NFRA vs ICAI| Who will audit the auditors and how
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NFRA vs ICAI| Who will audit the auditors and how
More than three decades ago, Justice VR Krishna Iyer, the former chief justice of India, had a rhetorical question — who will judge the judges; who will audit the auditors, and who will police the police? Finally, there seems to be an answer at least for the auditors.
The National Financial Regulatory Authority (NFRA) has started reading the riot act to the Institute of Chartered Accountants of India (ICAI), a self-regulating lobby of the country’s auditors, which has enjoyed an unchallenged autonomy for all these decades.
In its latest recommendation, the SA600, the government body responsible for suggesting accounting and auditing standards and overseeing and overruling the work of the self-regulatory body the ICAI, wants the auditors of parent companies to be held accountable for the foibles of the auditors of their subsidiaries.
The ICAI has come up with the response that should this happen, small auditors who are usually the auditors of subsidiaries, would be out of business as big ones, who are usually the auditors of the parent companies, would insist on doing the group audit themselves obviously for additional fees.
It is easier for auditors of parent companies to keep tabs on their own partners and other staff than on other audit firms. Countering ICAI’s concerns over the survival of smaller auditors, the NFRA says its proposal impacts but only 1.5% of total active companies in the country, and, in any case, government-owned entities would be exempt from the new guidelines including banks where branch audits are done by smaller firms.
The NFRA seems to be right as its proposed change stems from the alleged audit failures at companies like Reliance Capital Ltd., Coffee Day Global Ltd., Dewan Housing and Finance Ltd., and IL&FS Group. These are just some of the examples of companies with multiple subsidiaries, sometimes in the the hundreds.
NFRA incidentally has been trying to enhance the credibility of accounts and auditors by sacking and penalising negligent auditors, using its summary and plenary powers much to the resentment of the ICAI. Now, it is batting for consolidated accounts and its audit by the main auditor at the pain of bearing the cross should there be any deficiencies in the subsidiaries’ accounts and audit reports thereon.
ICAI cannot afford to demure NFRA initiative citing a weak alibi — loss of audit work for small auditors if the big auditors of parent companies oust them from auditing the subsidiary accounts. Indeed, if it wants to, it has time to respond to the consultation paper floated by the NFRA till October 30, 2024, suggests Chartered Accountant S Murlidharan.
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