NFRA and ICAI at odds over plan to sync audits with global norms
Aug 29, 2024
Synopsis
The National Financial Reporting Authority and the Institute of Chartered Accountants of India are at odds over proposed changes to domestic audit standards. ICAI fears the changes could concentrate audit work among large firms, impacting smaller practitioners. Meanwhile, other regulatory bodies have backed the new norms aimed at preventing corporate frauds.
Differences have cropped up between the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI) over a plan to revamp domestic audit standards in sync with global norms, people aware of the development told ET.
In a meeting of the NFRA board on Monday, senior ICAI representatives are learnt to have raised concerns over the former’s draft norms to overhaul the extant Standard on Auditing (SA) 600, which will be applicable to only listed companies and banks, barring the state-run ones.
The institute fears the draft norms could "result in a concentration of audit work with a few large firms" and adversely impact most chartered accountant firms that comprise “small and medium” practitioners, senior industry executives said.
The draft proposes to mandatorily make the principal auditor of a corporate group responsible for the entire group's financial statements, they said.
This, ICAI reckons, gives adequate power to the principal auditors—often belonging to large accounting firms—to influence the company management and get the component auditors, who are mainly from small and mid-sized ones, replaced with their own people. Component auditors usually conduct the audit of various subsidiaries of a corporate group.
ICAI has also objected to another proposal to mandate the principal auditors to assess the professional competence of component auditors. All these auditors are members of the same professional body—ICAI--having the same education, training and licensing requirements, it argues.
Under the extant norms, various such stipulations are advisory in nature and are, therefore, not strictly followed.
Emails sent to ICAI and NFRA didn’t elicit any response until the time the paper went to press.
NFRA has regulatory power over auditors of all listed and large unlisted public limited companies for professional lapses, while the ICAI has jurisdiction over the rest.
CAG, others back draft norms
However, the office of the Comptroller and Auditor General (CAG) and regulators, such as RBI and Sebi, whose officials are also part of the NFRA board, have endorsed the audit watchdog’s draft norms, ET has learnt.
In separate letters to NFRA over the past two months, the CAG, the RBI and Sebi have given their go-ahead for aligning the domestic audit standards with the global ones, one of the people cited above said. While endorsing NFRA’s draft norms, the CAG, however, is learnt to have advised the audit regulator to seek legal views on them for smooth sailing.
Since its roll-out in 2002, the domestic audit standards haven’t been upgraded in accordance with the revamped International Standard on Auditing (ISA) 600.
NFRA, which has been holding meetings for months to revise the standard, will soon release a formal draft for stakeholders’ comments. Once it finalises the revised standard, it will send the proposal to the corporate affairs ministry for notification.
NFRA’s take on draft norms
For its part, NFRA believes that the revamp is a must to prevent corporate frauds by fostering greater accountability among auditors responsible for the financial statements of companies, based on which millions of retail investors and others put their money in stock markets, said people aware of the regulator’s thinking.
So, greater public interest overrides any other issue, said the people.
Also, the new norms would apply only to a few thousand listed companies, barring the state-run ones, leaving hundreds of thousands of unlisted ones. This adequately protects the interests of small and mid-sized audit firms, they said. "In any case, the revamp of the standard isn't aimed at hurting any audit firm, big or small. But it's an attempt to further bolster audit quality to protect the trust of shareholders and investors in the country's audit eco-system," one of them said.
NFRA’s move also follows its probe into various corporate scandals—from IL&FS, DHFL and Reliance Capital to Coffee Day Enterprises—where principal auditors and component auditors often sought to blame one another for the frauds, the people added.
NFRA also endorses the proposed assessment of component auditors’ professional competence by the principal auditors. In various professions, NFRA believes, one person gets to judge another, both of whom may have cleared the same examination or undergone same training (IAS officers appraising the performance of other IAS officers, etc), they said.
“This is an established practice across professions. The component auditors shouldn’t have issues with the principal auditors judging their professional competence,” said one of them.
The NFRA board comprises its chairperson Ajay Bhushan Prasad Pandey, two full-time members and nine part-time members. The ICAI president and chiefs of the institute's Accounting Standards Board and Auditing and Assurance Standards Board are among the part-time members, who also include a nominee each of the corporate affairs ministry, the CAG, the RBI and Sebi, and two independent ones.
[The Economic Times]
