Audit needs to be proper
Written by The Financial Express
January 1, 2025 05:00 IST
Global investors will look for transparent accounting, best practices are a must.
The last couple of years have seen the National Financial Reporting Authority (NFRA), the audit watchdog born in 2018, getting its act together with a keen sense of purpose and apparent determination. This is consistent with the need for a qualitative improvement in India’s audit systems and processes, and to move in synchrony with the constantly evolving global standards. As the NFRA has put its foot down and widened the scope of inspections, however, a host of controversies too have erupted, which refuse to die down easily. While the demarcation of the mandates of the Institute of Chartered Accountants of India (ICAI), the statutory body regulating the CA profession, and the NFRA was thoroughly debated during the formative period of NFRA itself, and defined with reasonable clarity, the “turf conflicts” weren’t to end soon.
According to recent reports, solicitor general of India Tushar Mehta has stated, in response to opinion sought by the NFRA, that the ICAI doesn’t have the power to issue standards on quality management (SQMs) for accountancy firms, or introduce consequential changes to audit norms. The SG’s clarification reinforces the position that the ICAI is not only not empowered to issue “audit standards” on its own, but it can’t all alone publish SQMs, which encompass auditing and all services rendered by accountancy firms. Going by the SG’s view, the two new quality management standards — SQM1 and SQM2 — for auditors issued by the ICAI on October 14 may not be legally tenable. Put plainly, Section 143(10) of the Companies Act empowers the government to prescribe audit and audit-related standards, based on the ICAI’s recommendations, but subject to consultations with and review by the NFRA. Of course, until the Centre notifies these standards, those specified by the ICAI will remain recognised; that is, the ICAI’s absolute powers in this regard are “transitory” in nature, and can’t be invoked afresh.
The ICAI’s understanding of the CA profession and practical issues faced by the community of accountants is much better than that of anyone else. But in the current debates, it is indeed caught on the wrong foot. It is undeniable that sufficient SQMs at the level of audit firms are fundamental to the quality of auditing, as much as the standards per se. Similarly, as regards auditing standards SA600, the ICAI’s view that auditors operating at the parent company level could be content with the component auditors’ reports while vetting the consolidated financial statements of corporate groups, defies logic. Many of the large accounting frauds and fund diversions reported in the country have seen either complicit involvement or deft use of subsidiary firms. It is vital for the group auditors to sit together with the component auditors, and satisfy themselves of the whole audit process for the group. This is indeed the dominant global practice under ISA600, which global investors place their faith in.
To be sure, such cohesiveness among auditors is envisaged under India’s company laws too, but not followed on flimsy grounds. It is important to identify risk centres within corporate groups more efficiently and preemptively, buttress the risk assessment process, and put in place tailor-made and scalable audit systems. In fact, the component auditors too would do well to ask for group audit reports to double check. Given Indian companies’ increasing exposure to global markets and finance, and the country’s significant reliance on global investors for its start-up ventures and infrastructure projects, it can’t afford any complacency in aligning its audit practices with the best in the world. The prospects of audit, after all, are contingent on healthy and fast-growing companies.
[The Financial Express]
