Regulators Clash: NFRA issues consultation paper on revamp of key auditing standard SA600

The National Financial Reporting Authority (NFRA) has released the much awaited consultation paper on revision to a key auditing standard (SA600- Using the Work of Another Auditor) to address the deficiencies in conducting group audits.

The decision to revise the two-decade-old SA 600 follows observations by the NFRA, which identified significant deficiencies in the audits of Public Interest Entities (PIEs). The NFRA noted that many audit firms and auditors lacked a clear understanding of their legal responsibilities and improperly applied the SA 600 auditing standard, both as principal and other auditors.

The NFRA’s investigations, including cases referred by the government and its own suo-motu inquiries, have revealed gross negligence and a serious lack of due diligence by auditors, which has adversely affected the interests of stakeholders in PIEs.

NFRA, which is the country’s sole independent audit regulator, has now sought public comments — both from individuals and organisations — on the consultation paper by October 30. The proposed revision to SA 600 is intended to completely align it with the ISA 600, which is the corresponding international auditing standard already issued by the International Auditing and Assurance Standards Board (IAASB).

In the consultation paper, NFRA has mooted changes to empower the principal auditor to access the working papers of audit of component auditors. It also wants principal auditors to own up to the actions of the component auditors instead of just relying on them.

The proposed revisions as specified in NFRA consultation paper will go a long way in protecting the interest of retail and other investors, creditors such as banks and other financial institutions, and foreign investors, say economy watchers. 

The SA 600 is applied in case of audit of companies that have subsidiaries and associates, with the holding company being audited by a principal or main auditor and the subsidiaries and/or associates by ‘other’ or ‘component’ auditors. 

The auditing standard outlines the responsibilities of the principal auditor vis-a-vis those of the component auditor. 

The principal changes mooted in the consultation paper include requiring the principal auditor (auditor of a holding company in a corporate group) to own and take responsibility for the actions of the component auditors (auditors of the subsidiaries) in a corporate group.

ICAI-NFRA tussle 

The NFRA consultation paper was made public on a day (Tuesday) the Central Council of the CA Institute held a “special meeting” in the capital to discuss and debate the fallout of the NFRA move.

The Institute of Chartered Accountants of India (ICAI) is locked in a battle of wits with the NFRA over the latter’s intervention to overhaul SA 600.

CA Institute is not in favour of any refresh of the two-decade-old SA600 as it could lead to the concentration of the audit market only in a few hands.

India has 1.6 lakh practising chartered accountants and 96,000 CA firms. Of this, nearly 75 percent of the firms are proprietorship firms. The small firms will be affected if SA 600 changes as proposed by NFRA are implemented, Ranjeet Kumar Agarwal, President of ICAI had recently said.

CA Institute has main two options— either toe the line of NFRA and on its own take initiative to upgrade the SA 600 in line with international standard (ISA 600) or face the situation of NFRA proceeding ahead to bring changes to SA 600, audit industry observers said.

Reacting to NFRA move, Vishesh C Chandiok, CEO, Grant Thornton Bharat, said, ”We have consistently supported all regulatory initiatives that aim at enhancing audit quality. As indicated by the trends in regulatory findings, SA 600 was clearly in need of alignment with the international standards and we are glad to see the proposal in that direction, albeit in a staggered manner. It is encouraging to see the regulators presenting their rationale for the proposed changes, including their consideration of apprehensions related to the alignment. We do believe that this proposal will work towards bringing in global best practices in group audits with clarity in the role of principal auditor, enhanced transparency in component reporting and essentially enhancing trust in financial reporting.”