The National Financial Reporting Authority (NFRA) on Tuesday brought out revised Standards on Auditing 600 (SA) to match the International Standards on Auditing (ISA 600). This is for public consultation to address “the severely deficient quality and serious lack of due diligence” found in group audits in India.
The revised standards have been proposed by NFRA for audits of listed companies and public interest entities, except public sector enterprises, public sector insurance entities, public sector banks and their branches.
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This would bring a total of 17,450 listed holding companies and their subsidiaries, including unlisted ones, under the ambit of the revised standards, NFRA said.
NFRA — while inviting public comments — has said that inherent complexity of group structures cannot be handled by the 2002 version of SA 600 currently practised in India. Internationally, these standards were revised in 2009.
“The primary reason for proposing adoption of a revised standard for group audits is to help safeguard public interest and investor protection, and the need for a standards framework that is robust enough to meet the challenges posed by complex financial systems today,” it said.
The revised standards deal with special considerations that apply to an audit of group financial statements.
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The revised standards hold that the group auditor is ultimately responsible for the audit.
Group auditor under revised standards would also evaluate the component auditor’s communications and the adequacy of his work.
The regulator was addressing concerns raised by the Institute of Chartered Accountants of India (ICAI) on concentration of audit with a few big firms. It said the total number of entities under the NFRA domain and their subsidiaries together account for only about 1.8 per cent of the total active companies in the country.
“The audit of around 98 per cent of the companies may not be impacted by the revision in the standard. In other words, there may not be any significant impact on the number of audits done by small and medium audit firms,” NFRA said.
According to sources, ICAI is concerned that adoption of the ISA 600 will result in an unwarranted situation. It will lead to concentration of audit work with a few large firms. This will adversely affect small and medium practices, which is detrimental for growing economies like India.
The Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) have conveyed their in-principle agreement for the need to revise the existing standards.
The Comptroller and Auditor General of India (CAG) suggested stakeholder consultation and a graded approach in shifting to the revised standards.
It cited examples of its own orders in matters including Reliance Capital, Reliance Home Finance, Reliance Commercial Finance Limited — together with an alleged fraud of Rs 29,000 crore. Also, other examples are — Coffee Day Global Limited, with an alleged fraud of Rs 3,500 crore, and Dewan Housing and Finance Limited, with alleged fraud of Rs 34,000 crore.
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.
Also there was non-consolidation of significant subsidiaries in the consolidated financial statements.
There were also non-performance of adequate audit procedures in the identification, assessment and conclusions of risk of material misstatement and failure to verify related-party transactions.
A senior partner at a Big Four firm said it is essential to prioritise these efforts.
This is because many Indian companies have expanded or intend to expand across borders and global investors continue to look to invest in India.
“With an effective regulatory framework in place, which is well aligned with global standards, we are confident that fairness and transparency will be upheld,” the senior partner said.
The issue of adopting the ISA 600 was discussed in the last board meeting of NFRA attended by regulators, including RBI, Sebi and ICAI. It also had representatives from the ministry of corporate affairs.
Group auditor responsible for audit
Group auditor to also evaluate component auditor’s communications
They would also be responsible to evaluate the component auditor's adequacy of work