Top Stories NFRA Findings Expose Individual Auditor Failures, Not Standard Inefficiencies: ICAI Prez Raises Concerns Over Revised SA 600 and SA 299 India’s unique auditing landscape, where all auditors are ICAI members subject to uniform education and training standards, further complicates the application of ISA 600 By Navasree A.M – On December 2, 2024 8:41 pm – 3 mins read The ICAI President has raised concerns regarding the adoption of revised auditing standards SA 600 and SA 299, recently approved by the National Financial Reporting Authority ( NFRA ) for recommendation to the Central Government.

The president, Ranjeet Agawarl has stated that NFRA’s recent findings, where auditors were held accountable for lapses, were based on existing standards, demonstrating that the failures were due to individuals, not the standards themselves.  The Future of Tax and Finance: Upskill with Us These revised standards, modeled on International Standards on Auditing ( ISA ), propose a shift in responsibility from component auditors to the group auditor. Unlike the existing SA 600 in India, which permits shared responsibility between holding and subsidiary company auditors, ISA 600 mandates that the holding company auditor assumes full responsibility for the consolidated group balance sheet.

This shift is seen as a major departure from the Indian auditing framework, where reliance on component auditors has been a cornerstone of the process.  RBI and C&AG have resisted implementing similar standards in entities under their jurisdiction. The RBI’s April 2021 circular stipulates that one audit firm can audit only one RBI-regulated entity in a group, necessitating separate auditors for all entities within a business group. This scenario poses substantial challenges under ISA 600, as the lead auditor would need to perform additional work to consolidate reports, increasing both time and cost burdens for companies.

This multiplicity of effort, instead of simplifying processes, could lead to inefficiencies and redundancies.  The ICAI President highlighted that even developed economies like the USA allow group auditors to rely on component auditors, while China does not directly adopt ISA 600. India’s unique auditing landscape, where all auditors are ICAI members subject to uniform education and training standards, further complicates the application of ISA 600. Unlike other jurisdictions where group auditors appoint component auditors, in India, component auditors are appointed independently by regulatory bodies such as CAG, RBI, or shareholders, making it impractical for group auditors to assess their competency. This responsibility traditionally lies with audit committees, and duplicating this assessment offers no additional value.  The Future of Tax and Finance: Upskill with Us “Adoption of this standard will result in an unwarranted situation of the concentration of audit work with few large firms and will be very detrimental to India’s growth as it will adversely impact 98% of Small and Medium Size Firms (SMPs)” said  ICAI President. It was pointed out that India’s auditing practices also differ from international norms in requiring all components to be audited, while foreign jurisdictions often exempt certain components.

This unique requirement, coupled with robust regulatory oversight through the Companies Act, SEBI regulations, CAG, and RBI, necessitates that any adoption of international standards be tailored to India’s circumstances. Notably, all Indian Standards on Auditing ( SAs ) have been converged with ISAs except ISA 600, reflecting the need for a more pragmatic approach.  The president added that, “Implementation of ISA 600(Revised) will lead to challenges for Indian audit firms conducting audit of Indian companies having large subsidiaries abroad. In such situations, Indian audit firms will be at disadvantage compared to  multinational accounting firms. Further, there will be challenge as to whether management of Indian Companies will be willing to allow Indian audit firms to duplicate the time and costs for audit of foreign components, if a foreign country auditor is also required to be appointed for foreign components as per their laws.”

The Future of Tax and Finance: Upskill with Us Additionally, the foundational “maker-checker” approach in Indian audits ensures accountability and balance, which the proposed standards risk undermining by concentrating responsibility with group auditors, stated the President. The ICAI President stressed that enhancing component auditors’ accountability through improved reporting requirements would better serve audit quality than overburdening group auditors. India’s current standards have supported its economic growth, moving the country from the 10th to the 5th largest economy, with aspirations of becoming the 3rd largest. Disrupting this system by concentrating audit work and sidelining the consultation process with professional accounting bodies could hinder India’s vision of becoming a developed nation (“Viksit Bharat”).