The Institute of Chartered Accountants of India (ICAI) has raised concerns with the National Financial Reporting Authority (NFRA) on the latter’s move to update the existing SA 600 auditing standards in line with the International Standard on Auditing 600 (ISA 600). The institute fears that some of the proposed standards could lead to the concentration of work in the hands of large audit firms.

“We have given our objections on ISA 600 to NFRA. We have called our council meeting on September 17 where we will discuss this matter. This issue is impacting the entire economy of the economy so it has to be debated,” said Ranjeet Kumar Agarwal, president of ICAI on Friday.

The NFRA will shortly issue the exposure draft of the ISA 600 for public consultation; the standards are applicable to auditors of listed firms.

For instance, as per draft standard of ISA 600, principal auditor is responsible for the opinion on the entire group’s financial statements. Experts said that for taking this huge responsibility, the principal auditor may coerce the company’s management to replace the component auditors by principal auditors.

After months of discussion, the National Financial Reporting Authority (NFRA) on Monday decided to move towards the International Standard of Audit 600 (ISA 600) for all listed companies, barring public sector companies and state-run banks and their branches.
Separately, the Institute of Chartered Accountants of India (ICAI) also agreed to revise the Standard on Quality Management (SQM), a mechanism for quality management for audits or reviews of financial statements, where public consultations have been completed.

The National Financial Reporting Authority (NFRA) is set to hold a meeting next week with key financial regulators, including the Reserve Bank of India, the Securities and Exchange Board of India (Sebi), and the Institute of Chartered Accountants of India (ICAI), and the Ministry of Corporate Affairs to adopt the revised International Standard of Audit 600 (ISA 600), in a bid to address gaps that have contributed to major audit lapses, according to people familiar with the matter.
The move to adopt ISA 600 (Revised) is intended to tighten oversight on auditors who are often found shielding behind audit reports approved by subsidiary companies, the sources said.

“It is through such mechanisms that monies from listed companies are siphoned off,” one source said. “Audit reports from subsidiary companies are relied upon by the principal auditor,” allowing malfeasance to go unchecked.

This issue has surfaced in several of NFRA’s orders, most recently in the connection with the Coffee Day Enterprises Limited matter. In that case, the regulator found that auditors failed to report the fraudulent diversion of funds, despite evidence that public money had been channelled to an entity controlled by the promoter, which had no legitimate business ties to the listed company.

Alarm bells are ringing in the audit affiliates of top professional services firms after the regulator fined BSR & Associates LLP, a KPMG affiliate, Rs 10 crore and banned two of its auditors for alleged lapses in audit of Coffee Day Enterprises (CDEL) where the audit firm had relied on subsidiary auditors while preparing consolidated audit reports.

All audit firms have multiple audits where the firms rely on subsidiary auditors' work when preparing consolidated audit reports for parent companies.

In the CDEL case, BSR & Associates had relied on the work of auditors of its subsidiaries while auditing the parent company.

The National Financial Reporting Authority (NFRA) claimed that the auditors "put on their blinkers" and, when questioned, tried to justify their actions by citing Standard on Auditing 600, which allows reliance on the work of subsidiary auditors.

This was despite CDEL's investments in these subsidiaries amounting to Rs 1,937 crore, making up 89% of the standalone balance sheet.

In July last year, the regulator had fined and barred ASRMP & Co and AS Sundaresha for lapses in the audits of Coffee Day Enterprises' subsidiaries.

The National Financial Reporting Authority's ongoing inspections of major audit firms have prima facie revealed some audit quality issues, for which the regulator is in talks with them, NFRA chairman Ajay Bhushan Prasad Pandey has said.

The top five audit firms - BSR & Co, Deloitte Haskins & Sells, SRBC & Co, Price Waterhouse Chartered Accountants, and Walker Chandiok & Co LLP - that were inspected last year have introduced some positive changes, but a lot more needs to be done, Pandey told ET's Banikinkar Pattanayak in an interview. Edited excerpts:

What is the status of your annual inspection of audit firms this year? Do you notice any change this time around in the standards and processes followed by the auditors you inspected last year?

In this round of inspection, we have divided our work into two parts. First, we have taken some firms that were not inspected by us last year as per our rotation policy.

India is considering changes in the Limited Liability Partnership (LLP) Act and other measures that would enable domestic accounting firms to merge and acquire scale. The government is of the view this will help create large domestic audit firms akin to the Big Four, people aware of the development said.

The Ministry of Corporate Affairs (MCA) could outline some details as part of the new government's 100-day agenda, one of them said. The LLP law and the Companies Act could be amended in the winter session of Parliament, likely to be held in December, he added.

The ministry is also engaged in talks with the Institute of Chartered Accountants of India (ICAI), which has decided to relax key provisions in its regulatory framework to facilitate the "aggregation of chartered accountant firms," the person said.

The Big Five audit firms in India are facing a talent crunch. A regulatory clampdown and a higher number of “relatively safer” career opportunities elsewhere are pulling chartered accountants (CAs) away from the audit profession.

A senior partner at a Big Five firm told FE that the auditing verticals in top firms are operating with 20% lower staff than the required strength. At present, the top five firms have around 12,500 people in their audit function.

“The amount of work is increasing every year but the staff strength is not growing as fast. Although we need to increase the capacity to handle the additional work and deal with the regulatory oversight, getting the right workforce has certainly become a challenge,” said audit vertical head at a Big Five firm.

Another partner in the same firm said that the talent crunch is largely due to heightened regulatory scrutiny and because of the expanding opportunities beyond the traditional audit. “When I completed my CA in 1980s, there were fewer avenues. But young CAs today have a vast number of opportunities, and unless somebody is passionate about auditing, most of them usually land up somewhere else,” he said.

The top six professional services firms in India combined now have over 3,300 partners - equity plus non equity - with EY being the first firm to exceed 1,000 partner benchmark driven by continued strong growth in advisory businesses after the Covid-19 disruption.

In the last three years, the advisory businesses - consulting, deals and risk - have grown much faster - 25% plus-than the traditional areas like audit and tax, which have grown between 15% and 22% for most firms, as the firms continue to pivot towards high-growth advisory services, including tech consulting and implementation.

With EY being the last Big Four firm to close its financial year on June 30, the combined revenue of the Big Four firms - affiliates included - in the last financial year has crossed Rs 39,000 crore, according to multiple senior partners ET spoke to across firms.

The Centre is working on coming up with accounting standards for the banking and insurance sectors, Corporate Affairs Secretary Manoj Govil said on Monday.
At an event organised by the Institute of Chartered Accountants of India (ICAI) on its 75th foundation day in New Delhi, Govil said that along with the body, the Centre is also working for the aggregation of accounting and auditing firms in the country to make them global players.

"We are also working towards bringing new accounting standards," he said.

"We have asked big companies to follow IFRS standards... but no such thing for the insurance sector yet. We have completed our research and will come up with standards for the insurance sector," he added.

Auditors in India are upset over the lack of “fair remuneration” for the same kind of work their counterparts in developed countries do. “For us to be competitive, we have to infuse technology, and hire the best talent. In India, the audit fees should go up by at least 200% from the current levels,” said the head of the auditing vertical at a Big Five firm.

Arvind Sethi, national leader at SR Batliboi & Co said that the average size of an audit engagement with a particular company varies depending on a host of factors such as the company’s size, sector, business model, geographical presence, complexity of business processes, and the regulatory oversight. “Where Indian multinationals have substantial global operations, the audit fee levels outside India are in the range of 0.02 to 0.04% of the revenues whereas fees for Indian operations are around 0.01% of the revenues,” Sethi said.

One of the issues that is being confronted all over the World is that of the Big 4 Audit Firms (Deloitte, KPMG, EY, PWC) controlling a disproportionate number of large corporate audits.

There is concern that this seeming monopoly of few audit entities to select from as company auditor has multiple disadvantages.

The Companies Act 2013 tried to counter this Big 4 hold on large corporates audits by making it mandatory to have audit firms being changed after some years. A game of musical chairs started where there was a re-arrangement of audit activity within the Big 4 firms. The 4 types of cards in the pack did not change.

The highlighted importance of being digital has spurred the adoption of technology among Indian businesses. As customers moved to online channels, digitalization has become a vital part of the new normal, resulting in a paradigm shift in how financial records are stored and maintained. Accounting, one of the most significant parts of running a business has also been transformed into a truly technologically-enabled system. The widespread adoption of tech-led accounting software has moved business’s towards automation and artificial intelligence. The tasks that earlier used to take months can now be done in minutes, all through a single click of a button. This has proved to be the most significant transformation of the business finance and accounting sector.

While tech advancements have accelerated globally and in India, there’s a critical need to tweak Esop Costs. Some experts even opine that keeping Employee Stock Options (ESOPs) outside the purview of operating EBITDA is best. This is because factoring it while calculating operating EBITDA can skew numbers for a company’s overall financial report card, thereby impacting its performance, growth and profitability. This factor is already creating hurdles for new-age tech Indian companies getting listed on Dalal street.

Discontinuation of interest expense recognition based solely on the expectations of waiver or concession by the lender is a violation of the Indian Accounting Standards, the National Financial Reporting Authority (NFRA) said, cautioning against such practices by firms with regard to loans classified as NPAs.

To ensure that such violations do not occur when firms make financial statements, the NFRA has issued a circular dated October 20. The idea is to draw the attention of all companies, audit committees and statutory auditors. Also, company secretaries have been advised to take note and apprise the boards of directors of companies of the issue.

Ease of Doing Business for MSMEs: The Ministry of Corporate Affairs (MCA) is continuously working towards driving transparency and strengthening the integrity of financial reporting in the business. The notification pertaining to the new audit trail rule is a step in this direction. This mandate is expected to be implemented from April 1, 2022, for companies that are registered under the Companies Acts in India. As per the notification “Every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.”

The National Financial Reporting Authority on Tuesday recommended to the chartered accountants' apex body ICAI to carry out a regulatory impact assessment with respect to proposed revision to certain accounting standards. The Institute of Chartered Accountants of India (ICAI) had submitted to NFRA an approach paper for revision of existing accounting standards of companies that are not required to follow Indian Accounting Standards (Ind ASs).
Apart from conducting a regulatory impact assessment, NFRA noted that ICAI should reconsider the structure, form and contents of revised accounting standards for such companies.

The proposed texts of 18 revised Accounting Standards (ASs) out of a total of 32 revised ASs expected to be prescribed upon completion of the revision project was submitted by ICAI.

Chartered accountants’ apex body ICAI will come out with eight new forensic accounting and investigation standards, whereby forensic auditors will be required to issue a precise and unambiguous report, sources close to the development said.

Under the new accounting standards, auditors will be required to follow stiff norms while conducting forensic audit, they said.
The new forensic audit standards are likely to render several existing forensic audit reports untenable, especially where lenders have used ambiguous and inconclusive reports to classify borrower loan accounts as fraud.

These are part of eight new forensic accounting and investigation standard (FAIS) proposed by the institute’s Digital Accounting and Assurance Board. These proposals will be placed for final approval on Friday.

The Institute of Chartered Accountants of India (ICAI) had earlier issued 13 FAIS.

The sources said that governing council of ICAI is meeting on Friday to approve the new forensic audit and investigation standards. As a part of the new accounting standards, forensic auditor will be required to issue a precise and unambiguous report.

Further, such report is also required to be backed by reliable evidence and relevant documents collected by the auditor in line with the requirements of FAIS to support its conclusions.

The government, in continuation of its theme as regards ease of doing business, has increased the limits for classification as Small & Medium Sized (SMC) companies. The objective is to reduce the compliance burden and the time required to prepare the financial statements. As a result of this notification, a significant number of companies would be covered in the definition of the SMC companies.

These amendments follow the recent changes made by the government to the Micro, Small and Medium Enterprises Development Act, 2006 wherein the upper cap of turnover for the purpose of registration was enhanced for micro, small and medium enterprises.
The limits were not amended from many years and considering the overall growth in the economy it was imperative that the limits need to be increased. The benefit of this amendment would be available to a large number of companies.

The government has notified the accounting standards for small and medium companies that revise the turnover and borrowing limits as well as help in making disclosure requirements less onerous. Besides, the definition of Small and Medium Sized Companies (SMCs) under the standards has been revised.

The Companies (Accounting Standards) Rules, 2021 have been notified by the corporate affairs ministry under the Companies Act, 2013. The latest notification mirrors the accounting standards that were in force under the Companies Act, 1956, which is no more there, according to a senior official. Among the changes, the revised definition of MSMEs has been included, the official added.

The government has amended rules pertaining to various Indian Accounting Standards (Ind AS), including those related to interest rate benchmark reform. Ind AS are converged with the International Financial Reporting Standards (IFRS).

On Friday, the corporate affairs ministry notified the Companies (Indian Accounting Standards) Rules, 2021. The changes have been made after consultations with the National Financial Reporting Authority (NFRA).

Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services (FAAS) at EY India, said the ministry has issued the second phase amendments to interest rate benchmark reform and "has consequently made amendments to Ind AS 109, Ind AS 107, Ind AS 104 and Ind AS 116".