CA Amresh Vashisht

There is always debate in the minds of practicing Chartered Accountants over the size of the firms and their role in innovation. Some argue for their importance of large size having the top slab of the categories of firms, while some others argue for small size firms. In fact, the size of a firm is not clear in our minds that are correlated with the innovatory advantage. We are going to point advantages and disadvantages of small and large firms in innovation, especially related to the government audits i.e Bank Audits, Insurance Audits, audits from C & AG, Audits for RRBs and other scheme based audits.

Motivated by theories of the CA firm, which can be classified as arrangement or organizational structure to operate upon, there are considerable points before opting for the size of the firm across the country. It is established that on average, large firms are facing larger clients and medium and small firms are facing mixed of the clients. BIG 4 firms are really large and more or less enjoying a monopoly. The auditing firms are having ownership restrictions. The concept of acceptance of partnerships rather than the introduction of Joint Auditors is still not visible.

AAA. LARGE BIG 4 FIRMS.

The large firms currently referred to as the ‘Big Four’, all operate globally. The ICAI is trying hard to regulate the functioning of multinational accounting firms in the country. However, allegedly, they do practice under surrogate names and hence do not fall under the purview of the ICAI directly. ICAI can act only against its members or the firms registered with it in case of any malpractice or defaults. The Big Fours have come under severe criticism after the Satyam fraud where Pricewaterhouse Coopers was involved in auditing the accounts of the IT firm. ICAI has released a Report on Operation of Multinational Network Accounting Firms in India showing its helplessness in dealing the MAFs. The report clearly suggested that MAF has entered in India to set up representative office after obtaining permission from RBI under open trade agreement to do the consultancy. But in 2004, RBI has declined to ever grant any permission to operate from Indian soil. Now they are dealing in internal audits through companies in a big way and also having the audits of more than ¾ listed entities in India. Certain Indian CA firms & private limited companies associated with them hold out to public that they are actually MAFs in India whereas to the regulator, they hold out that they are purely Indian CA firms having no relationship with foreign entities. Their infrastructure, marketing skill and their strength of Chartered Accountants are the finest reasons to grow multifold. Bur so far Big 4 haven’t shown any interest in Govt. audits. Some of their move like to take the SBI Tax Audit by reducing the quantum of fees found much criticism and timely Govt. intervention saved the tax audit opportunity with the statutory branch auditors.

AA. LARGE FIRMS; CATEGORY I: 7 Partners +

Many of these firms operate both nationally and internationally. About 3% of Chartered Accountants belong to this segment. In the last few years, these firms are in process of restructuring. The charm of this sector is to have central auditor ship of the banks and PSU audits. However these firms if they can consolidate themselves can counter the MAFs operating through Indian firms in India. Naresh Chandra committee on corporate audit and governance suggested that ICAI should propose to the Government a regime and a regulatory framework that encourage the consolidation & growth of Indian firms in view of the international competition they face , especially with regard to non audit services. For a government audit work these firms are eligible for the following.

1. NORMS ON ELIGIBILITY, EMPANELMENT AND SELECTION OF STATUTORY CENTRAL AUDITORS IN PUBLIC SECTOR BANKS

(i) The audit firm shall have a minimum SEVEN full time chartered accountants, of which at least FIVE should be full time partners exclusively associated with the firm. The remaining TWO could be either exclusive partners or CA employees with a continuous association with the firm for a period of one year. These partners should have minimum continuous association with the firm i.e. one each should have continuous association with the firm at least for 15 years and 10 years, two with a minimum of 5 years each and one with a minimum of one year. Four of the partners should be FCAs. Also at least two of the partners should have minimum 15 and 10 years experience in practice.

(ii) The number of professional staff (excluding typists, stenographers, computer operators, secretary/ies and sub-ordinate staff etc.), consisting of audit and articled clerks with the knowledge in book-keeping and accountancy and are engaged in outdoor audit should be 18.

(iii) The standing of the firm should be of at least 15 years which would be reckoned from the date of availability of one full time FCA continuously with the firm.

(iv) The firm should have minimum statutory central audit experience of 15 years of Public Sector Banks (before or after nationalization) and/ or by way of statutory branch audit thereof or that of statutory audit experience of a private sector bank with deposits resources of not less than Rs.500 Crore.

(v) The firm should have statutory audit experience of 5 years of the Public Sector Undertakings (either Central or State Government undertaking. While calculating such experience, more than one assignment given to a firm during a particular year or more than one year’s statutory audit (audits in arrears) assigned to the firm will be reckoned, as one year experience only, for the purpose of counting such experience.)

(vi) At least two partners of the firm or its paid Chartered Accountants must possess CISA / ISA qualification.

(vii) A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS MAJOR AUDITS.WHERE AUDIT FEE IS ABOVE RS 1.50 LACKS.

(i)        The firm should have at least 6 CAs (out of which 5 should be partners and one could be a full time paid CA employee), which is indicative of capacity to handle big audits.

(ii)        At least one partner should have an association of 10 years or more with the firm and at least 3 partners of the firm should have an association of 5 years or more with the firm and the remaining two should have an association of one year or more with the firm, to demonstrate stability over time.

(iii)       The firm itself should have been in existence for 10 years or more, to prove that it is a well established firm. Allotment of major audits is based not only on the size of the firm considering the number of partners, and their association with the firm, number of Chartered Accountant employees, and the Zone in which the firms’ head office is located but also on the basis of factors such as sector experience, capability of handling big audits, past performance, eligibility of the firm to conduct a particular audit, location of the firm’s branch offices etc.

3. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS Category I may be drafted for large scale amalgamated RRBs.

A.    MEDIUM SIZED FIRMS: CATEGORY I: 5 Partners +

This includes the so called ‘second tier firms’. Many of these firms operate nationally. About 8 % of Chartered Accountants belong to this segment. In the last few years firms restructuring is evident in this category with a sole purpose to have big advances statutory branch audits. The firm is not eligible for Major audits of the PSU.

1. NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here FIVE numbers of CAs should be exclusively associated with the firm on Full time basis. But out of total number of CAs, THREE numbers of PARTNERS exclusively associated with the firm on full time basis. The minimum strength of Professional staff is EIGHT. The firm or at least one of the partners should have a minimum of 8 years experience of branch audit of a nationalized bank and/ or of a private sector bank & the audit firm standing should be more than EIGHT years. A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS WHOSE AUDIT FEES ARE UP TO RS 1.50 LACKS

The selection is made by correlating the point score earned by each firm of Chartered Accountants towards empanelment with the size of the audit fee. The point score is based upon the experience of the firm, number of partners and their association with the firm, number of Chartered Accountant employees, as follows: (i) Experience of the firm 0.5 point for every calendar year -Maximum 15. (Counted from the date of constitution of the firm with one full time FCA or date of joining of the firm by the existing partner having the longest association with the firm whichever is later.)(ii)  Full Time FCA Partners 5 points each for first 5 partners and 2.5 points each from 6th partner onwards. (iii) Full Time ACA Partners3 points each for first 5 partners (including FCA partners) and 1.5 points each from 6th partner onwards (iv) Points for long association with the same firm5 points for each partner above 25 years. (4 points for each partner above 20 years.- 3 points for each partner above 15 years -2 points for each partner above 10 years- 1 point for each partner below 10 Years but above 5 Years (v) Full Time CA Employees1 point each for first 20 C.A Employees-Maximum 20 points (vi) CISA/ISA Qualified Partners 2 points each for three partners. -maximum 6 points (vii) CISA/ISA Qualified Employees1 point each – Maximum 3 points for 3 employees.

3.  SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS Category I may be drafted for large scale amalgamated RRBs.

B.  MEDIUM SIZED FIRMS: CATEGORY II.

This includes the so called ‘third tier firms’. This includes Chartered Accountants working in public practice in metros and in the smaller firms. . About 8 % of firms belong to this segment. To date, most of these firms have operated exclusively in local markets. These firms are eligible for big advances statutory branch audits. The firm is not eligible for Major audits of the PSU.

1.NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here THREE numbers of CAs should be exclusively associated with the firm on Full time basis. But out of total number of CAs ,   TWO numbers of PARTNERS exclusively associated with the firm on full time basis. The minimum strength of Professional staff is SIX. The firm or at least one of the partners should have preferably conducted branch audit of a nationalised bank or of a private sector bank & the audit firm standing should be more than SIX years for the firm or at least one partner. A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS WHOSE AUDIT FEES ARE UP TO RS 1.50 LAKH Same as above for category I ( 5+ )

3.      SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS For Standalone RRBs Statutory Auditors may be drawn from Category II

C.     SMALL FIRMS: CATEGORY III

This includes Chartered Accountants working in public practice, in practice through small partnerships or in the smaller firms. . About 8 % of firms belong to this segment. To date, most of these firms have operated exclusively in local markets. For a statutory bank branch Audit this is the comfortable category to get in to the statutory audits. These firms are largely spread over to the country and involve in every kind of professional service from financing, taxation to audits.

1. NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here TWO numbers of CAs should be exclusively associated with the firm on Full time basis. But out of total number of CAs,   ONE numbers of PARTNERS exclusively associated with the firm on full time basis. The minimum strength of Professional staff is FOUR. The firm or at least one of the CAs should have preferably conducted branch audit of a nationalised bank or of a private sector bank for at least THREE years & the audit firm standing should be more than FIVE years for the firm or at least one partner. A full time partner does not include a person who is a partner in other firm or employed full time/part time elsewhere, practicing in own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice.

2. SELECTION OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF PSUS WHOSE AUDIT FEES ARE UP TO RS 1.50 LAKH Same as above for category i ( 5+ )

3. SELECTION CRITERIA OF CA FIRMS FOR APPOINTMENT AS STATUTORY AUDITORS OF REGIONAL RURAL BANKS For Standalone RRBs Statutory Auditors may be drawn from Category III

D.    SMALL AND SOLE FIRMS: CATEGORY IV

Sole Proprietors Chartered Accountants are working in public practice in their individual names or through their firms. As a matter of fact, 71 per cent of the profession is comprised of proprietors and, even after 65 years of the profession, most of the members still wait for a bank audit assignment as their major work sphere. THIS is the most sufferer class of the Chartered accountants. The majority of the doors of professional opportunities are closed to them. They are neither eligible for PSU audits nor for Concurrent Bank & Statutory Bank Branch audits is also banned for Initial three years. Above all, these Sole Proprietors firms are not being considered for statutory audit of RRBs.

1. NORMS FOR THE EMPANELMENT OF AUDIT FIRMS TO BE APPOINTED AS STATUTORY BRANCH AUDITORS FOR PUBLIC SECTOR BANKS

Here TWO numbers of CAs should be exclusively associated with the firm on a Full time basis. But both the PARTNERS exclusively associated with the firm on a full time basis. Even proprietorship concern without bank audit experience may be considered as hitherto. The proprietary concerns of Chartered Accountants with ONE paid CA, TWO professional staff and not having any statutory branch audit experience of a nationalized bank or of a private sector bank will be treated at par with the partnership firm after deducting their 3 years seniority from the date of their establishment. The minimum strength of Professional staff is TWO. No experience required & the audit firm standing should be more than THREE years for the firm or at least one partner.

(About the Author- Author was Member of ICAI- Regional Research Committee 2013-14 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email amresh_vashisht@yahoo.com or on phone Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2 having office at 1 1 5, Chappel Street, Meerut Cantt, UP, INDIA)

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0 responses to “Optimal Size of CA Firm for Government Audits”

  1. CA Jai Kishan says:

    Very true. The Central Government, RBI and the ICAI should pay attention so that category IV of CA firms should not be ignored any more.

  2. Praveen Kumar says:

    Explained the topic nicely and very clearly.Thanks

  3. CA Jamuna Shukla says:

    Very nice article clarifying the structures of C A firms.

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