NFRA’s plan to impact 96000 Chartered Accountant Firms

The Institute of Chartered Accountants of India (ICAI) has been at odds with the National Financial Reporting Authority (NFRA) since the latter intervened to overturn a key audit standard (SA600 – “Using the Work of Another Auditor”). The CA Institute has called a special central council meeting for September 17 to discuss the matter.

This meeting will address the issue raised by a recent NFRA proposal that would require the principal auditor (auditor of a holding company in a business group) to own and accept responsibility for the activities of the component auditors (auditors of subsidiaries) in a corporate group.

Ranjeet Kumar Agarwal, President of the ICAI, stated that the CA Institute opposes any refresh of the two-decade-old SA600, which would result in the concentration of the audit industry in the hands of a few individuals.

“We oppose this (NFRA plan) because it will disproportionately affect small practitioners and effectively eliminate the majority of the country’s 96,000 CA firms. India cannot afford to have a small number of organizations dominate the audit sector,” Agarwal stated.

“The central council will address this topic on September 17. This is a bigger concern. It is having an impact on the country’s economy. Things that have been going on for 20 years cannot be changed with a single line,” he explained.

According to R Narayanaswamy, former Professor of Finance and Accounting at IIM-Bangalore and current part-time member of NFRA, the ICAI has two issues regarding applying ISA600 (International standard similar to SA 600) in India. One, the group auditor, typically a larger firm, will examine the component auditor’s work by accessing their work documents. Second, the group auditor may take over the task of component auditors, resulting in increased work concentration.

He stated, “First of all, there is no restriction on reviewing the work of the component auditors. Peer review entails an evaluation by another firm. On the second, auditing standards should defend the interests of investors, creditors, and the general public.”

“They cannot be used to protect auditors’ business interests, whether large or small. If there are anti-competitive practices, they can be reported to the Competition Commission of India,” Narayanaswamy remarked.

The NFRA, the country’s sole independent audit body, intends to grant the principal auditor access to the working documents of the audit of component auditors. It also wants the major auditors to be accountable for the actions of the component auditors rather than depending solely on them.

These suggested changes will initially be included in a consultation paper that the NFRA intends to release for stakeholder and public feedback, according to sources. The NFRA Board met on Monday to review the elements of the required amendments to SA600.