NFRA-ICAI tussle over key audit standard overhaul: CA Institute Council to meet on Sep 17 to discuss future strategy
New Delhi, August 31, 2024
ICAI to debate NFRA’s plan to overhaul audit standard SA600, fearing concentration of market in few hands
The Institute of Chartered Accountants of India (ICAI) is locked in a battle of wits with the National Financial Reporting Authority (NFRA) over its intervention to overhaul a key audit standard (SA600–‘Using the Work of Another Auditor’). A special central council meeting has been convened on September 17 by the CA Institute to debate the matter thoroughly.
The meeting will discuss the issue which arises from a recent NFRA plan to require the principal auditor (auditor of a Holding Company in a Corporate Group) to own and take responsibility for the actions of the component auditors (auditors of the subsidiaries) in a corporate group.
Ranjeet Kumar Agarwal, President of ICAI, said that CA Institute is not in favour of any refresh of the two-decade-old SA600 that would lead to the concentration of the audit market only in a few hands.
“We are not in favour of this (NFRA plan) as it will affect small practitioners and virtually kill the majority of 96,000 CA firms in the country. India cannot afford to allow the audit market to be concentrated in the hands of few firms”, Agarwal told businessline.
“We at the central Council will discuss this matter on September 17. This is a larger issue. It is impacting the economy of the country. Things that are going on for twenty years cannot be changed by one line,” he said.
According to R Narayanaswamy, Former Professor of Finance and Accounting, IIM Bangalore and current part-time Member at NFRA, there are two concerns (from ICAI) about implementing ISA 600 (international standard corresponding to SA 600) in India.
One, the group auditor, usually a bigger firm, will review the component auditors’ work by having access to their work papers. Two, the group auditor could take away the work of component auditors, leading to further concentration of work.
“On the first, there is no bar on review of the component auditors’ work. Peer review involves evaluation by another firm. On the second, auditing standards should protect the interests of investors and creditors and the public interest.
They can’t be used to protect the business interests of auditors, big or small. If there are anti-competitive practices, it can be taken up with the Competition Commission of India,” Narayanaswamy told businessline.
NFRA, which is the country’s sole independent audit regulator, plans to empower the principal auditor to access the working papers of audit of component auditors. It also wants principal auditors to own up to the actions of the component auditors instead of just relying on them.
These proposed changes will initially form part of a consultation paper that NFRA plans to issue for stakeholder and public comments, sources said. The elements of the changes required to SA 600 (Auditing Standard on ‘Using the Work of Another Auditor’) were discussed at a meeting of the NFRA Board on Monday.
Currently, while attesting the consolidated financial statements of a corporate group, the Principal auditor relies on the work done by the component auditors (of the subsidiaries). They however don’t own any responsibility for any professional misconduct or acts of omission or commission by the auditors of the subsidiaries.
Probes made by NFRA on recent audit failures in Corporate India in cases such as DHFL, IL&FS, Reliance Capital, and Coffee Day Enterprises saw the principal and component auditors blame each other and neither owning responsibility for the frauds. This has prompted NFRA to look at filling the gaps in auditing standards, sources said.
Agarwal highlighted that there are 1.6 lakh practising chartered accountants and 96,000 CA firms in the country. Of this, nearly 75 percent of the firms are proprietorship firms. They will be affected if SA 600 changes as proposed are implemented, he added.
Amarjit Chopra, former ICAI President, said, “In my view, Principal Auditor should identify the critical areas that he wishes Component Auditor to focus on, e.g. related parties transactions, utilisation of loans etc and should issue directions for the same. Later on principal auditor may ask for working papers in respect of such areas from the component auditor in case he feels the need for the same”.
But asking for working papers for the entire audit may not be desirable, Chopra said. He added that certain carve-outs in SA600 may be necessary in India for RBI, CAG, and IRDAI audits.
[The Hindu Business Line]
