Splitting audit, consulting biz may be a short-term solution to fix conflicts: Yogesh Sharma, BDO
Splitting audit, consulting biz may be a short-term solution to fix conflicts: Yogesh Sharma, BDO
Yogesh Sharma, Deputy Managing Partner, at BDO India LLP shares in an interview with ETCFO his his perspective on what EY Split could mean for the accounting profession and firms like his. BDO India is a member firm of BDO International, the fifth largest global accounting network after the Big 4 firms Deloitte, PwC, EY and KPGM.
Sharma feels the splitting up of audit and consulting businesses isn’t a long-term solution to tackle the problem of conflict of interest arguing that in future it is inevitable that audit firms will rebuild their expertise to cater to growing client needs and asks and that could mean back to square one. Edited excerpts:
Q: What is your impression of EY deciding to split its consulting and audit businesses?
Yogesh Sharma: The announcement has the market abuzz with certain other large firms re-evaluating their business strategies too.
Q: But why do you think that the split may not be a long-term solution to manage conflicts?
Yogesh Sharma: The strategy of splitting up the auditing and consulting business is not new. We saw Arthur Anderson split its consulting business to form Accenture. KPMG's consulting business split to become BearingPoint. PwC’s consulting branch was acquired by IBM. In fact, EY already sold off its advisory services to Capgemini 20 years.
And today we are again standing at another split by EY. It does raise a pertinent question - s this a long-term play, or just a temporary arrangement, ultimately leading us back to where we started as far as the conflict of interest is concerned.
Large organisations prefer multidisciplinary firms for their resources, and experience in auditing complex financial statements.
Let’s take an example of the use of technology. Clients use multiple information systems; auditing the client in the IT environment requires resources and specialists. The need and importance of technology are going to peak for audits, in the future. The technology function resides in most firms in the advisory arm. We need to acknowledge that while the audit business provides a steady stream of income, other disciplines support and contribute to investments for innovation and development, to positively impact the quality of audits, sophistication in auditing tools, better compensation for teams and overall helping attract talent.
The feasibility of the audit arm to self-invest in technology, external consultants, etc. will pose a serious problem which can only be solved by incubating these practices, leading to the rise of a multi-disciplinary firm once again.
Q: How would you read the split for the Indian regulatory framework?
Yogesh Sharma: If the decision of a split is largely to address conflict of interest in providing services and address the concerns of regulators worldwide, it may not be as necessary in the Indian regulatory environment. In India, the Companies Act prohibits the auditor from providing certain specified non-audit services to the company being audited.
These include accounting, bookkeeping, internal audit, actuarial services, investment banking and management services. In case of services that do not pose any conflict, audit firms are already providing those services and will continue to do so.
Q: How do you see employees and clients getting impacted due to such a split and also what implications it could have for firms like BDO?
Yogesh Sharma: The split is bound to stir the client and employee rosters. The benefits of synergies in work and pricing would be lost and clients may start looking out, which may open up doors for other firms. We may no longer be looking at the big 4 as we earlier did and start looking at the Big 6 or Big 7 as the go-to-firms for auditing large companies.
Source: Economic Times