The National Financial Reporting Authority (NFRA) has kicked off an epic overhaul of the way auditors verify the truthfulness of corporate financial information, in a change of regime from the current system where auditing standards issued by Institute of Chartered Accountants of India (ICAI) are deemed to be final.
According to two persons familiar with the development, NFRA has begun the revision of all audit and quality standards issued by ICAI, as the Centre seeks to align them with global practices. The authority, which has three ICAI representatives on its board, will submit the revised standards to the corporate affairs ministry for notification.
Out of ICAI's 38 audit standards, NFRA has already start work on revising SA600, which pertains to consolidated financial statements of business groups. According to one of the two people cited above, the authority has also started work on revising the remaining 37 audit standards, plus two other standards on quality management issued by ICAI.
“The Central government has asked (NFRA) for expediting the process of notifying audit standards, and NFRA is duty-bound to do that,” the person cited above said on the condition of anonymity.
Queries emailed to the ministry of corporate affairs, ICAI and NFRA on Friday seeking comments remained unanswered at the time of publishing.
A second person, who is also privy to the development, said that NFRA has sent all the changes it wants to be incorporated in all these audit standards and the quality management norms, to ICAI for its views.
ICAI had earlier called for a pause in the revision of SA600, saying that NFRA’s move came when ICAI’s own regular process was underway but could not be completed before the NFRA sought public comments on its proposals for changes.
However, NFRA is going ahead with revision of all the 38 audit standards and the two quality management norms as it is long overdue, said the first person quoted above.
NFRA’s 12-member board is expected to meet on Monday and Tuesday. The second person quoted above said that some of the changes NFRA wanted to be included in some of the standards came very recently and that ICAI has to follow its procedures in offering comments.
At NFRA board meeting, the two regulatory bodies will discuss a way forward. A third person, who also spoke on condition of not being named, said that ICAI does not want any controversy on revising the standards.
The legal requirement for notifying audit standards by the ministry, in consultation with NFRA was built into the Companies Act of 2013, in a policy response to the 2009 Satyam Computers fraud. However, NFRA was set up only in 2018 and the audit watchdog is keen to get the legal requirement accomplished without further delay as its investigations into some of the corporate collapses like IL&FS and some frauds have brought to light what the regulator calls “gross negligence and audit failure in audits.”
“It cannot go on like this for another decade,” the third person said.
“The standards issued by the ICAI are temporary and the government has to notify them with the required changes as the standards should have appropriate legal cover and therefore are enforceable and companies can be held accountable for deviations. The standards should also conform to international practices. NFRA is not in any confrontation with ICAI, it is only following the requirement of the Companies Act, section 143 (10),” said the person.
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This shift is extremely important for instilling investor confidence in the financial statements of companies, which has to reflect their true state of affairs and is not a mere formality, the person said. “It is also a social cause and is important for the economy,” said the person.
"When Companies Act 2013 was framed, the government respected ICAI's authority and gave it interim powers, holding that till the time audit standards recommended by ICAI are notified by the government in consultation with and after NFRA's examination, ICAI's standards will be deemed to be the auditing standards,” explained Vijay Kapur, a former director at ICAI.
“It is clear that ICAI is not the final authority in prescribing audit standards,” said Kapur. It can be said that aligning Indian audit standards with international standards will benefit the economy and where legal requirements mandate a deviation, carve outside can be made, added Kapur.
