New group audit norms to cover a wide spectrum of economic value
September 23, 2024
Improved standards to boost investor confidence in Indian firms, say experts
The National Financial Reporting Authority (NFRA) indicated that its revised Standards on Auditing 600 (SA 600), which are aimed at improving the quality of group audits, would cover just 1.8% of the 1.7 million “active” companies, to allay the fears that the new norms would result in large-scale business loss for smaller audit firms. However, in terms of the value – measured by turnover or market capitalisation – the companies in NFRA ambit account for a lion’s share of India’s incorporated entities.
For instance, just 2% of the 79.7 million “business income” returns filed for the assessment year (AY) 2023-24 (financial year 2022-23) accounted for 72% of such income reported in the year. The concentration of “value” in the corporate world is such that just 637 companies with business income of Rs 500 crore or more reported combined such income of Rs 16.16 lakh crore in AY24, while total business income reported in the year by all including other businesses and non-incorporated ones, was Rs 46.56 lakh crore.
This clearly shows that listed companies in India –about 17,540– have a dominant share of business income reported. Unincorporated entities, though much larger in number, have a smaller share of business income.
Meanwhile, the SA 600 continued to be receive mixed response. Independent analysts say that the group auditor’s facility to review component auditors’ reports would help boost the confidence of global investors in Indian firms. A key theme of the revised guidelines is that the group auditor would be responsible for keeping a check on the quality of the auditing process, which is being carried out by other auditors for group entities. The SA 600, as it exists today, does not permit review of work papers of component auditors by the principal auditor.
However, the Institute of Chartered Accountants of India (ICAI) on Friday called for a pause in the standard revision proposed by NFRA. “ICAI calls for a pause in the revision process to allow for a comprehensive review and discussion with all relevant stakeholders to ensure that any changes are in the best interest of the profession and public,” it said in a statement.
Experts said that the proposed changes are likely to be a big positive for the Indian economy and help attract investments. “We are a growing economy. The adoption of new standards will put India at par with the global practices. Foreign investors would like India to follow transparent accounting practices, and this move will repose their faith in Indian companies,” said Manmeet Kaur, partner at Karanjawala & Co.
Ashok Haldia, former secretary at ICAI said that the revised standard will help in improving the quality of consolidated financial statements as it is based on collaborative approach between group auditor and component auditor with the former having ultimate responsibility. This makes a sense as focus is not on component audit but on matters which are material for financial statements of the group as a whole, he added.
Experts said that the draft guidelines are just reaffirming India’s commitment in the G20 to align with the international standards. “Rules related to blindly accepting work of another CA and not having access to their work papers were established when there was no peer review. If CAs can share their work with other CAs for peer reviews, why not for consolidation. This change should be looked at as an opportunity to enhance audit quality across board – big or small alike,” said Vishesh C. Chandiok, CEO at Grant Thornton Bharat.
Despite a host of benefits, audit professionals claim that the revised standards would increase the manpower and other administrative costs for the auditors. In addition, the scrutiny will increase for the component auditors as they will be answerable to the group auditors. “The group auditors will have to get into more details while auditing a company’s books. Their accountability will increase tremendously, especially in case where the group company has several subsidiaries. Since the group auditors will be required to micro-manage things, they will need more manpower,” said Kaur.
According to NFRA, in several cases of Public Interest Entities (PIEs), severe deficiencies and lack of understanding on the part of the audit firms and auditors of their responsibilities in law was observed. This led to improper application of the standards by the Principal and other auditors, and “gross negligence and serious lack of due diligence,” hurting the interests of the stakeholders in PIEs, it added.
[The Financial Express]
