NFRA likely to notify revised audit standards soon amid ICAI concerns

ICAI feels that given the complexities of the Indian market, the revised standards will concentrate audit work in the hands of a few big firms

The tug of war between the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI) over the need to revise India’s auditing standards to match global norms further intensified recently with the CA body bringing new quality management rules without taking the auditing regulator on board.

 

While the proposed adoption of revised International Standards on Auditing (ISA) 600 itself has become a bone of contention between the two regulators, several auditors themselves have supported the move. Many of the big audit firms feel that any move to strengthen audit quality and enhance trust in financial statements is both welcome and essential and that it should take precedence over narrow interests.

 

ICAI this month released a new Standard of Quality Management (SQM) for chartered accountants and audit firms despite legal requirements that these standards be notified by the government based on recommendatiCAons from the National Financial Reporting Authority (NFRA).

 

‘Need to keep pace with global standards’ 

The revised standards deal with special considerations that apply to an audit of group financial statements. The revised standards hold that the Group auditor is ultimately responsible for audit. Group auditor under revised standards would also evaluate the component auditor’s communications and the adequacy of their work. NFRA has invited public comments till October 30 for the revised standards. Sources said that after its next board meeting in November, NFRA is likely to notify the new standards for companies in its domain.

 

“We must keep pace with global standards and evolving market dynamics, as many Indian companies have expanded internationally or intend to, and many global organisations are already invested or keen to invest here. India is a mature nation with an effective regulator, to ensure fairness and transparency,” said a senior partner from one of the Big Four firms.

 

The ICAI, however, feels that given the complexities of the Indian market, the revised standards will concentrate audit work in the hands of a few big firms. Experts feel that NFRA is using its legal powers to regulate and revise the audit standards in order to bring in a robust and modern regime that would ensure that there is reduction in lapses by the auditors.

 

Survival of small firms difficult: ICAI sources

 

Sources in the ICAI said that the unique regulatory architecture and professional environment in India requires a careful consideration of domestic needs before transplanting overseas standards.

 

ICAI has also said that there are apprehensions in the minds of small and medium CA firms who are generally entrusted with audit work of the subsidiary companies that the Group auditor in the guise of overseeing of quality of their work and under the pretext of ensuring uniform quality may persuade the managements to replace the small audit firms of subsidiary companies with that of his own firms. This, ICAI feels, would make the survival of the small firms difficult.

 

Speaking on the condition of anonymity, a top executive in a Big Four firm said without elaborating that NFRA’s interpretation of the international standards could be debated.

 

However, talking of implementation challenges, Aurelia Menezes, partner, King Stubb & Kasiva, Advocates and Attorneys said, “One of the major practical challenges in the implication of the revised SA 600 is meeting the increased requirements for the group auditors and performance of the additional responsibilities outlined thereof.” 

 

Menezes said that ICAI’s concerns that revisions would hamper the business of smaller audit firms are valid to an extent. He said that post implementation of the revised SA 600, the principal auditors or the group auditors would want to take up the audit of the associate or subsidiary companies as well in order to be in a better position to audit and to avoid any associated risks rather than to rely on the audits prepared by component auditors.

 

“However, the ICAI’s concern is limited to these public interest entities which we believe does not put a major dent on the business of smaller audit firms,” Menezes added. 

 

Revised standards applicable to public interest entities

 

The revised standards would be applicable to public interest entities in India that fall under Rule 3 of NFRA Rules 2018, except Public Sector Enterprises, Public Sector Banks, Public Sector Insurance Entities, and their respective branches which comprises merely 1.5 per cent of the total active companies which are required to be audited. 

 

Sources in NFRA have said that ICAI in opposing the revised standards has never mentioned public interest or investor protection and the focus has always been the interest of the profession. 

 

Citing the examples of its own orders in matters including Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial Finance Limited - together alleged fraud of Rs 29,000 crore, Coffee Day Global Limited with alleged fraud of Rs 3,500 crores and Dewan Housing and Finance Limited with alleged fraud of Rs 34,000 crore, NFRA highlighted, “A mechanical reliance was placed by the Principal Auditor on the work of the Other Auditor without assessing the special circumstances that required additional audit procedures.”

 

NFRA said that across the above cases, there were several obvious indications of syphoning off of funds through subsidiaries, including promoter-controlled subsidiaries, nonconsolidation of significant subsidiaries in the consolidated financial statements, nonperformance of adequate audit procedures in the identification, assessment and conclusions of risk of material misstatement, failure to verify related party transactions.

 

The senior partner of one of the Big Four firms quoted above said that it is essential to prioritise these efforts especially as many Indian companies have expanded or intend to expand across borders and global investors continue to look to invest in India.   

Tug of war 

ICAI recently introduced new quality management rules without taking NFRA of the Corporate Affairs ministry on board 

The proposed adoption of revised International Standards on Auditing (ISA) 600 has become a focal point in the dispute between the two regulators 

Several auditors supported the move, viewing it as essential to strengthen audit quality 

ICAI said that there are apprehensions by small and medium audit firms who are generally entrusted with audit work of the subsidiary companies