NFRA inches ahead of ICAI in regulatory turf

ICAI cannot investigate statutory auditors of listed companies and large unlisted businesses governed by NFRA, according to the legal opinion given by Solicitor General Tushar Mehta, two persons informed about the development said. The top lawyer also endorsed NFRA’s power to make independent recommendations to the government on audit and accounting standards, going beyond merely commenting on ICAI's recommendations.

Mehta's backing of NFRA's power to give independent recommendations gives the authority a free hand in rule-making. The Solicitor General also said that once NFRA submits its recommendations, the ministry may not need to consult ICAI again on the matter, and is free to seek more inputs from either of the bodies if it wants. The legal opinion, which follows a request from the authority, comes at a time NFRA and ICAI have differed over harmonizing Indian audit standards with international standards on the norms governing auditing group financial statements.

Also read | NFRA Board revises all audit standards despite ICAI dissent on some; likely effective from FY26

NFRA had on 12 November recommended to the ministry of corporate affairs to notify SA 600, an audit standard for group financial statements, making the lead auditor responsible for consolidated financial statements even if subsidiaries are audited by others. However, ICAI is not in favour of this change.

NFRA also proposed to the government to notify two standards on quality control at the level of the audit firm as per global practices. Later in the month, it proposed similar changes for audit norms of limited liability partnerships.

ICAI, which has regulated the sector for decades until NFRA was formed in 2018, has been of the view that making the principal auditor who audits the holding company responsible for the component auditor, the one who audits the subsidiary, will lead to the concentration of the audit market around big audit firms at the expense of other auditors, Mint reported on 14 November. The corporate affairs ministry is expected to take a final view on this difference in the opinion of the two regulators.

Also read | NFRA begins work to overhaul audit norms

An ICAI spokesperson said in a statement, "If the government, on the recommendation of NFRA, notifies standard on quality management (SQM) 1 and SQM 2 as auditing standards under Section 143(10) (of the Companies Act), ICAI will fully abide by such notification. However, in the view of ICAI, SQM 1 and 2 are frameworks for quality management at the firm level, providing essential standard operating procedures (SoPs) for firms and are not auditing standards." ICAI did not comment on other points in the Solicitor General’s opinion given to NFRA.

Queries emailed to NFRA and to the ministry on Tuesday seeking comments for the story remained unanswered at the time of publishing.

“NFRA is not a passive body. It is an independent regulator to oversee the audit of public interest entities including listed companies. ICAI has to recognize that there is a government regulatory agency set up to oversee this specific segment of the corporate sector and consequently, the safeguarding of the public interest. Hence, it ought to play an active role and may formulate standards to perform the role envisaged by the law," explained Vijay Kapur, former director at ICAI.

Also read | ICAI puts its foot down, informs NFRA of its powers

“In any case, the NFRA can't be perceived to play the role of postman between the ICAI on one hand and the MCA on the other. Given the defined role of each of the institutions, ICAI has all the powers to regulate its members including more than 90,000 audit firms and oversee the entities coming under it," Kapur added.

NFRA having the sole mandate on public interest entities will ensure there are no conflicting rulings by the two regulatory bodies, said one of the two persons quoted above.

The public interest entities coming under NFRA's jurisdiction include listed companies, unlisted companies with paid-up capital of not less than ₹500 crore or having annual sales of not less than ₹1000 crore, or having outstanding loans and deposits of not less than ₹500 crore. Insurers, banking companies and power utilities are also under NFRA's oversight.

And read | Be harsh when you see serious fudging, NFRA tells auditors