NFRA circular warns against selective application of audit standards
Oct 3, 2024
Synopsis
The circular asks auditors to follow both the Standard on Auditing (SA) 600 and the Companies Act 2013 in letter and spirit, on top of other relevant norms, and act accordingly.
The National Financial Reporting Authority (NFRA) on Thursday issued a circular, underscoring the primacy of principal auditors of listed companies in finalising financial statements under existing norms.
The circular asks auditors to follow both the Standard on Auditing (SA) 600 and the Companies Act 2013 in letter and spirit, on top of other relevant norms, and act accordingly.
It makes clear that any narrow interpretation by auditors of a provision to bypass their fiduciary duty to provide shareholders with a fair financial picture of the company would be unacceptable.
The circular applies to auditors of all listed and large unlisted public limited companies that come under the NFRA ambit.
The move follows the audit regulator’s probe into various big 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 circular indicates.
Interestingly, the circular also comes after NFRA’s draft norms to revamp the domestic audit standards in sync with the global ones were opposed by the Institute of Chartered Accountants of India (ICAI).
NFRA draft norms propose to make the principal auditor of a corporate group responsible for the entire group's financial statements.
This, ICAI had reckoned, would give adequate power to the principal auditors—often belonging to large accounting firms—to influence the company management and get the component auditors, who were mainly from small and mid-sized ones, replaced with their own people, leading to a concentration of audit work with a few big firms.
Component auditors usually conduct the audit of subsidiaries of a corporate group.
The NFRA, however, dismissed the fears as “misplaced” and said 98% of the active companies in India might not be covered under the new standards when they apply.
No advisory
The NFRA circular also advised auditors against interpreting several provisions that stipulate obligations under the extant SA600 as advisory, as opposed to mandatory, due to the use of the word “should” instead of “shall”.
“Considering these provisions as directory and not performing the required procedures frustrates the basic purpose of the audit and the objectives of this Standard and results in non-compliance of the Section 143(2), Section 143(3), Section 143(9) of CA 2013 and the Standards of Auditing,” the circular said.
[The Economic Times]
