Over half the audit firms earn audit fees of under Rs 5 lakh annually. Only 10% make more than Rs 50 lakh.
Corporate India pays it’s auditors less than Rs 14 for every lakh of turnover it achieves. That is about half a rupee less than it did in 2012, and almost four rupees lesser than it did in 2010, according to a research by Chennai based Prime Academy titled ‘Who are India’s top auditors’. In contrast, the equivalent in the US was $47.2 for each lakh in dollar turnover (in 2012, for which we have the latest data).

The fineprint can paint an even bleaker picture. Large firms still manage to get remunerated at close to Rs 20 per lakh turnover, but the smaller firms with three or less audits a year are feeling the pinch, earning half that rate. “Audits are perceived to be a commodity, says V Pattabhi Ram, the editor of the report.

Under the new Companies Act, which imposes much heavier liabilities on auditors, firms that continue to undercut may undergo severe financial difficulties, given that the cost of compliance and risk shall increase significantly, says Nikhil Singhi, partner at seven decade old audit firm, Singhi & Co, a member of baker Tilly international Singhi, however, feels the comparison may be inadequate. In the west, the mid- and small-tier firms are active in the mid-tier company audit space, whereas in India it is a bit of a mix. Due to historical reasons, mid-to small-tier firms continue as auditors of very large corporates and we often see the big 4 compete for even mid-tier to smaller company audits. The difference in size between the big 4 and the mid tier in India is significantly greater than that in the west.

In a sense, the Indian audit market is much more fragmented than it’s western counterparts. For
example, the Prime Academy report finds that only 44.6 per cent of the top 500 companies are audited by the Big 4, that is Deloitte, EY, PwC, and KPMG. On UK’s FTSE 350, that percentage is 96.2 per cent, which amongst the S&P 500 companies in the US, the Big 4 audits all but two, a whopping 99.8 per cent.

This raises the question. Are the mid-tier audit firms considered more on par with the Big 4 in India?To an extent the answer is yes. “In India, companies usually go for a big brand only when compelled to by a foreign investor”, says Pattabhi Ram. More over, a system of peer review initiated by the Institute of Chartered Accountants of India ensures that the some level of standards are adhered to by all firms, and hence a prestigious local firm which quotes a 30-40 per cent lower fee could well get a mandate easily. Singhi, however, feels the comparison may be inadequate. In the west, the smaller firms are fully active in the mid-tier company audit space, he says, whereas in India, the big 4 compete for even mid-tier audits. There size helps the bigger firms. The difference in size between the big 4 and the rest is baffling, he says. It could be as much as fifty times.

Moreover, it is not that a greater share for non-Big 4 firms has resulted in more fees. Over half the
total audit firms earn total audit fees of under Rs 5 lakh annually. Only 10 per cent make more than Rs 50 lakh. This statistic could be misleading, because the same auditors could have other remunerative work like a tax audit or even internal audit, but how much that would skew the picture remains to be seen.

This picture might be about to change, however. The new Companies Act imposes heavy penalties on auditors who fail to detect fraud. Many audit firms could stop exposing themselves to such liability, or at least demand a much higher fee for their services. Firms will have no option but to get insured against potential liability, but the possibility of debarment of errant firms could raise the cost of insurance punitively high. Retaining talent also becomes difficult when costs are kept low. 82 per cent of the newly qualified Chartered Accountants since 2005 – presumably the brightest of the lot – have opted for industry. That is, chosen more lucrative work on the payroll of a company, rather than as an auditor.