ICAI puts its foot down, informs NFRA of its powers

The move comes ahead of a crucial board meeting of NFRA in mid-November to amend the norms for auditing consolidated financial statements of business groups, against ICAI’s calls for pause.

It suggests the two regulatory bodies hold divergent views on their powers and on some key matters of audit.

Halting SA600 amendment

ICAI, after its Council meeting on Tuesday, conveyed to NFRA that it should halt the move to amend the audit standard for group financial statements, called ‘standard of audit 600 or SA600’--and that amending the norms for quality management within audit firms is entirely ICAI’s remit, said one of the two persons quoted above.  

ICAI also conveyed the same to the ministry of corporate affairs, the person, who spoke on condition of not being named, said. 

Also read: Lead auditor responsible, accountable for consolidated financial statements: NFRA proposal

NFRA’s public consultation for amending SA 600 to bring it in line with global practices ends on 30 October. The idea is to make the auditor of a holding company of a business group responsible for the audit of its consolidated financial statements even if subsidiaries are audited by other professionals. 

Shortly after NFRA started public consultation on the subject on 17 September, ICAI had called for a pause, to “allow for a comprehensive review and discussion with all relevant stakeholders to ensure that any changes are in the best interest of the profession and public." 

However, NFRA has not accepted this plea.

The second bone of contention is over ICAI’s move to amend norms on quality management within a firm.

ICAI on 14 October issued standards on quality management 1 and 2 (SQM1 and SQM2), replacing the standard that existed earlier. These standards are recommendatory for the period starting 1 April, 2025 and will become mandatory by 1 April, 2026. 

NFRA has not backed these standards and ICAI is of the view that quality management norms are outside the purview of a company law provision that requires audit standards to be notified by the Central government. 

The first person quoted above said that the ICAI’s position is that status quo should continue with respect to its powers. “ICAI has been set up under an Act of Parliament. Its mandate has to be honoured," said the person.

Also read: Top auditors, consultants back NFRA's tighter group audit norms

Queries emailed to ICAI, NFRA and to MCA on Monday and on Tuesday evening seeking comments for the story remained unanswered. 

Realities of audit 

While large audit firms and consultants have backed NFRA’s efforts to align SA600 with global practices, some experts said the domestic realities of the audit profession—having a large number of small audit firms—have to be kept in mind while embracing the global norms. 

NFRA has offered a carve-out for audit of certain businesses from the proposed norms to address concerns around large audit firms edging out smaller ones from the market.

“In all developed, capitalist-oriented economies, be it the US, the UK, Japan or Australia, post the Enron accounting scandal, the power to set accounting, auditing and ethical standards have been taken away from local self-regulatory professional bodies and have been vested upon government set up regulators, with respect to public interest entities," said Vijay Kapur, a former director at ICAI.

Also read: India Inc must embrace global audit practices in a connected economy: NFRA chief

“If the ICAI had allowed foreign audit firms to open practice in India in the spirit of reforms introduced in the country since 1991, and foreign audit firms had set up collaborative ventures here, it would have helped in the seamless transition to allow the local firms to grow and develop on the lines of the best international practices including audit standards," said Kapur.

“Throughout the world, the audit standard setting process is with the government set up by the regulator," said Kapur.