMG does indeed rank #3, and the gap between the Top 2 is not insignificant.

KPMG could have been easily the largest in India if a merger proposed in 1996, with AF Ferguson, had materialised. It did not, and then Ferguson went into the Deloitte fold. KPMG is represented in the audit field by three audit firms—all with the initials BSR in them—after the firm Bharat S. Raut & Company, which KPMG virtually took over to operate in India. Yet, KPMG’s India operations are nothing to be sneezed at, what with audit clients like Reliance Communications, Siemens India, Infosys and ICICI Bank in the bag. Currently, with an employee base of 3,200, KPMG plans to take it up to 5,000 by 2010.

Russell Parera, CEO: Knee-jerk reactions are not the answer
Russell Parera
Factfile

Estimated revenues for 2008: Rs 608 crore

Estimated audit: non-audit ratio: N.A.

No. of partners: 68

No. of employees: 3,200

No. of accountants: N.A.

Biggest clients: ICICI, Infosys, Reliance Communications, Siemens India

Indian affiliates: BSR, BSR & Associates, BSR & Company Acquisitions in India: None

Company and industry sources


How serious KPMG is about India is evident from the famous story about the firm trying to register a partnership firm in India with four partners who had names starting with the letters K, P, M and G to bypass ICAI regulation (foreign firms are not allowed to audit Indian companies; and it is mandatory for firms to have the names of the partners in their brands). KPMG officials deny any knowledge about this anecdote.

KPMG, along with Deloitte, barged into the Satyam affair after the scandal erupted, only to face the ICAI’s wrath for allegedly attempting to audit accounts despite not being registered as an auditor in India. However, Satyam director Deepak Parekh later clarified that KPMG was on board in an advisory capacity and sources said KPMG, in fact, is doing forensic work— investigating the fraud, in other words. Says Russell Parera, CEO for KPMG in India, who used to head the audit division before taking over in 2006: “Full facts on the Satyam incident will only be known when the investigation is complete... I believe that the profession is capable of rising to this challenge.”

KPMG has a large forensics team and has been holding seminars and publishing reports on both fraud in India and how unprepared the Indian corporate sector may be in the eventuality of fraud. It wasn’t wrong.

Suman Layak

Deloitte Tuche Thmatsu
When small is big
The #4 of the top four firms, Deloitte has a good balance of consulting and audit—and claims to manage it well.

Deloitte haskins & sells (dhs) had registered in India back in 1978 before the restrictions on registration of firms came into being (Indian rules mandate that all firms need to be registered with the names of the local partners). So Deloitte can audit company accounts in India through DHS as well as its affiliates. It is the second among the Big Four that has been roped in to look into the affairs of Satyam; with KPMG doing forensics, it is likely that Deloitte will be working on restating the books of accounts of the company.

In terms of sheer employee numbers Deloitte is huge—at 8,500 people, the largest on that front in India. But that may be because the company is big on consulting, and the largest amongst the Big Four in the country (globally, Deloitte is the only Big Four firm that hasn’t shed its consultancy arm). Roopen Roy, Managing Director, Deloitte & Touche Consulting India, says: “Deloitte’s consulting business is by far the largest in terms of headcount, footprint of services and global delivery capabilities.” Deloitte also does a lot of off-shoring work in India for their global clients and that is one reason for the high employee count in India.

He goes on to add that in many segments Deloitte’s consulting business does not compete with the other Big Three of accounting but is pitched against consultancy majors like McKinsey, Boston Consulting, Accenture and IBM. Yet, as a proportion of overall revenues, audit is no loose change, accounting for 40 per cent of the bacon—perhaps the highest audit contributor to the top line amongst the Big Four in India. Grant Thornton, which has a similar structure to the big Four but is much smaller, has an audit business that accounts for half of the total pie.

Roopen Roy, MD: High employee count in India
Roopen Roy
Factfile

Estimated revenues for 2008:
Rs 500 crore (excluding offshore)

Estimated audit: non-audit ratio: 40%

No. of partners: N.A.

No. of employees: 8,500 (all included)

No. of accountants: N.A.

Biggest clients: (Audit) Reliance, HDFC, Idea Cellular, Sun Pharma, M&M, Hero Honda, Tata Steel, Tata Motors, Tata Power

Indian affiliates: C. C. Chokshi & Co., A. F. Ferguson & Co, Fraser & Ross, MCA & Co P. C. Hansotia and Deloitte Haskins & Sells

Company and industry sources


With a sizeable consultancy operation, how does Deloitte deal with potential issues of conflict between consulting and audit? Even as EY, PwC and KPMG shed their consulting businesses, Deloitte refrained from doing so. “On the contrary we grew it. Speaking from my personal experience I would say it is extremely difficult to build a consulting business from scratch. Our consulting business has grown from strength to strength…,” says Roy, for whom conflict is virtually a non-issue, thanks to the fragmented nature of the auditing business in India. “A large number of companies are audited by competitors and other audit firms. Therefore, there are neither any real or perceived independence issues in a majority of these clients,” adds Roy.

Yet, globally, Deloitte runs the same risks as its Big Four counterparts. The Parmalat case (The Italian milk products multinational went bankrupt in 2003 with a e14 billion hole in its accounts) now threatens the future of Deloitte, whose Italian arm was the auditor to Parmalat’s accounts. The mess-up in Italy could take all of Deloitte down.

Suman Layak

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