NEW DELHI: The National Financial Reporting Authority (NFRA), backed by RBI and Sebi, is nudging the Institute of Chartered Accountants of India to plug a critical gap in the country’s accounting standard, which was finalised over two decades ago, with the revamped international norms.
On Monday, the NFRA board will discuss an urgent updation of SA 600 with International Standard on Auditing 600 or ISA 600, which was revised in 2009 and 2023, after it observed divergences in several cases handled by it — from Reliance Capital to IL&FS, DHFL and Café Coffee Day.
The agency, tasked with oversight over auditors and audit firms for large and listed companies, has taken up the task of updating the standards to plug the regulatory gap and commenced discussions in May, sources told TOI, adding that SA 600 was proving to be particularly contentious.
While a group of chartered accountants opposing the move has argued that small firms will be impacted, regulatory sources said this was a misconception and, in any case, interest of small investors was paramount. “The Reliance Capital case is an eye opener. The revamp has to be done in public interest since it affects millions of investors who depend on the audited accounts to invest their hard-earned money,” a source familiar with the discussions told TOI.
The revised standards will, in any case, be adopted after public debate and are proposed to be implemented in phases, starting with listed companies.
Based on an analysis of cases dealt by NFRA, regulators are of the view that provisions in SA 600 such as “the principal auditor would not be responsible in respect of the work entrusted to the other auditors, except in circumstances which should have aroused his suspicion”, or principal auditor “will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied”, gives a lot of discretion to the auditors. “These have resulted in audit failures and undermined audit quality. They are also not in conformity with provisions of the Companies Act,” a source said.
Similarly, a review of working papers of the component auditors by the principal auditor is an important requirement in the international standard as it helps the group auditor assess the sufficiency of audit work, given the risks that present in case.
On Monday, the NFRA board will discuss an urgent updation of SA 600 with International Standard on Auditing 600 or ISA 600, which was revised in 2009 and 2023, after it observed divergences in several cases handled by it — from Reliance Capital to IL&FS, DHFL and Café Coffee Day.
The agency, tasked with oversight over auditors and audit firms for large and listed companies, has taken up the task of updating the standards to plug the regulatory gap and commenced discussions in May, sources told TOI, adding that SA 600 was proving to be particularly contentious.
While a group of chartered accountants opposing the move has argued that small firms will be impacted, regulatory sources said this was a misconception and, in any case, interest of small investors was paramount. “The Reliance Capital case is an eye opener. The revamp has to be done in public interest since it affects millions of investors who depend on the audited accounts to invest their hard-earned money,” a source familiar with the discussions told TOI.
The revised standards will, in any case, be adopted after public debate and are proposed to be implemented in phases, starting with listed companies.
Based on an analysis of cases dealt by NFRA, regulators are of the view that provisions in SA 600 such as “the principal auditor would not be responsible in respect of the work entrusted to the other auditors, except in circumstances which should have aroused his suspicion”, or principal auditor “will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied”, gives a lot of discretion to the auditors. “These have resulted in audit failures and undermined audit quality. They are also not in conformity with provisions of the Companies Act,” a source said.
Similarly, a review of working papers of the component auditors by the principal auditor is an important requirement in the international standard as it helps the group auditor assess the sufficiency of audit work, given the risks that present in case.
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