NFRA Addresses Concerns Over Revamping Domestic Audit Standards
The National Financial Reporting Authority (NFRA) has dismissed as “misplaced” the fears surrounding the proposed overhaul of domestic audit standards aimed at aligning with global norms, which some believe could negatively impact small and mid-sized audit firms in India.
In a recent note discussing its draft norms for revising the existing Standard on Auditing (SA) 600, NFRA emphasized that the audit processes for over 98% of active companies in India would remain unaffected by the new regulations. This follows revelations from the Economic Times, which reported on August 28 that the Institute of Chartered Accountants of India (ICAI) had expressed concerns regarding the NFRA’s draft norms. These norms propose that the principal auditor of a corporate group should carry responsibility for the complete approval of the group’s financial statements. ICAI indicated that such a shift could empower principal auditors, who are frequently part of larger accounting firms, to influence company management and potentially replace component auditors—typically affiliated with smaller firms—with their own personnel. This could lead to a concentration of audit tasks within a handful of large firms.
Component auditors are responsible for auditing the subsidiaries of a corporate group. However, NFRA countered this argument by stating that “audit work concentration” is not a recognized trend. The authority pointed out that these concerns undermine the rights of shareholders to appoint auditors and the function of audit committees in determining auditor selection, as stipulated in the Companies Act. On Tuesday, NFRA officially released its draft norms, inviting public comments until October 30.
‘No Audit Work Concentration’
According to NFRA, the forthcoming audit standards will exclusively apply to listed companies and banks, with the exception of state-run entities, totaling approximately 7,850 organizations. Currently, these companies are audited by around 2,500 to 3,000 accounting firms, of which only 60 to 70 are categorized as large firms. The majority of remaining firms operate as sole proprietorships or are small in scale.
In total, when including the subsidiaries and joint ventures of both listed and unlisted companies (again, excluding state-owned), the number reaches 24,469—representing merely 1.5% of the 1.746 million active companies in India that require auditing, according to NFRA. Furthermore, the data from the National Stock Exchange indicates that only about 1.8% of active companies will likely fall under the new standards, which NFRA asserts should alleviate concerns regarding audit concentration, albeit without directly referencing ICAI.
The domestic audit standards have remained unchanged since their rollout in 2002, lacking updates in line with the revised International Standard on Auditing (ISA) 600. Vishesh C Chandiok, Chief Executive of Grant Thornton Bharat, expressed support for NFRA’s proposal, asserting that it aims to integrate global best practices into group audits while clarifying the role of the principal auditor, enhancing transparency in component reporting, and ultimately bolstering trust in financial reporting.
