* About 5 pct of US audit work now performed in India
* Trend complicates regulation of U.S. corporate auditing
* Investor advocates raise quality, disclosure concerns
By Dena Aubin and Sumeet Chatterjee
NEW YORK/MUMBAI, Oct 16 Auditing of U.S.
corporations' financial books, a vital underpinning of investor
confidence, increasingly relies on work carried out in India,
where there is no clear system of oversight.
U.S. audit regulators do not conduct regular physical
inspections of offshore centers in India where U.S. audit work
is performed, Indian accounting officials and employees of large
audit firms told Reuters.
The U.S. arms of the Big Four audit firms - Deloitte Touche
Tohmatsu Ltd, KPMG, PricewaterhouseCoopers
and Ernst & Young Global Ltd - said that work
handled by Indian employees is routine and systematically sent
back for review to the United States.
But some audit firms are layering on more complex tasks in
the offshore centers and Indian workers are rising to senior
positions in the auditing ranks, said Big Four firm employees
and others in the accounting industry in India.
Given the failures of U.S. auditors so alarmingly displayed
in recent accounting problems - for instance, February's $2
million penalty against Ernst & Young over its past Medicis
Pharmaceutical Corp audits - some experts said having
more Indian auditors on the job may result in better audits.
Yet concern is growing that no coherent regulatory system
exists to closely police the work in India, to gauge its
quality, and to take action if problems should develop.
Perhaps as much as 5 percent of U.S. audit work is presently
done in India, said M.G. Fennema, an accounting professor at
Florida State University who has researched offshoring.
That is up from an estimated 1 to 2 percent about five years
ago when the firms launched offshoring pilot projects.
"If it's done properly, it would be OK, but the risks are
that work will be offshored that is beyond the training, skills
and experience of the people that it's offshored to," said
Douglas Carmichael, former chief auditor of the Public Company
Accounting Oversight Board, or PCAOB, a U.S. watchdog group.
CRUNCHING THE NUMBERS
Auditing is labor-intensive. In offshore centers scattered
from Mumbai to Bangalore, swarms of entry-level workers review
piles of documents and cross-check numbers on balance sheets.
In India, many rookie accountants consider $10,000 a
generous annual salary; their U.S. peers earn five times that.
Attracted by wage savings and Indians' command of English,
the U.S. arms of the Big Four have opened offices or joint
ventures in India and hired thousands of local workers to do a
range of tasks, including tax, consulting and audit work.
PCAOB Chairman James Doty said offshoring helps large firms
be efficient. He added: "We have to watch, to be alert for, when
efficiency becomes an enemy of quality."
The firms said that their offshored audit work meets the
same quality standards as work done in the United States.
A PwC executive said about 4 percent of its U.S. corporate
audit work is conducted at "alternate delivery centers," located
both inside and outside the United States.
"The work performed at these delivery centers is limited to
specified standardized tasks, none of which involves auditor
judgment, and is reviewed and supervised by U.S. firm
employees," said Michael Gallagher, a PwC managing partner.
PwC's goal is to send about 20 percent of audit work to the
delivery centers, said the firm's global chairman, Dennis Nally.
Deloitte said audit workers in India "receive training
consistent with their U.S. colleagues, and their work is
reviewed and supervised by professionals in the United States."
Viral Thakker is a Mumbai-based partner at KPMG. Its
offshore centers in India handle audit, tax and advisory work.
He said offshoring gives the firm's overseas clients low-cost
"access to a ton of really smart, talented individuals."
Ernst & Young did not respond to requests for comment.
TOUGH SELL FOR SOME
The Big Four started offshoring work to India about a decade
ago, at first primarily to prepare tax returns. Today, the firms
together employ about 22,000 people in India for offshore
operations, mostly in tax and consulting, said industry sources.
Bill Gradison, a PCAOB member until early 2011, said audit
firms told him they were moving slowly into offshoring, but that
some firms' partners were concerned about control.
"I had a sense that there was some pushback in the United
States within firms to some of this," he said.
Communication was another concern. "It is tough to supervise
on a remote basis," said Carmichael, the former PCAOB chief
"You can look at the work papers, but looking the person in
the eye and having them respond to spontaneous questions is
where you can really assess their capabilities," he said.
With offices around the world, there is little to stop the
Big Four from moving more work to countries where they can do it
cheaply, said Bruce Pounder, director of professional programs
for SmartPros, a firm that provides education for accountants.
In the United States, the PCAOB oversees corporate auditing.
The board was set up a decade ago after the book-cooking
scandals at Enron Corp and a slew of other big U.S. businesses.
Under law, any firm that audits or plays a major role in the
audit of a public U.S. company must register with the PCAOB.
Hundreds of firms from more than 85 countries are registered.
NO PACT WITH INDIA
In practice, this has meant the PCAOB has had to forge
working relationships with national audit regulators around the
world, and it has done so with at least a dozen nations,
including the United Kingdom, Germany and Japan.
The PCAOB is struggling to work out a cooperative pact with
China, where dozens of accounting scandals have erupted at
companies listed on U.S. exchanges. The PCAOB has been barred
from inspecting audit firms in China - an issue so serious the
PCAOB is considering de-registering Chinese audit firms.
No country hosts more U.S. auditing work than India. No
audit failures have been traced to offshore work there, and
audit work done in India is routinely sent back to the United
States where the PCAOB can review it.
But there is no formal agreement on offshoring with India,
which allows the PCAOB unfettered access to inspect audit firms.
The PCAOB's Indian counterpart, the Institute of Chartered
Accountants of India, has no oversight of the Indian offshore
centers doing audit work on U.S. companies' books.
PCAOB Deputy Chief Auditor Greg Scates told Reuters: "There
are no standards that limit what you can do" in the area of
He added, "The key question here is, are the staff that's
doing the work properly trained and supervised?"
The PCAOB would be concerned if firms offshored audit work
involving high risk and judgment, he added.
The PCAOB is considering making auditors disclose in audit
reports when major parts of an audit are performed overseas. The
proposal comes after PCAOB inspectors turned up numerous
problems in overseas audits.
In April 2011, the PCAOB fined an Indian affiliate of PwC
$1.5 million for audits of software company Satyam Computer
In response to the PCAOB's disclosure proposal, some audit
firms have asked to be exempted from disclosure in cases where
Indian offshore workers are supporting a U.S.-based audit team,
which remains in control of the audit.
Like other U.S. companies, audit firms are not required by
law to publicly disclose offshore hiring. Audit firms said they
disclose offshoring in engagement letters - essentially
contracts with their clients - but those letters are private.
Anne Simpson, corporate governance director for the
California Public Employees Retirement System, the largest U.S.
public pension fund and a major institutional investor, said:
"If firms are fully convinced that the decisions they're making
about offshoring are sensible, then it should simply be
(Additional reporting by Tanya Agrawal in Bangalore and Huw
Jones in London; editing by Kevin Drawbaugh and Matthew Lewis)