Recently an interesting trend has emerged in the Indian boutique audit space - Partnerships with reputed international audit firms. In today's post we try to look into the rationale for the emergence of the trend now, what it adds to Indian audit firms, and the long term implications of the move on the Indian Equity markets.
Auditors have been under the microscope a lot in recent times, and with good reason. While Deloitte and BSR Associates came under the scanner for IL&FS, the Satyam ghost continued to haunt PWC until very recently. This increased regulatory pressure continues to push both small and large audit firms to live up to a higher standard, driving a move to either find ways to improve internally, or seek outside help. Top international audit firms who don't have an India presence partnering up with smaller Indian audit firms looking for improved quality emerges as a win-win for both parties
Next, we look at what operational benefits this trend has for Indian audit firms. The first most obvious benefit is the knowledge transfer. Partnering with these top global audit firms gives smaller Indian firms access to the processes and knowledge base of the older more developed firms. In competing with the stronger audit players in the country, this certainly gives smaller firms a slightly better footing from which to compete. Another key advantage that these partnerships bring is the ability to upgrade the legacy IT infrastructure to better technology stacks. Both of these features combined with the better brand strength that comes with the partnership, helps Indian audit firms better serve the customers they have, and equips them better to acquire and serve new customers.
Finally coming to the benefits this trend will have on broader Indian Markets in the long run. One of the many problems Indian Markets have faced is lack to sufficient international interest in stocks outside of the top 60-80 names. While a part of this is liquidity needs of the larger investors, lack of faith around the governance structure of the smaller Indian firms also keeps many global investors away. What these partnerships could do is give smaller firms which have boutique audit firms as auditors better name recognition, giving investors greater confidence in the quality of accounting and governance at these firms. And while there is a long way to go before we see comparable interest and liquidity in the smaller names, this definitely seems like a step in the right direction for the Indian markets.
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