In 2017, addressing the chartered accountants (CAs), the prime minister (PM) set out his wish for a doubling of the roster of the Big Four accounting firms with names that are desi. He had set out a time frame of five years.
It has been almost eight years and the noticeable change is that the dominance of the Big Four in audit and consulting has only grown furiously!
The overall tally for the Big Four in FY24-25 is placed by media sources at Rs45,000 crore; nearly a 20% increase over FY23-24 which very few businesses have achieved in the country.
The PMO (prime minister's office) may have also seen the data of the audit market consolidating around the Big Four and felt the need to jump-start the effort to create an alternative force to compete in the market. No other agency, like the Institute of Chartered Accounts of India (ICAI), seems to have made any dent in this matter.
News reports dated 6th June suggest that the PMO is directly stepping into the arena to pick up this topic and give momentum to realise the vision the PM laid out eight years ago.
There appears to have been a meeting of the heads of a few key ministries under the leadership of Shaktikanta Das, a key functionary in the PMO.
Compete for large-scale government projects
Build global credibility
Offer serious competition to the current Big Four
Create high-value jobs in India, especially in tier-1 and tier-2 cities
The interesting part to this development is that it is happening under the aegis of the PMO, rather than any of the functional ministries like finance or corporate affairs. ICAI has ceded ground, failing to wrest the initiative in right earnest, except for some tinkering at the margins on tie-up with overseas firms.
More than a year back, the then-president of ICAI had said in a press interaction, “At present, there are about 96,000 CA firms in India. Of these, 75,000 firms are proprietorships and are small and medium-sized. Another 24,000 firms are partnerships with two to 100 partners. Of these, about 400 firms have ten partners or more.”
The above statistics may have undergone some change in due course, but the essential problem the data underlines is the highly fragmented nature of the CA practice in the country.
This is not a problem peculiar to India. Even in a market like the US, with an estimated US$150bn (billion) in annual revenue (2023 data), the Big Four account for about US$80bn. In the years since, the percentage may have been further distorted.
In the US, the need for consolidation of firms to create adequate competition to the Big Four is spearheaded by the private equity (PE) funds, sensing a new opportunity of making money.
PE has funded firms like Baker Tilly, Grant Thornton, and Eisner Amper, a few notable examples, to scale up through the acquisition of other firms.
The next logical step for them to exit at a valuation would be a public float. However, the US Securities and Exchange Commission (SEC) will not allow a listing by audit firms. Hence, a separation of audit and non-audit business may happen in the future to facilitate listing.
“
In less than three years, PE firms have bought stakes in five of the top 26 accounting firms, and this trend is
predicted to continue, which can be attributed to a few key factors. First, tax & accounting firms often have stable, recurring revenue streams, which are attractive to PE investors. Second, the
fragmented nature of the accounting industry presents opportunities for consolidation and economies of scale, also attractive to PE firms. Finally, the increasing complexity of regulatory environments worldwide has driven demand for specialised accounting services, creating growth opportunities.”
The subject of multinational accounting firms (MAF) in India has been an emotive one. Chennai, not often spoken of as a key location for big Indian audit firms, became the unlikely situs to spearhead the anti-MAF campaign.
Despite the campaign having the active support of some of the politically well-endowed in the city, after a spell of initial euphoria, the movement petered out. Curiously, a few who were part of this themselves, went into the Big Four, or sought some other foreign affiliation!
The seminal question to pose is: who are these Big Four in India and how did they emerge?
ICAI controls how a CA firm can be named. A Pricewaterhouse, or a Deloitte Haskins Sells, are an exception, having secured the names before the rigidity of the regulations set in. An EY or a KPMG has no such luxury of using the global brand for the audit and regulated businesses.
In fact, ICAI has been aggressively targeting these firms for, allegedly, sharing the technological and administrative infrastructure of the non-regulated entity using the global brand.
All these firms operate only with staff and partners who are Indians. There may be an occasional exchange of personnel for securing specific expertise but that would be an exception. There may be reimbursement of costs for services provided by the global entity or payment of royalty in some cases, but there will not be any direct foreign interest in the outfit that delivers regulated services.
The emergence of the Big Four was actually a case of consolidation of firms that pre-existed their entry. Deloitte may be a good example to take note of. It consolidated a few local firms in the west and south of the country to create a network that took shape as a single umbrella entity, using the global brand.
In essence, the substratum is entirely ‘desi’ and native. The present mission of consolidating small firms to create bigger firms to compete with the Big Four was actually the way they set about to create their own presence in the country.
The basic driver was cash on the table to acquire firms, partners, personnel and infrastructure. Acquiring key talent by paying a premium has been the key to the dominance of the Big Four in India and elsewhere.
Therefore, the way to counter the Big Four may be to encourage other non-Big Four global firms to enter India and fund the consolidation. Does this sound weird and the very opposite of what the PM wants? Not entirely. The aim in India, as in the US or the UK, should be to create more competition with the Big Four. This predicament is not unique to us.
It is unlikely that the kind of funding through PE and other modes, which these firms are able to access, can be replicated in India easily in the short term. Therefore, it may be a prudent step to encourage smaller global firms to enter India without any restriction and acquire and consolidate the medium-sized firms which have the talent and competence but are unable to raise the game to the next level.
It is best to deregulate to effectively address the lack of competition rather than look for solutions keeping constant some of the obsolete restrictions and fears around the entry of foreign firms. There can be suitable safeguards to prevent any form of abuse of this.
But this will be frowned upon as an antithesis to the ‘desification’ agenda. That would be due to the typical lack of understanding of what these firms are. These firms are a collection of ‘desi’ people held together by a common desire to advance professionally without being constrained by a family or a close group holding the reins. Barring exceptions, there are no family successions in these firms, and merit alone counts.
The desi CA firms are no different than desi companies that seek to pass the baton of control and ownership within the family. An outsider would stand less chance to be at the helm. The profit sharing is also tilted towards the founding family. The best talent will not join such firms, with no assured career path.
No debate or argument or persuasion of being patriotic or national in outlook will sell, if that is the case being made out!
The debate loses purpose if it is made out on the premise that the local firms are short of capacity, resources, technology, talent and the like.
Till the advent of the audit rotation, the desi firms were ruling the audit market. A random sample of large Indian companies, which were entirely or jointly audited by local firms before the rotation set in, is shown in the table for reference.
Similarly, PSUs (public sector undertakings), like SBI, ONGC and Indian Oil, which dwarf most private companies by size, are jointly audited by various desi firms demonstrating that it is possible to achieve adequate capacity to audit complex and giant-size companies by farming out work to different smaller firms.
Hence, viewing the desi firms as lacking in technical skills or capacity will be as erroneous as believing that the Big Four have something unique in terms of audit capabilities. It is not uncommon, in audit committee discussions, to get a better perspective on critical business risks or potential accounting compromises from experienced desi auditors than from the Big Four which set much store by global methodology and institutional capabilities.
Quite often, in companies that are well-managed with strong internal systems and a well-equipped finance team, the value addition that comes from the audit techniques, tools or standard methodology of a big firm, falls short of the intuitive comments and informal feedback that one gets from an experienced desi audit team, that inputs more passion and partner time in the audit work!
The PMO’s initiative may also be reflecting another dimension to the Big Four domination, which is in the consulting and advisory space, where the government at the Centre, state and local levels, are the biggest spenders.
According to the information obtained under the Right to Information (RTI) in 2023 by a media outlet, the Big Four accounting and consulting giants secured projects worth nearly Rs450 crore from the Central government between 2017 and 2022. PwC, Deloitte, EY and KPMG bagged at least 305 consulting assignments from various government ministries and departments.
PwC bagged the highest number, totalling 92 contracts for over Rs156 crore. Deloitte was second with 59 assignments worth over Rs130 crore. EY won 87 contracts for Rs88 crore, while KPMG landed 66 contracts worth Rs68 crore.
This is a space where the traditional desi firms are entirely missing the action! They may have little to complain about as the starting point in many of these would be a set of credentials that any desi firm may not possess. Often, global firms write the request for proposal (RFP) making sure that only a few of them would qualify!
Some large desi outfits like TCS may compete if the assignment is a tech-based project. Pureplay consulting is the domain of the BCGs, Mackenzie and the like. The door will not open for a Krishnaswamy or a Kader Basha!
It would be futile to even make this as an agenda item for the PMO to find answers to. At best, they may curtail giving out consultancy work outside and have internal teams figure out solutions.
Since the PMO is driving this initiative, there is bound to be quick action. How would it sound that, by force of habit, just to meet a tight deadline, a lower-down officer tenders out this task of finding a feasible solution, to a Big Four company!
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
