In India, the National Financial Reporting Authority (NFRA) levied a record penalty of ₹10 crore on an audit firm for not complying with auditing standards during the audit of a listed entity.

In China, a prominent audit firm is expected to face a six-month ban and a huge monetary penalty for gross negligence in the audit of Evergrande — a real estate company in China which collapsed in months.

In the UAE, the Audit Disciplinary Board censured a large audit firm, which the firm did not disclose to the Public Company Accounting Oversight Board (PCAOB) in the US. The firm ended up getting censured by the PCAOB as well, and had to pay a monetary penalty, too.

The Securities and Exchange Board of India (SEBI) is asking auditors to be a “bit more careful” while auditing companies that float SME IPOs. Such focused regulatory oversight on the profession has resulted in a view that signing a balance-sheet and an audit report without any comments should count as one of the bravest things one can do these days.

A direct result of this could be a further reduction in the number of professionals opting for practice — they would opt for the comfort of a corporate job despite its shortcomings.

NFRA action

The ₹10-crore penalty on the audit firm was the sixth of a series of actions taken against the auditors of Café Coffee Day (CCD). NFRA slapped the penalty on the auditor of the consolidated entity — the previous orders were against the auditors of the subsidiaries. NFRA believed the consolidation auditor did not investigate the work done by the auditors of the subsidiaries properly.

The earlier orders of the NFRA detailed how funds were being diverted between subsidiary companies and no repayment was happening. The consolidation auditor responded that he relied on the work of the other auditors of the subsidiaries, associates and joint ventures.

They stated that it would be impossible for the consolidation auditor to dig deep into the work done by auditors of 46 subsidiaries, four associates and three joint ventures. NFRA did not accept these arguments stating that Auditing Standard SA-600 — Using the Work of Another Auditors — provides enough ammunition to the consolidation auditor to look more closely into the financial statements and, if necessary, the work done by other auditors.

If India adopts the revised International Auditing Standard ISA-600, the responsibility of the consolidation auditor is only going to increase. It is apparent that the sheer scale of the diversion of funds amongst companies of the CCD group made the NFRA feel that any one of the auditors should have commented on this in their report.

The 74 orders passed by the NFRA and the actions of the regulators across the world have undoubtedly made auditors who have stayed back to play the game more vigilant. It is expected that audit reports will tell a lot more than what is being told now and that auditors would give up high-risk audits.

One of the things that regulators can do to ensure that auditors have some skin in the game is to tilt the risk-reward ratio for audit fees towards rewards rather than risk as it is now.

India is talking about creating a few large accounting firms from India that can take on the present large firms and service global clients. Initial responses to this have been that it is impossible to create a few large firms when there are about 75,000 proprietorship firms from a population of 96,000 accounting firms. A few medium-sized Indian firms are merging with other medium-sized firms but the volume of these mergers ensure that the firms still remain medium-sized.

Interesting times lie ahead for the auditing profession. The fittest would only survive, and they could also end up being one of the finest.

The writer is a chartered accountant

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