A proposal to enhance the responsibility of auditors in preparing consolidated financial statements for companies and their subsidiaries has sparked a disagreement between two prominent accounting regulators in India.
Recently, the National Financial Reporting Authority (NFRA), established by the Indian government to oversee compliance with accounting standards, released a consultation paper suggesting that the auditor of a parent company should bear responsibility for the financial statements that combine the accounts of subsidiaries and affiliates. This change aims to align Indian regulations with global standards.
In opposition, the Institute of Chartered Accountants of India (ICAI), a self-regulatory organization, expressed concerns that this move could concentrate power within a few large audit firms. They argue that many small firms could be driven out of business if these larger auditors decline to rely on audits conducted by them.
The NFRA’s proposal arose from several high-profile audit failures involving companies such as Reliance Capital Ltd., Coffee Day Global Ltd., Dewan Housing and Finance Ltd., and the IL&FS Group, where auditors reportedly placed excessive reliance on the work of other auditors. This situation complicates attributing accountability, according to the regulator.
Data from the NFRA indicates that among the 100 largest mid-cap and large companies, 23 have more than 50 subsidiaries and affiliates, while 76 of these companies have international divisions. Currently, many of these subsidiaries and affiliates are audited by smaller firms.
The top five audit firms, including EY and Deloitte, audit over 60% of the 500 largest publicly traded companies in India, meaning thousands of smaller firms rely on subsidiaries and affiliates for a significant portion of their business.
Addressing ICAI’s concerns about the viability of smaller audit firms, the NFRA noted that its proposal would only affect 1.5% of active companies in the country and would exempt government-owned entities, including banks where audits are conducted by smaller firms.
Ketan Dalal, founder of Katalyst Advisors and a member of three company boards where he chairs the audit committees, stated that having a single auditor for both the parent company and its subsidiaries would provide reassurance to public stakeholders and the company’s board. He added that the potential for increased concentration of audit work should not be a major factor in considering this change.