NFRA’s revised norms could lead to audit market concentration: ICAI

New Delhi: Proposed revisions in the audit standard for consolidated financial statements of business groups could lead to the concentration of the audit market around big audit firms at the expense of other auditors, said an official of the Institute of Chartered Accountants of India (ICAI), the profession’s self-regulator and rule maker.

A senior ICAI official said that the existing standard framed by ICAI—called SA600—has served well for the last 22 years and that a few corporate scandals cited in a public feedback note for the proposed revision are aberrations and should not be the basis for a change.

Audit concentration refers to a big chunk of the audit market going to the top audit firms, a trend seen in economies like the US and the UK.

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Audit watchdog National Financial Reporting Authority’s (NFRA) on Tuesday decided to propose notification of 40 revised audit standards issued by the ICAI, in spite of objections from the accountants' body to the revisions to two of these—SA600 dealing with group financial statements and SA299 that deals with joint audits. 

Joint audits are done for public sector companies, state-run banks and large listed companies. 

NFRA recommended the implementation of the revisions to the government from 1 April 2026, the ministry of corporate affairs said in a statement. 

Fixing responsibility

NFRA wants the lead auditor to be responsible for the consolidated financial statements even if subsidiaries are audited by others in order to improve accountability of auditors and to prevent instances of promoters siphoning off company funds.

Some leading voices in the audit and professional services industry supported NFRA’s proposals. 

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“SA600 will enhance reliability of financial statements by getting the principal auditor to take more responsibility, whoever that firm is big or small”, said Vishesh C. Chandiok, CEO, Grant Thornton Bharat.

The current norm on joint audits issued by ICAI says that work will be divided and individual auditors will be responsible for their respective work. Where there is joint work, they will be jointly responsible. 

The revised standard recommended by NFRA to government suggests that each of the joint auditors will be responsible for the full work—‘jointly and severally responsible’ in the regulator’s parlance. 

Duplication of work

“This will lead to duplication of work and cost,” said the ICAI official.

“In the case of SA600, our view is that the principal auditor (who audits the holding company) should not be responsible for the component auditor (who audits the subsidiary) even if the former can ask questions about the latter’s work,” said the official.

“Companies Act allows subsidiaries to be audited by any auditor. By making the principal auditor responsible for the subsidiary’s audit, the most valuable companies in the country will be audited top audit firms. We want level playing field. All auditors should be equal. ICAI’s mandate includes both regulation and development of the profession,” said the person.

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The official said that its views were put across at NFRA’s board meeting earlier this week and that the ministry of corporate affairs will also be informed about this. 

Queries emailed to the ministry of corporate affairs, NFRA and to ICAI on Wednesday seeking comment for the story remained unanswered at the time of publishing.