Not until the Companies Act, 1997, removes the roadblock.

By Paroma Roy Chowdhury

In an era of downsizing, big seems to be beautiful in the auditing and consulting business. In the last two months, there have been two global mega-mergers: between the $6.80-billion Coopers & Lybrand (C&L) and the $5.10-billion Price Waterhouse, followed by that of the $8.10-billion KPMG Peat Marwick (KPMG) and the $9.10-billion Ernst & Young (E&Y).

The rationale is the same: size, service, and strategy, dubbed the 3-S framework. Says Shridhar Iyengar, 50, CEO, KPMG India: "These mergers are not only for size, but also for offering better service, and pooling each other's human resources to retain a competitive edge." So, the moves that have turned the world's six largest audit firms--Arthur Andersen and Deloitte & Touche besides the merged onesÄÄinto four were prompted by the desire to increase geographical spread, consolidate human and capital resources, and become more competitive.

Adds Richard N. Findlater, 50, vice-chairman, E&Y: "The merger was sensible as it has given us access to more capital and wider reach in the emerging markets." Confirms Y.H. Malegam, 64, a senior partner at the country's oldest audit company, S.B. Billimoria: "The merged entities will achieve economies of scale and will be able to serve their transnational clients better." Obviously, the benefits that the global majors gain from the mergers will also be shared by their Indian subsidiaries, affiliates, and associates. Right?

Wrong. India's auditors are caught up in a different numbers game. While new ventures--and affiliations--have swelled the ranks of the players, the possibility of a shake-out in the domestic accounting and consulting industry is growing stronger. And these apprehensions have been fuelled by the impact of the global mergers on their Indian affiliates in the short run.

Archaic Indian laws, and the high probability of conflict of interests between the clients of the Indian affiliates, could lead to chaos. Consider, for instance, the possibility that the global mergers will lead to similar mergers of their Indian affiliates. This will create a situation where the merged entities will actually have to shed a portion of their business to conform to the laws regulating audit firms in this country.

For one, the Companies Act, 1956, restricts the number of partners in an audit firm to 20, further stipulating that each partner cannot handle more than 20 clients. Thus, an audit firm can have a maximum of 400 clients. But not more than half the clients can have an equity base of over Rs 25 lakh. The result: no firm can have more than 200 large clients--including transnationals. Concurs Amal Ganguli, 58, senior partner, Price Waterhouse: "No audit firm has more than 10 large clients per partner today."

Thus, a merger may actually reduce the number of clients that the new entity can handle. At present, KPMG is represented by Bharat S. Raut, which has about 100 clients, while E&Y's affiliate is S.R. Batliboi, which services 400 clients. It seems likely that the two may be forced to merge in the face of the marriage of their parents abroad. Admits K.M. Memani, 57, chairman, E&Y India: "We'll certainly consider it if it is an option."

If the merger takes place, the new entity faces the piquant situation of not being able to service its combined base of 500 clients. However, there is a way out. The Companies Bill, 1997, which will be tabled in Parliament during the Winter Session, proposes that the number of partners per firm be increased to 50, and the number of clients per partner to 25. If accepted, this could make the mergers of the Indian affiliates viable as far as the volume of business they can handle is concerned. Admits e&y's Memani: "If passed, the Bill will solve our problems."

But there is already opposition to these provisions. Says M.M. Chitale, 47, the president of the Institute of Chartered Accountants of India (ICAI): "We have to safeguard the interests of the small, domestic audit firms." That's why the ICAI, in 1983, introduced the rule that an audit firm in this country can only be named after the partners who can sign a balance-sheet. Which is why the international firms--except for the $9.50-billion Arthur Andersen and Price Waterhouse, which set up shop here before 1983--can only function through their Indian affiliates and associates. Recently, KPMG found a way out by getting four of its Indian partners--S. Kapadia, R. Pereira, N. Makhijani, and K.R. Girish--to set up an audit firm named obviously KPMG.

If the Chitale-led lobby succeeds in scuttling the provisions of the Companies Bill, the global audit firms will have two alternatives. The first, according to Ganguli, is that "these firms could have a number of partnerships, which are loosely governed by a central group." The second is to let the affiliates continue, and to set up subsidiaries, or separate companies, to offer services other than auditing.

For instance, C&L is strong in areas such as strategic consulting and human resources development while Price Waterhouse specialises in systems management. earlier, C&L had obtained clearances from the Foreign Investment Promotion Board (FIPB) to pursue some of these activities in this country. BT learns that E&Y is also submitting a proposal to the FIPB to set up a consulting firm with an initial capital of $2 million in the country.

However, the ultimate aim of the global audit firms is to offer all their services--auditing, consulting, and allied services under one roof to their transnational clients, and their subsidiaries around the world. Says J. Rajagopal, 42, CEO, C&L India: "The main objective of the mergers is to provide global support to our clients, and give them superior service by combining our individual strengths."

But this may lead to conflicts of interests: rivals being serviced by the auditing subsidiaries, or the consulting subsidiaries--or both. For instance, Price Waterhouse handles the audit account of the Rs 7,956.48-crore Maruti Udyog while the $146.99-billion Ford Motor Co. is a client of C&L. Now, if their Indian affiliates also merge, the new entity may have to give up one of the accounts.

Senior accountants maintain that such instances are rare. Says Iyengar: "It is only in extreme cases that we have to resign a client. Usually, it is a non-issue." For instance, C&L services six of the seven transnationals in the pharmaceuticals business operating in the country and, according to Rajagopal, "there is no problem since our clients trust us." But conflicts of interests between the auditing and consulting arms may become an issue.

There is widespread apprehension too that auditors may be less critical in order to grab the more lucrative consultancy business. Admits Findlater: "E&Y had to once resign an audit account to get the consultancy assignment." There are statutory restrictions as well. KPMG services four foreign banks while E&Y works for another four. As the rules allow a firm to service a maximum of four such banks, if KPMG and E&Y are to function as a single entity, they will have to resign four accounts. As of now, the firms bypass this by working through their affiliates.

Clearly, the plans of the global audit firms to consolidate their Indian operations, as well as their clients' desire to work with them, are likely to trigger a shake-out. But, as the top audit firms will only service the high-end clients, there will still be room for small- and middle-level companies. Says Billimoria's Malegam: "Mid-sized firms may also merge, and move into niche areas." These developments, however, will depend on the changes in the Indian Companies Act--and the ICAI's rules. So, only an audit can determine whether the Big Six will ever be able to become the Big Four in India.