|
NFRA tightens its grip on the auditing profession
A sound financial reporting system is a key contributor to economic development. The financial reporting system should be backed by strong standards (that are aligned with international best practices) and supervised by regulators. Globally, these regulators include the Public Companies Accounting Standards Board in the US, the Financial Reporting Council in the UK, Certified Public Accountants and Auditing Oversight Board (CPAAOB) in Japan. Although these regulatory bodies are different from the capital market regulators in their respective country, they serve an important regulatory function and are focused more on financial reporting and auditing.
NFRA in India
Financial or accounting scandals are often followed by rigorous amendments to the law, increasing the scope and power of a regulator, or introduction of a new regulator. In Indian context, the Companies Act, 2013 (the 2013 Act) replaced the old company law i.e. Companies Act, 1956 (1956 Ac) in wake of the Satyam scandal and/or the Sahara sc'. This also involved constitution of the National Financial Reporting Authority of India (NFRA). A larger part of the 2013 Act came into force from 1 April 2014. However, it was only after the discovery of the Punjab National Bank fraud in March 2018 that the NFRA was constituted on 1 October 2018. The role of NFRA under the 2013 Act included making recommendations to the Central Government (CG) on laying down of Accounting Standards (AS) and Standards on Auditing (SA) as well as monitor their compliance and to oversee the quality of services rendered by the auditors.
Auditing Standards
Section 143(10) of the 2013 Act empowered the CG to notify auditing standards to be followed by auditors of the Company. This was a departure from the 1956 Act which was silent regarding Auditing Standards. However, till date, since no SAs are notified under the 2013 Act, the auditors follow the SA issued by the Institute of Chartered Accountants of India (ICAI).
Recent Development
In its meeting held on 11 and 12 November in 2024, NFRA recommended certain standards to the CG for notifying under the above section. This information was made public by way of a press release. The standards recommended included SQM 1 and SQM 2 relating to quality management that will replace SQC 1 (in line with the International Accounting Standard Board mandating ISQM 1 and ISQM 2).
The regulator also recommended the notification of standard governing the group audit assignments (SA 600) to bring it in line with ISA 600 (Revised) which will also trigger consequential amendments to SA 299 that deals with the responsibilities of the Joint Auditor. NFRA recently observed that the SA 600 which was issued by ICAI in 2002 had not been amended to bring it in line with the revised ISA 600 which was amended for the second time in 2022. The standard on group audits had recently gained lot of attention pursuant to the NFRAs review of an audit firm.
NFRA also recommended to CG the renaming of the SAs as IndSAs. This action would get the ball rolling for the Section 143(10) being actually effective rather than being just existing.
|
|
|
Our Comments
The notification of these IndSAs under the 2013 Act by the Central Government on the recommendation of NFRA will bring in with itself two sets of auditing standards to the country. Hence for certain SAs there might be differences that would need to be analysed.
|
|
|
|
