NFRA to Deliberate on Auditing Standards Amidst Tensions with ICAI
New Delhi: The National Financial Reporting Authority (NFRA) is set to convene on November 11 and 12 to discuss revisions to all 35 auditing standards (SA), including the draft norms for SA600. This comes amid ongoing tensions with the Institute of Chartered Accountants of India (ICAI).
In addition to the revision of the SA600, NFRA plans to review the standards on quality management (SQMs) for audit firms and 16 consequential changes to the audit standards that were proposed by the ICAI on October 14. Given the presence of three ICAI representatives on the 12-member NFRA board, the upcoming meeting is anticipated to be contentious, as there will likely be strong advocacy for halting the upgrades to SA600 and asserting the ICAI’s authority to issue the SQMs.
A Clash of Perspectives
During the last NFRA board meeting in August, senior representatives from ICAI vehemently opposed the SA600 revisions, which would hold the principal auditor of a corporate group accountable for the entire group’s financial statements. ICAI argued that this would grant excessive power to principal auditors—often from large accounting firms—to influence company management, potentially replacing component auditors, typically from smaller firms, with their own teams. This could result in a concentration of audit work within a few large firms, a concern that ICAI continues to raise.
Moreover, ICAI has questioned the relevance of SA600 revamps in the Indian context, particularly given the role of component auditors who handle audits for subsidiaries within corporate groups. Nevertheless, NFRA plans to proceed with finalizing the SA600 revisions at the upcoming meeting, bolstered by support from representatives of various regulatory bodies, including the Reserve Bank of India and the Securities and Exchange Board of India. These entities advocate for alignment of SA600 with global standards, asserting that over 98% of active companies in India will not be adversely affected by the new rules.
ICAI’s Position on Quality Management Standards
The NFRA has also expressed objections to the ICAI’s issuance of SQMs on October 14, asserting that these standards should be aligned with audit standards and hence notified by the government based on its recommendations. In contrast, the ICAI maintains that these quality management standards do not fall under the umbrella of auditing standards, and therefore, it retains the right to issue them independently of NFRA’s approval.
As the NFRA prepares for what promises to be a challenging meeting, the continued dialogue and disagreements highlight the complexities and critical nature of auditing standards in India’s financial landscape.
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