Institute of Chartered Accountants clashes with government over proposed audit reforms

NEW DELHI: A key reform underway in India to strengthen auditing standards may not be smooth sailing.

The Institute of Chartered Accountants of India (ICAI), the self-regulatory body of chartered accountants, on Friday called for a stay on the public consultation initiated by the National Financial Reporting Authority (NFRA) of India on reforming auditing standards in the country.

“ICAI has called for a pause in the revision process to allow for a comprehensive review and discussions with all relevant stakeholders to ensure that any changes are in the best interest of the profession and the public,” the accountancy industry body said in a press statement on Friday.

At its meeting on September 17, the ICAI Board of Governors said a controversial clause in India’s accounting standards that lies at the heart of the reforms has stood the test of time. However, it added that India’s accounting standards still have room for further strengthening to better serve the public.

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The provision in question is Accounting Standard 600 or SA 600, which allows a parent company’s auditor to rely on the work of a subsidiary’s auditor without being held liable for it, subject to safeguards – a loophole that NFRA wants to close.

On September 17, NFRA proposed that the chief auditor of a corporate group should have “ultimate responsibility and liability” for its consolidated financial statements, even if subsidiaries or branches are audited by other auditors, to bring India’s auditing standards in line with international rules.

The ICAI Council has entrusted its Auditing and Assurance Standards Board (AASB) to conduct this review.

“Unfortunately, while the issue was being discussed at the above mentioned council meeting, NFRA on the same day published the revised draft of SA 600 inviting public comments, which took the association by surprise,” ICAI said.

A person familiar with the matter said India should have revised its auditing standards long ago.

“ICAI has now asked for revisions in the review process of Auditing Standard 600. The review of the standard has been on hold since 2009. NFRA has raised the issue of review with ICAI in 2020 and 2023,” said the person, who did not wish to be named.

NFRA did not immediately respond to an email sent Friday seeking comment.

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Fraud Findings

NFRA’s reasons for recommending the changes at this juncture include findings from its supervisory and enforcement work, which show that incorrect application of SA 600 can lead to fraud, negligence and audit failures.

The survey results also showed that parent company auditors tended to rationalize their actions based on the provisions of SA 600, the people mentioned above said.

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ICAI has raised objections to NFRA’s draft revised auditing standards, stating that it is not appropriate for the auditor of a parent company to evaluate or control the decisions of an auditor of an equally qualified subsidiary company.

ICAI in its discussions with NFRA opined that if the revised SA 600 does not allow chartered accountants to rely on other accountants, then it will undermine the CA qualification.

Another person, who did not wish to be named, said: “All CAs should be of the same quality,” adding that SA 600 was not without force and that NFRA had also invoked it in certain cases.

Being a chartered accountant is a qualification and does not equate to competence, said the first person cited above. The person said the changes in audit norms proposed by NFRA would apply only to about 1.5% of the 1.74 million active companies that need to be audited.