Chartered accountants’ body clashes with govt authority over proposed audit reforms | Mint

New Delhi: A crucial reform in the works for tightening India’s auditing standards may not be a smooth affair. 

The Institute of Chartered Accountants of India (ICAI), the self-regulating body for chartered accountants, on Friday called for a pause in the public consultation on reforming the country’s auditing standards called by India’s National Financial Reporting Authority (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,” the accounting industry body said in a press statement on Friday.

In a meeting on 17 September, the ICAI Council expressed its view that a contentious clause in India’s accounting standards, which is at the centre of the intended reform, had stood the test of time. It, however, added that there was room for further strengthening India’s accounting standards to better serve the public.

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The clause in question is the standard of accounting 600, or SA 600, which allows a parent company’s auditor to rely on the work of a subsidiary’s auditor without being held responsible for it, subject to safeguards—a loophole NFRA wants to plug. 

On 17 September, NFRA proposed that lead auditors of business groups be “ultimately responsible and accountable” for their consolidated financial statements even if subsidiaries or branches are audited by other auditors—aligning India’s auditing standards with international rules.

The ICAI Council has tasked its Auditing and Assurance Standards Board (AASB) with this review. 

“Unfortunately, while this issue was still being discussed in the aforesaid meeting of the Council, NFRA has come out with an exposure draft of SA 600 for revision inviting public comments on the same day which has come as a surprise to the Institute,” ICAI said.

A person informed about the development said a revision of India’s audit standards was long overdue. 

“ICAI has now called for a revision in the process of review of the audit standard 600. Its review has been in a state of pause since 2009. In 2020 and in 2023 too, NFRA had raised the issue of its review with the ICAI,” said the person, who spoke on condition of not being named.

NFRA did not immediately reply to an email sent on Friday seeking comments.

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Findings of fraud

NFRA’s reasons for proposing the changes at this juncture included its findings from oversight and enforcement work, which indicated fraud, negligence and audit failure emanating from a faulty application of SA 600. 

The findings also showed a tendency on the part of the auditors of a parent company to rationalize their actions under the provisions of SA 600, the person quoted above said. 

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ICAI has objected to NFRA’s draft of the revised audit standard, stating that it is not desirable for the auditor of a parent company to assess or control the decisions of equally qualified subsidiaries’ auditors. 

ICAI has taken the view in its discussions with NFRA that if in the revised SA 600 a chartered accountant is not permitted to rely on another one, then it would be undermining the CA qualification. 

“All CAs are expected to be of the same quality,” a second person, who also spoke on condition of anonymity, said, adding that SA 600 is not toothless and NFRA has invoked it in some cases.

The first person quoted above said that being a chartered accountant is an eligibility condition and not the same as competence. NFRA’s proposed changes to the audit norms apply only to about 1.5% of the 1.74 million active companies required to get audited, this person said.