NFRA seeks to enforce scalable audit system
October 3, 2024
The ICAI had earlier floated a paper on SQMs, the modern version of the extant Standard on Quality Control (SQCs), which aren’t mandatory in nature.
After insisting on upgraded standards of group audits, the National Financial Reporting Authority (NFRA) may now put its foot down on a new dynamic system of quality management among audit firms. It has proposed that the Institute of Chartered Accountants of India (ICAI) make the proposed Standards on Quality Management (SQM) for auditors enforceable, rather than keep them merely advisory in nature.
“We are proposing that the SQMs should also be issued as “standards” as these are a critical foundation of audits. This would give them the required force of law so that companies can adhere to the standards strictly and improve audit quality,” NFRA chairman Ajay Bhushan Pandey told FE.
The ICAI had earlier floated a paper on SQMs, the modern version of the extant Standard on Quality Control (SQCs), which aren’t mandatory in nature. The draft SQMs, broadly modelled on similar ones in the advanced economies, including the US, take into account new realities in audit practice, lay increased emphasis on risk assessment, and envisage tailor-made, scalable audit systems. The shift from SQC to SQM has been taking place globally over the last few years.
Talking about the SA600, Pandey said many countries including the UK, Malaysia and Singapore have already adopted this latest version that allows group auditors of conglomerates to re-evaluate the reports of component auditors of group entities.
The NFRA’s stance is consistent with its focus on raising the bar for the audit community, as was indicated in its revised Standards on Auditing 600 (SA 600), which are aimed at improving the quality of group audits. The revised SA600 created a flutter among smaller audit firms which fear loss of business as a result of the new norms, which they allege, would lead to concentration of the audit profession in the hands of a few large firms.
“Globally, I-SA600 (present group audit standards) went through revisions twice. But in India, it has not been revised. In our enforcement orders, we have seen how major corporate failures and siphoning off of funds through subsidiaries and related party transactions went unreported because the principal auditors took the plea that they relied on the work of component auditors,” Pandey said, defending the move to enforce the norms. In group audits, it is essential for auditors to function as a “cohesive team,” he said.
The NFRA chairman also noted that the regulators like the Reserve Bank of India, the Securities and Exchange Board of India and the Comptroller and Auditor General have supported the proposal to revise SA600 standards and bring Indian norms on a par with the global standards.
The SA 600 norms, as they exist today, do not permit review of work papers of component auditors by the principal auditor.
Talking about the journey of NFRA in the last six years since it came into being, Pandey said: “Despite limited manpower, the number of orders issued by NFRA is comparable to the orders of international counterparts who are working with a much large workforce.”
SQM requires audit firms to establish and maintain a system of quality management that is appropriate for the size and nature of the firm and the complexity and risk of the engagements it performs. It is designed for both firms that perform audits or reviews of financial statements.
[The Financial Express]
