A year where audit integrity took centre stage
December 26, 2024
In November, NFRA finalised and recommended 40 SAs, including the SA 600 and SA 299, to the ministry of corporate affairs (MCA) for notification.
The year 2024 marked a renewal of confrontations between the fledgling audit regulator and the statutory apex body of chartered accountants (CAs), after a spell of harmony. In August, the Institute of Chartered Accountants of India (ICAI) raised concerns on the National Financial Reporting Authority’s (NFRA) decision to revise the existing SA 600 (standard on auditing 600) auditing standards, and align them with the International Standard on Auditing 600 (ISA 600). ICAI contended that changes in the SA 600, as proposed by NFRA, will lead to the concentration of work in the hands of large audit firms.
“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 may persuade the managements to replace the small audit firms of subsidiary companies with that of his own firms leading to concentration of the audit work in the hands of few firms. This would make the survival of the small firms difficult,” ICAI note said.
In November, NFRA finalised and recommended 40 SAs, including the SA 600 and SA 299, to the ministry of corporate affairs (MCA) for notification.
The other bone of contention was the SQMs (standards on quality management), which are a set of rules applicable on CA firms. While ICAI maintained that the SQMs should not be notified by the government separately, NFRA, on the other hand, wanted SQMs to have a legal backing. As part of its comprehensive set of recommendations in November, NFRA asked MCA to notify SQMs as standards.
For sure, NFRA remained active throughout the year with a series of orders being passed against erring auditors. In August, the regulator slapped KPMG-affiliate BSR & Associates with Rs 10 crore penalty, and barred two auditors for serious audit lapses in auditing work for Coffee Day Enterprises in FY19. Recently, the regulator also penalised Deloitte Haskins & Sells for Rs 2 crore, and fined two chartered accountants for lapses in the auditing of Zee Entertainment Enterprises for FY19 and FY20.
The regulator also expanded the scope of its annual inspection this year. It added three new names, including MSKA and Associates (affiliated to BDO) and Lodha & Co, to the exiting list of Big 5 auditors for its annual inspection. In a bid to improve the strengthen its annual inspection process, the NFRA also engaged with the audit committees, independent directors, chief financial officers, and other management executives of the companies this year.
So far, the regulator has issued inspection reports on BSR & Co. LLP and Lodha & Co. LLP where it has flagged major lapses in related-party transactions, audit documentation and independence controls.
Though NFRA sources said that a majority of the audit firms have taken corrective steps after the regulator raised issues with the auditors’ independence and their non-audit work in the last round of inspection. For instance, NFRA had found that auditors were providing non-audit services to their clients, which was leading to a conflict of interest with the auditees, and subsequently causing lapses in the auditing process. Anticipating action from the NFRA, many firms engaged in statutory audit work have stopped taking non-audit work through their affiliated firms.
On its part, the ICAI too remained busy with activities across several years. For instance, the institute passed two high-profile orders against S.R. Batliboi (EY affiliated firm) and PwC for professional misconduct. In the PwC case, ICAI’s disciplinary committee found out that was an apparent sharing of human resources, infrastructure, brand name and contact details between PwC and its affiliated firms which signified that in substance PwC was controlling Price Waterhouse & Co. LLP, New Delhi and network firms.
Though the ICAI’s order was challenged by S.R. Batliboi, in a July 3 order, the Delhi High court said the ICAI is “fully empowered” to take action against the professional misconduct of audit firms in accordance with law.
ICAI is currently working on multiple fronts, including finalising the international networking guidelines for the domestic CA firms which will enable the existing firms with global affiliations to expand the scope of their partnership, and also pave the way for more CA firms to partner with global firms to grow in size and scale. The guidelines are expected to come in the current financial year.
[The Financial Express]
