 "Indian Accounting Standards, IndAS, accounting, joint ventures, mergers, acquisitions,")
The Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) have conveyed their in-principle agreement with the need to revise the existing standards.
The National Financial Reporting Authority (NFRA) on Tuesday brought out revised Standards on Auditing 600 (SA) to match the International Standards on Auditing (ISA 600), for public consultations to address “the severely deficient quality and serious lack of due diligence” found in group audits in India.
The revised standards have been proposed by NFRA for audits of listed companies and Public Interest Entities, except Public Sector Enterprises, Public Sector Insurance Entities, and Public Sector Banks and their branches. This would bring a total of 17,450 listed holding companies and their subsidiaries, including the unlisted, under the ambit of the revised standards, NFRA has said.
NFRA, while inviting public comments, has said that the inherent complexity of group structures cannot be handled by the 2002 version of SA 600 currently practised in India. Internationally, these standards were revised in 2009.
“The primary reason for proposing adoption of a revised standard for group audits is to help safeguard public interest and investor protection, and the need for a standards framework that is robust enough to meet the challenges posed by complex financial systems today,” it said.
The revised standards deal with special considerations that apply to an audit of group financial statements. The revised standards hold that the group auditor is ultimately responsible for the audit. Under the revised standards, the group auditor would also evaluate the component auditor’s communications and the adequacy of their work.
The regulator, while addressing the concerns raised by the Institute of Chartered Accountants of India (ICAI) on the concentration of audits with a few big firms, said that the total number of entities under the NFRA domain and their subsidiaries together account for only about 1.8 per cent of the total active companies in the country.
“The audit of around 98 per cent of the companies may not be impacted by the revision in the standard. In other words, there may not be any significant impact on the number of audits done by the small and medium audit firms,” NFRA said.
ICAI, according to sources, is concerned that the adoption of ISA 600 will result in an unwarranted situation of the concentration of audit work with a few large firms and will adversely affect small and medium practices in India, which is very detrimental to growing economies like India.
The Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) have conveyed their in-principle agreement with the need to revise the existing standards. The Comptroller and Auditor General of India (CAG) have suggested stakeholder consultation and a graded approach in shifting to the revised standards.
Citing the examples of its own orders in matters including Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial Finance Limited—together alleged fraud of Rs 29,000 crore—Coffee Day Global Limited with alleged fraud of Rs 3,500 crore, and Dewan Housing and Finance Limited with alleged fraud of Rs 34,000 crore, NFRA highlighted, “A mechanical reliance was placed by the principal auditor on the work of the other auditor without assessing the special circumstances that required additional audit procedures.”
NFRA said that across the above cases, there were several obvious indications of siphoning off of funds through subsidiaries, including promoter-controlled subsidiaries, non-consolidation of significant subsidiaries in the consolidated financial statements, non-performance of adequate audit procedures in the identification, assessment and conclusions of risk of material misstatement, and failure to verify related party transactions.
A senior partner at one of the big four firms said that it is essential to prioritise these efforts, especially as many Indian companies have expanded or intend to expand across borders and global investors continue to look to invest in India. “With an effective regulatory framework in place which is well aligned with global standards, we are confident that fairness and transparency will be upheld,” the senior partner said.
The issue of adopting ISA 600 was discussed in the last board meeting of NFRA, attended by regulators including RBI, Sebi, ICAI, along with representatives from the Ministry of Corporate Affairs.
First Published: Sep 17 2024 | 5:51 PM IST
