India will soon come up with forensic accounting and investigation standards (FAIS) as it aims to set basic quality parameters for conducting investigations. The Institute of Chartered Accountants of India (ICAI) has constituted a committee to deliberate on FAIS, which are expected to be framed by the end of this year, said Atul Kumar Gupta, president of the chartered accountants body, during a virtual press conference on Tuesday. “The proposed objectives of the FAIS are to codify best practices in the twin domains of forensics and investigations, set basic quality benchmarks for conducting assignments in these areas,” said an ICAI statement. The ICAI said the move will make India the first country in the world to release a set of forensic accounting and investigation standards. It was spurred by the lack of standardisation of forensic reporting and investigation leading to considerable differences in such reports. The FAIS will comprise 30 standards covering all aspects of these domains. Besides improving the quality of such reports and their admissibility as evidence in court proceedings, the move is expected to benefit corporate entities, banks, regulators and enforcement agencies such as the Serious Fraud Investigation Office, Economic Offence Wing and Reserve Bank of India (RBI), according to Gupta. The RBI has mandated a forensic audit for transactions over Rs 200 crore while lenders or companies individually call for such audits or investigations upon suspected fraud. “There should be forensic due diligence for all companies where public interest is involved, above a threshold level,” said Kumar.

The National Financial Reporting Authority (NFRA), the agency tasked with regulating auditors, has formed a technical advisory committee (TAC), which will not only advise it on accounting and auditing standards, but also how to improve the drafting of audit quality review reports (AQRRs). NFRA rules allow the regulator to constitute advisory committees, study groups and task forces for the effective performance of its roles and responsibilities. A senior government official said, “NFRA’s main function is protecting public interest and with this view, it was felt strongly for the need to set up an advisory committee which will review and provide views and concerns on various aspects of corporate financial statements.” The seven-member panel, which will be chaired by IIM Bangalore professor R Narayanaswamy, includes Titan CFO S Subramaniam, CFO of Infosys Consulting Group Gargi Ray and Anantha Narayan, former head of equity research at Credit Suisse and Morgan Stanley.

Will the company be able to continue its operations? Or to paraphrase in accounting terminology - will it be a going concern? In the pre-pandemic era, this was relatively simple to answer. Today, historical financials can no longer be relied upon to predict future trends such as cash flows. Companies are having to factor in the Covid-19 impact, and the resultant possibility of higher defaults from customers. Valuations are challenging too. This is because of significant reduction in the fair value of investments and other assets. The biggest issue relates to the going concern concept. Section 134(5) of the Companies Act requires directors to state that the annual accounts were prepared on a going concern basis. As auditors are responsible for evaluation of the management's assessment, the Institute of Chartered Accountants of India (ICAI) has issued a series of advisories, FAQs and guidance reports for its members. Covid-19 does not automatically translate into material uncertainty on the company's ability to continue, states ICAI's report, titled 'Going concern, key consideration for auditors amid Covid-19'. But, it calls for regular updating of the assumptions used in the management's going concern assessment.

From live video feed and digital documentation to finding local firms, audit companies are exploring all options available to audit financial statements of their clients during the COVID-19-induced lockdown. There has been an exponential increase in the use of technology to validate financial numbers, with a greater reliance on electronic evidence, use of live videos where possible, data analytics, and project management software to overcome the physical limitations in verifying transactions and accounts, said experts. From live video feed and digital documentation to finding local firms, audit companies are exploring all options available to audit financial statements of their clients during the COVID-19-induced lockdown. There has been an exponential increase in the use of technology to validate financial numbers, with a greater reliance on electronic evidence, use of live videos where possible, data analytics, and project management software to overcome the physical limitations in verifying transactions and accounts, said experts.

Ministry (MCA) has constituted a seven-member committee to examine the comments received on the consultation paper floated by it for enhancing audit independence and accountability in the country. The committee will examine the comments and make recommendations requiring any amendments in law, rules and standards to achieve the objective of enhancement of audit independence and accountability, official sources said. The panel has been asked to submit its report by June 30. The committee members are: Amarjit Chopra, Past President of CA Institute; KVR Murty, Joint Secretary, MCA; PR Ramesh, former Deloitte India Chairman; Ajay Bahl, Co-Founder & Managing Partner, AZB Partners; Sridhar Pamarthi, Joint Director, MCA; NK Dua, Joint Director, MCA, and Atma Sah, Deputy Director, MCA.

With the lockdown extended till May 3 and impacting business activities, bankers have sought permission for remote audit of branches as part of the statutory audit for the annual closing exercise. Noting that bank branches are working only on a limited scale, the Indian Banks’ Association (IBA) has written to the Reserve Bank of India that it would be a challenge for the branch statutory auditors to physically cover all the required number of branches for statutory audit within the stipulated timeframe. “We, therefore, suggest that banks be given the discretion to select a minimum of 50 branches or more covering 60 per cent of the credit portfolio of the bank as a whole,” said IBA Chief Executive Sunil Mehta in a recent letter to RBI Deputy Governor MK Jain.

Audit regulator NFRA has decided to hire consultants to assist it in identifying audit reports that need to be taken up for review. Consultants — mainly chartered accountants — are proposed to be hired for a period of one year (on a contract basis) to assist the National Financial Reporting Authority (NFRA) in the conduct of audit quality review and disciplinary proceedings. It may be recalled that the NFRA is a statutory body set up under the Companies Act. It is now an independent regulator for auditors of listed companies and large unlisted companies, besides banks and insurers. It was constituted by the Centre to enforce auditing standards. The Authority also has oversight of electricity firms and corporations referred to it by the Centre. Now, consultants, including senior ones, are proposed to be appointed across several grades. Calling the move a step in the right direction, Amarjit Chopra, past president of the Institute of Chartered Accountants of India (ICAI), said having permanent people within the Authority may create problems when it comes to weeding out issues in the future.

The Centre proposes to widen the scope of the National Financial Reporting Authority (NFRA), the newly set up audit profession regulator for large entities, for action against erring audit firms or its members, giving it specific debarment powers to deal with audit failures in large entities. Amendments to the Companies Act 2013 moved through the Companies (Amendment) Bill 2019 – passed by Lok Sabha on Friday – seek to clarify and make the debarment power more descriptive and focussed on the activities that the regulator may want to get stopped. Prior to the proposed amendment, the NFRA had the power to debar the member or the firm from engaging in practice as a member of the CA Institute for a minimum of six months and up to 10 years.

The government wants the Competition Commission of India (CCI) to assess whether the so-called “Big Four” auditing firms and their affiliates are hurting competition in any manner, a senior government official told reporters.CCI needs to conduct a survey or an investigation to assess whether the Big Four that include PwC, EY, Deloitte and KPMG are abusing their dominant position in the audit market, said the official, who spoke about the matter on condition of anonymity. The ministry of corporate affairs, which holds that view, is yet to send any formal request to CCI to probe the matter, the official said.

The Ministry of Corporate Affairs (MCA) decided on June 7, 2011 that all listed companies, including their Indian subsidiaries but excluding the overseas subsidiaries, companies having a paid up capital of more than Rs 5 crore or above, or turnover of Rs 100 crore or above are required to file their financial statements for the year 2010-11 onwards using XBRL – the ‘extensible business reporting language. In the first phase, banking, insurance, power, and non-banking financial companies (NBFC) are exempted. This is a landmark decision as far as change in the format of in financial reporting of companies is concerned which may affect approximately 90,000 companies in the first round. The MCA had sought the views of the corporates before issuing the final notification in July. XBRL is a open royalty-free, software developed through collaboration between accountants and technologists from all over the world, constituting XBRL International with more than 650 members. Based on XML, the language incorporates many accounting and analytical software tools and applications.

Financial statements attain sanctity when they are attested by an auditor. Auditors, in turn should exercise certain precautions before lending their names to the financial statements lest they are held liable for negligence. Certain heads are not capable of being cross-checked and the risk attached to such lines such as travelling, etc., is less than those of others where a cross-check can be made even by an outsider. Upon completion of substantive procedures, the auditor would do well to ponder over certain aspects. The following are some areas where caution is to be exercised Capital vs revenue: There are several case laws deciding whether a particular expenditure or income is to be treated as revenue or capital. Error of judgment results in distorting the true and fair view. The auditor should document the reasons for treating a particular expenditure as capital or as revenue.

The government-appointed auditor Parakh & Co, which conducted a special audit on the books of Reliance Communications (RCom) has for the second time sought the government's help in what it calls being victimised for conducting its duty in a professional manner. The audit firm has written to the department of telecommunications alleging harassment at the hands of RCom and sought its intervention for rescuing its from the clutches of RCom. It has also sought DoT's advice whether it should tender the materials pertaining to audit to the anti-extortion cell of Mumbai police which is examining the case on a complaint by RCom. The firm had first written a similar letter on October 1, last year alleging that RCom was intimidating it and had been making false and baseless accusations against the auditor at various forum and authorities.

In an effort to avoid scams like those associated with 2G spectrum and Commonwealth Games, the government is planning to make concurrent audit mandatory for procurements by all departments. The move shows that the UPA establishment is acutely aware that it can no more withstand big corruption cases. Currently, only defence department purchases go through a rigorous ex-ante/concurrent audit while those by other wings of the central government are subject only to ex post facto checks including the statutory audit by the Comptroller and Auditor General. Government procurements at the central, state and local levels account for 25-30% of the country’s GDP, with the Centre accounting for bulk of this amount. The huge jump in revenue in recent years coupled with the expansionary fiscal stance that followed the global economic crisis has led to an over 60% increase in central government expenditure in the last five years to over Rs 11.

Fraud in the Citibank's Gurgaon branch amounting to Rs 316 crore or more may remain a mystery. It may offer interesting lessons for the regulators as it has happened in a bank awarded for excellence in almost every sphere of banking activity, including best Internet banking and brand equity. It was reported that the relations manager had got a forged circular in the name of the Securities and Exchange Board of India (SEBI) which claimed that the high return scheme was available only at Citibank's Gurgaon branch. He managed to open 18 fraudulent accounts and succeeded in swindling the investors' money . The top notch bank is expected to have robust computerised information system, enterprise risk management, application of BASEL norms. The foreign-listed bank is regulated by Sarbanes Oxley Act of 2002 in the US and its Indian counterpart is required to comply with the corresponding SEBI Clause 49 Listing Agreement. The bank is regulated by SEBI and the Reserve Bank of India (RBI) and is to be inspected and audited by senior management, internal audit and I-T audit teams, accredited information system auditors as well as external statutory auditors. One of the objectives of SOX and Clause 49 compliance is to build adequate internal controls by testing, validating and overseeing their effectiveness to help the organisation prevent occurrence of fraud and material misstatements in the financial statements. It may be possible that controls may be there to prevent misstatements of financial statements, but controls restricting user access to sensitive functions, information and data and segregation of duties may be lacking.

THE government has mandated cost audits for over 100 companies, covering a host of sectors including pharmaceuticals, fertilisers, steel and petroleum. Cost audit, which is a system of government scrutiny into a company's production cost and profit margins, is currently mandated for only 44 products in sectors like manufacturing, mining and services. The Cost Audit Branch (CAB), a department under the ministry of corporate affairs, in an order issued last week, has asked 115 companies to file their cost audit report for the year ending March 31, 2011. The list of companies includes names like Biocon, Bayer Pharmaceuticals, BASF India, Haldia Petrochemicals, Tata Steel and Steel Authority of India Ltd (SAIL). The present list of companies, which also include many small and mid-cap companies as well, have been formed, on basis of recommendations made by sectoral regulators, in order to keep a track of the costing structure of these companies, said an official in the ministry of corporate affairs, without mentioning details about any firm in particular. The present order has been passed under section 233B of the Companies Act, which gives the government an authority to call for such an audit if it considers it to be necessary. The government has the power to ask the registrar of companies to inspect the books of any company, if any discrepancy is noticed in the cost audit report.

The ministry of corporate affairs may allow companies to retain their audit firms for seven years instead of a maximum consecutive term of five years, as recommended by the parliamentary standing committee on finance in August. However, individual auditors working on behalf of these firms may not be so lucky. The ministry is likely to cut their term from the currently proposed five years to a maximum of four years. The changes are meant to make the draft Companies Bill 2009 more industry friendly. Industry bodies such as CII had strongly opposed the move to impose frequent rotation of auditors. The Bill is expected to be tabled in Parliament during the Budget session early next year.