Top auditors, consultants back NFRA's tighter group audit norms
Summary
- NFRA board will soon consider enforcing the proposal for making the auditor of the holding company of business groups responsible for their consolidated financial statements even if subsidiary accounts are signed off by other auditors.
The National Financial Reporting Authority’s (NFRA) board will soon consider enforcing tighter norms for statutory audits of conglomerates, two people aware of the development said, a move that has received support from some of the top audit and consulting firms.
The period for receiving public feedback ends this month and the NFRA’s 12-member board is expected to meet soon after that, said one of the people cited above on the condition of anonymity. It will consider the proposal for making the auditor of the holding company of business groups responsible for their consolidated financial statements even if subsidiary accounts are signed off by other auditors.
“Implementation will be based on the decision of NFRA’s board, which comprises representatives of Sebi, RBI, the Comptroller and Auditor General of India (CAG) and two independent members. The board decision will be notified," said the person.
The NFRA is set to go ahead with the changes even as audit profession’s self-regulator and rule maker, the Institute of Chartered Accountants of India (ICAI), had called for a “pause" on harmonizing domestic audit norms for group companies with the global practices to allow for “a comprehensive review and discussion with all relevant stakeholders".
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To be sure, NFRA has offered a carve-out for audit of certain businesses from the proposed norms so that small auditors’ concerns about larger audit firms increasing their market share are addressed.
Audit firm BSR& Co LLP., consulting firm PwC in India., consulting and audit firm Grant Thornton Bharat and another leading audit firm, which did not wish to be named, supported NFRA’s tighter norms.
“BSR& Co LLP believes that alignment with the global standards is a step in the right direction for audit quality," the firm told Mint about NFRA’s proposed amendments to SA600, the audit standard dealing with group financial statements. “Any changes should allow for education and transition for the audit profession."
While BSR has a contractual arrangement with KPMG to share certain methodology, tools, software and training, it is an independent firm.
The amendments seek to fix gaps in the current regime of audit of business groups which the regulator has pointed out to be “severely deficient" as the lead auditor of the holding company was seen placing a “mechanical reliance" on the auditors of subsidiaries. NFRA also said that in some group audit cases it investigated, there were signs of siphoning funds using promoter-led subsidiaries.
Sanjeev Krishan, chairperson, PwC in India, said with the proposed changes, NFRA aims to adopt the best global accounting and auditing standards to ensure that Indian practices align with international benchmarks.
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“This initiative, coupled with proper training and appropriate transition time, will foster investor confidence and create trust among stakeholders," said Krishnan. “It will also help establish an enabling framework that supports sustainable economic growth while upholding the highest standards of accountability, positioning India as a leader in financial governance."
Vishesh C. Chandiok, chief executive officer of Grant Thornton Bharat, a leading consultant and auditor, said the firm has consistently supported all regulatory initiatives that aim at enhancing audit quality.
“As indicated by the trends in regulatory findings, SA600 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," said Chandiok. “It is encouraging to see the regulators presenting their rationale for the proposed changes, including their consideration of apprehensions related to the alignment."
NFRA’s proposed change applies only to public interest entities that come under the regulator, barring state-owned companies, banks and insurers and their respective branches.
“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," said Chandiok.
The principal auditor is the auditor of the holding company and components are subsidiaries.
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Queries emailed to NFRA, ICAI and SRBC & Co. Llp., a leading audit firm, on 23 October seeking comments remained unanswered at the time of publishing.
The first person quoted above said that the revision of SA600 should not be seen as a tussle between NFRA and ICAI. “Also, audit is not a bilateral matter between the auditor and the company, it is a matter involving public funds and interest of all public shareholders," said the person.
The person also dismissed worries that making the holding company auditor responsible for the group financial statement could push audit fee higher. “In listed companies, the public is investing and the auditor signing off its accounts should be reasonably compensated, as per the efforts," said the person.
While SA600 revision is underway, the NFRA earlier this month issued a circular, which builds on the existing audit requirements by interpreting, but not modifying, the extant audit norms.
It explained interpretation and selective application of the provisions of SA600 in group audits was incorrect and not in line with the other auditing standards and the Companies Act, said Nilanjan Paul, a chartered accountant.
The circular makes it amply clear that the group auditor cannot outsource responsibility for parts of the group audit to the component auditor.
“The group engagement partner should take leadership responsibilities for managing and achieving quality on group audits," said Paul.
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