India sets out to close a critical auditing standard gap to align itself with global peers
Aug 26, 2024
Synopsis
The NFRA, backed by RBI and Sebi, is urging the Institute of Chartered Accountants of India to update SA 600 in line with revised international auditing standards. This update aims to address regulatory gaps and audit failures in cases like Reliance Capital and IL&FS, ensuring better protection for investors through phased implementation.
NFRA sets out to close a critical auditing standard gap to help India align with global normsThinkStock Photos
The National Financial Reporting Authority (NFRA), in collaboration with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi), is urging the Institute of Chartered Accountants of India to update a crucial auditing standard to align with revamped international norms, addressing a gap that has existed for over two decades, ToI reported on August 26.
On Monday, the NFRA board will deliberate on updating SA 600 to match the International Standard on Auditing 600 (ISA 600), which has undergone revisions in 2009 and 2023. This move follows the NFRA's observation of discrepancies in various cases, including those involving Reliance Capital, IL&FS, DHFL, and Café Coffee Day.
The NFRA, responsible for overseeing auditors and audit firms of large and listed companies, initiated discussions in May to update these standards, aiming to close the regulatory gap. Sources have indicated that SA 600 has been particularly contentious. While some chartered accountants argue that smaller firms might be adversely affected, regulatory sources insist that protecting small investors' interests is paramount.
"The Reliance Capital case is an eye opener. The revamp has to be done in public interest since it affects millions of investors who depend on the audited accounts to invest their hard-earned money,” ToI's report (by Sidhartha) said citing a source familiar with the discussions.
The revised standards will be adopted after public debate and are planned to be implemented in phases, beginning with listed companies. According to an analysis by NFRA, current provisions in SA 600 provide too much discretion to auditors. For instance, it states that “the principal auditor would not be responsible in respect of the work entrusted to the other auditors, except in circumstances which should have aroused his suspicion,” and that the principal auditor “will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied.”
“These have resulted in audit failures and undermined audit quality. They are also not in conformity with provisions of the Companies Act,” a source said.
Furthermore, the international standard requires the principal auditor to review the working papers of component auditors, an important step to assess the adequacy of audit work given the risks present.
This update is viewed as necessary to strengthen audit practices and safeguard the interests of millions of investors who rely on accurate and reliable financial statements for their investment decisions.
[The Economic Times]
