Anti-trust conduct of the much-trusted auditors

Recently, when the forensic audit brought out the skeletons in the closets of Amrapali Group showing diversion of more than 2000 crores of investor’s money, the whole country was in shock with the auditing trickeries deployed by the company to defraud the public. Accounting scams are not new to the country, people have seen similar frauds in past by many top-notch companies, like Satyam, Kingfisher, Harshad Mehta just to name a few. With Billions of dollars siphoned in these snowballing accounting scams that shook the whole Dalal street, it is evident that such activities warrant greater scrutiny by legislators and regulators.

Last year a Committee of Experts, constituted by MCA submitted its report on “Regulating audit firms and the Networks”, wherein it scrutinised the networking arrangements adopted by the big four audit firms commonly referred as multi-national accounting firms to understand their legal structure and method of operation. The Committee also addressed serious concerns regarding the concentration of market power in the market for audit services, which has raised the brow of the concerned authorities. After this report, National Financial Reporting authority (NFRA) was notified as an independent regulator for auditing, that will review the quality of corporate financial reporting and take disciplinary action against auditors for failing to discharge their duties with due diligence. However, thus far there has been no assessment of the conduct of these auditing giants popularly known as the “BIG-4”, and how it may affect the free competition in the market.

The Competition Commission of India (“CCI”), which is the competition watchdog and regulator in the country, primarily intends to promote and sustain competition in the market by eliminating practices that may adversely affect it, and thereby protect the interests of consumers and ensure freedom of trade in the market. Taking note of the fact that, with a catch of almost 60% of the Indian auditing market, these four titans together have the potential to hegemonize the Indian market, just like it has done all across the world, CCI is duty-bound to look into any such conduct of these enterprises that may adversely impact the competition. Such apprehension of anti-competitive conduct by the big four are not confined to any county, state, polis or country, but rather these Multi-National Entities, have been observed to be indulged in anti-trust practices by anti-trust regulator around the globe, like EU, Australia, Canada, etc.

As per news reports the Government of India has asked CCI to conduct a proper investigation to assess whether they are abusing their dominant position in the Indian audit market or hampering free competition in any manner. There have been many allegations over these enterprises time and again to be involved in activities like coordinated pricing and charging methods, and colluding in making decisions, bid rigging on government contracts.

Moreover, Section 4 of the Competition Act, 2002 prohibits the abuse of dominant position, which is apparently the case with BIG-4 in the Indian market, as these firms cumulatively share a dominant position, and have allegedly been abusing this position for foreclosing the market, restricting entry of new competitors in the market and driving out the existing one. However, it would be interesting to see how CCI will get hold over these BIG-4, keeping in mind that collective dominance has not been recognized in the Indian competition law regime. The concept of collective dominance is premised on the fact that the companies need not be dominant individually, but may also be so collectively. It is used when a group of independent or unrelated entities, connected through an economic link cumulatively hold a ‘dominant position’ in the market and start abusing the same.

Given the vide penal powers of CCI, it becomes necessary for these audit companies to look at the news reports with all alertness and err on the side of caution, as CCI has the power to conduct dawn raids divide, pass cease & desist orders, make divesture, and impose penalty. Other likely recourses that may be adopted by the commission are directing an Operational split, which will require separate management, accounts and remuneration: a separate CEO and board for the audit arm; separate financial statements for the audit practice; an end to profit-sharing between audit and consultancy. Also, joint auditing can be mandated, increase the capacity of challengers, to increase choice in the market and thereby drive up audit quality. However, these measures would need to be backed up by an annual progress review by the commission, to analyse the effects of these changes periodically, like the benefits of moving to the independent appointment for auditors; assessing any need to go beyond the operational split already proposed; and how to fine-tune the joint audit remedy to adapt to market developments.

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