MUMBAI: The market regulator's order banning Price Waterhouse from auditing listed companies has forced other multidisciplinary professional services firms to look at further tightening audit processes, parse carefully through current client rosters to pinpoint potentially risky clients and in some cases even begin re-evaluating the risk-reward equation of the audit business.
What has set off the bout of introspection is the tough order from the Securities and Exchange Board of India, nine years after the Satyam Computer scam unfolded. In order to send a message, Sebi has chosen to punish the audit firm instead of the partners involved in an order without precedent in the Indian market. Globally, regulators punish the partners or the leadership, or ban the firm from accepting new clients, but in very few cases have they barred the firm from servicing existing customers.
And, if the order is any precursor of authorities taking a more stringent stance against firms involved in wrongdoing, it could drive bigger firms to change the way they view and run their audit business.
Though global firms tightened the audit processes considerably after the Enron scam, the Sebi action has initiated another round of internal process tightening in India. Interestingly, Price Waterhouse had the most stringent audit processes in place among larger firms and the process was overseen by global experts for years after the Satyam case unfolded. Some firms are also closely looking at their client rosters for potentially risky clients that can create problems in the future.
But the big debate within the firms is how to deal with the audit business. Over the years, the Big Four firms have transformed into multidisciplinary firms and revenue contribution from audit business is getting smaller and tax, advisory and transactions pie is becoming bigger. The Sebi order has the potential to hurt all business directly or indirectly.
The bigger audit firms may get selective about future audit clients and pick and choose only 'safe' clients and some might even opt for a larger proportion of unlisted clients. Also, tougher internal controls and less risky approach on judgement-based work will slow down audits. These firms will maintain an audit business, but seek growth largely from non-audit work.
"The risk for auditing a company will go up and so the biggest firms will stay away from many audits. Many audit partners could say that why must they take a risk; instead they could join other service lines," said the CEO of a foreign audit firm.
The implication of the Sebi order could be bigger for audit-heavy local firms.
There is a set of experts who believe that Sebi was correct to have taken action on the firm and not just penalise partners.
"Appointment of an auditor is made in the name of the firm, not the partners. If the governance system of the firm has failed, one cannot quarantine just the partners and not punish the firm," said Vinayak Padwal, managing partner, Sharp & Tannan.