Smaller CA Firms Oppose New NFRA Rules

The National Financial Reporting Authority’s (NFRA) proposed changes to large firms’ audit requirements are receiving fierce opposition from small and medium-sized audit firms, which make up the majority of India’s chartered accountancy (CA) firms. In a discussion paper released earlier this week, NFRA proposed that a firm’s group auditor be liable for the company’s whole financial statements. This is one of the ISA 600 standards that NFRA intends to implement.

Currently, large companies hire a principal auditor who examines the parent company and is solely responsible for its financial statements. The subsidiaries are audited by so-called component auditors, who undertake audits that are specific to one subsidiary. When auditing the group’s finances, the major auditor depends on certificates provided by the component auditor.

Under the current rules, the main auditor is not held accountable for the accuracy of accounting reviewed by a component auditor. Companies usually hire large audit firms, notably the Big Four consultants, as their principal auditors, whereas component auditors are small, local firms.

An email sent to NFRA went unanswered.

The statutory authority for auditors, the Institute of Chartered Accountants in India (ICAI), has already provided feedback to the NFRA.

“The auditing and CA profession in India will suffer if ISA 600 is implemented, especially for Small and Medium Practices (SMPs). A group auditor has the right to put pressure on the group management to appoint group auditors in lieu of component auditors so that they can oversee the group’s whole set of financial statements. They may also use reasons like overall audit fee savings and audit quality uniformity for that purpose,” according to a person close to ICAI.

All major companies as defined by NFRA Rule 3 will be subject to the new rules. Public sector companies, however, are excluded from the requirement. The NFRA Act states that all listed and unlisted companies have paid-up capital of at least Rs.500 crore or a turnover of at least Rs.1,000 crore will be subject to the regulations. Additionally, all insurance, banking, and power firms, as well as any unlisted company with outstanding loans totalling more than Rs. 500 crore, will be subject to the new rules.

“ISA 600’s impact on small auditors, particularly component auditors, will be greater. Current practice is based on component auditors’ reports, however ISA 600 requires primary auditors to assess their work. This may result in a loss of work for component auditors, perhaps favouring larger firms,” stated Amarjit Chopra, former ICAI President.

“A better thing would be that a principal auditor and component auditor should equally share the division of work and with that, responsibilities and accountability,” says Chopra.