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The National Financial Reporting Authority (NFRA) is unlikely to roll back or materially change its proposed plan to upgrade to International Standard on Auditing (ISA) 600, despite the concerns raised by the Institute of Chartered Accountants of India (ICAI).
FE has learnt from sources privy to the matter that there is “a growing consensus” among majority of the members of the 12-member panel authorised to prepare the draft ISA-600 that any special carve-outs or relaxations from the internationally followed norms in this regard should not be allowed, as it could undermine the audit quality. Also, key regulators of the country including the Reserve Bank of India and the Securities and Exchange Board of India (SEBI) too have supported the NFRA move, the sources added.
A senior official said the draft would be published for public comments in a week.
The ICAI has raised objections to the proposed overhaul of SA-600 norms (concerning use of another auditor’s work), which would lead to the principal auditor of a corporate group to be in charge of the auditors of all subsidiaries in the group. Given that already the listed firms are the preserve of large auditors like Big Five, this could expand their remit to a large sections of Indian companies, including a sizeable number of unlisted ones. The ICAI had said that the move could push most of India’s audit firms out of business, and lead to concentration of audit market with a handful of firms. The council is scheduled to meet on September 17 to deliberate on the matter.
If NFRA has to allow carve-outs (for smaller audit firms) in ISA 600, then the standards would be out of sync with the international ones. Normally, such (relaxation) from international standard is considered only under exceptional circumstances,” said Ashok Haldia, former secretary at ICAI.
In a May 2024 meeting, two full-time and two part-time members of NFRA as well as the joint secretary concerned at the ministry of corporate affairs argued in favour of ISA-600, saying the adoption would be productive. In addition, the representatives from the RBI, Sebi and the Comptroller and Auditor General of India (CAG), too, gave support to ISA 600, with some riders. For instance, the CAG official asked NFRA to follow a “graded approach” for adoption in addition to exploring the legal aspects of its implementation.
“Even though the NFRA is seeking public comments, most members of the 12-member designated authority have expressed their support for the new standards. The three members of ICAI who are part of the authority are in a minority,” said a senior auditing expert, on the condition of anonymity.
On the other hand, the ICAI has been in favour of the extant SA 600 standards. Modifications, if required, should be brought in the same norms, it said. An ICAI source told FE that despite ISA 600 being adopted in many countries, the cases of audit lapses continue to prop up, and these global standards are not a “magic pill” for the current problems.
An NFRA source, however, told FE that the regulator has to follow the best global practices in order to strengthen the auditing profession in the country. “On July 26, the Cabinet secretariat told ministries and departments to examine global benchmarks and best practices at the stage of formulating proposals related to policy matters, schemes, programmes and projects. We are following the memorandum. The ICAI has played a major role in strengthening the audit profession, but there’s a scope to improve it further,” the source said.
The NFRA source added that a spate of recent suspected frauds involving dubious transactions between the parent companies and their subsidiaries has come in recent years. “In cases like IL&FS, Dewan Housing Finance Corporation, Cafe Coffee Day, and others, we have seen money being swindled through subsidiaries. These are known cases. The actual number would be at least 10 times (what is being reported/highlighted) ,” said the source.
The ICAI said that by putting the onus on the principal auditors to take full responsibility of the audit opinion expressed on the group financial statements, including those audited by the component auditors, the principal auditors may pressurise the group management to replace the component auditors by the group auditors.
Currently, there are over 7,000 listed and 1.7 million unlisted companies, with the bulk of the unlisted companies are audited by 96,000 small and mid-size practices (SMPs), comprising either sole proprietors or partnerships with 2-5 partners. SMPs are mostly component auditors of larger parent companies, which are audited by larger firms.
ICAI argues that the draft ISA 600 asks for the principal auditor to assess the professional competence of component auditors which is unwarranted since all auditors are members of ICAI, and are being subject to the same education, training and licensing requirements.
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