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NFRA issues revise Standards to Address Deficient Audit Quality
Context:
- The National Financial Reporting Authority (NFRA) has proposed revised Standards on Auditing (SA 600) to align with International Standards on Auditing (ISA 600).
- This update is a response to recent audits that exposed significant deficiencies and negligence by auditors.
Key Features of the Revised Standard:
- The new standard focuses on audits of listed companies and public interest entities, excluding public sector enterprises, insurance entities, and banks.
- Updated Responsibilities: The revised SA 600 aims to replace the outdated 2002 version by clarifying the roles of principal and component auditors in group audits.
- It holds the group auditor accountable for the entire audit, including evaluating the work of component auditors.
- Stronger Framework: The revision seeks to address the complex nature of today’s financial systems, providing a more robust structure for public interest and investor protection.
- Need for Revision: The existing SA 600 is inadequate in managing the intricacies of modern group structures.
- The new standards address a “severe lack of quality and due diligence” in audits, highlighted by cases like Reliance Capital, Coffee Day Global, and Dewan Housing, where auditors failed to address fund syphoning and non-consolidation of key entities.
Concerns from ICAI:
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- The Institute of Chartered Accountants of India (ICAI) is worried that adopting ISA 600 could concentrate audit work among large firms, sidelining small and medium practices.
- ICAI argues that if the principal auditor is held fully responsible for the entire group’s financial statements, smaller firms may be excluded, which would negatively impact the broader economy, where they play a vital role.
NFRA’s Counterview
- NFRA contends that the revised standard will mainly affect listed companies and banks, excluding public sector entities.
- Companies under NFRA’s purview represent only 1.8% of all active companies, meaning that 98% of businesses—and the audits done by small and medium firms—will not be significantly impacted by these changes.
National Financial Reporting Authority (NFRA) Overview:
Constitution:
NFRA was established on October 1, 2018, under Section 132(1) of the Companies Act, 2013.
Functions and Duties:
Under Section 132(2) of the Companies Act, NFRA’s key responsibilities include:
- Recommending accounting and auditing policies for government approval.
- Monitoring compliance with accounting and auditing standards.
- Overseeing the quality of auditing services and suggesting improvements.
- Performing additional necessary functions to protect public and investor interests.
Scope of Oversight:
As per the NFRA Rules, 2018, NFRA governs:
- Listed companies in India or abroad.
- Unlisted public companies with a capital of ₹500 crores, turnover of ₹1,000 crore, or loans/debentures of ₹500 crores.
- Insurance, banking, and electricity companies, along with companies governed by special Acts.
- Companies referred by the government in public interest.
- Foreign subsidiaries of Indian companies if their income/net worth exceeds 20% of the consolidated group.
