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The core goal of both the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI) is to enhance the quality of financial reporting. While disagreements are inevitable, it is crucial for both bodies to engage in constructive dialogue and adopt a balanced approach, said Robin Banerjee, seasoned finance expert and Chairman of Nucleon Pvt Ltd.
“Phased implementation of the revised Standard on Auditing (SA) 600, starting with the top 1000 companies, along with enhanced oversight and risk-based questionnaires, could reconcile perspectives and strengthen India’s financial reporting standards while considering practical implications for all stakeholders,” Banerjee told ETCFO. To provide deeper insights into this controversy and explore potential solutions, ETCFO engaged with Robin Banerjee for his expert perspective.Edited Excerpts from Banerjee’s Interaction
Q. What’s the SA 600 controversy all about?
Robin Banerjee: “To gauge a company’s performance, we rely heavily on its financial results, especially when these are audited and signed by auditors. The auditor’s signature serves as a stamp of trust on these financial statements. The controversy centers on whether the principal auditor should be held accountable for the entire audit when dealing with large companies that have multiple branches or subsidiaries. Currently, Standard on Auditing (SA) 600 allows principal auditors to be responsible only for their direct work and not for the work of other auditors on components. However, international standards require principal auditors to be accountable for the entire group’s financial statements, a stance supported by the NFRA. The ICAI disagrees, arguing that this change may be unnecessary and could disadvantage smaller audit firms and impact the audit ecosystem in India.”
Q. How genuine do you believe the concerns raised by ICAI are regarding the proposed amendments to SA 600?
Robin Banerjee: “ICAI’s concerns about making principal auditors entirely responsible are valid. They argue that only a few instances have demonstrated sub-standard audits, suggesting that a major overhaul may not be warranted. NFRA’s recent reviews reveal only a handful of poor-quality audits. With approximately 1.6 crore auditor signatures annually in India, ICAI believes these isolated cases should not trigger drastic changes. They fear that making principal auditors fully responsible could disadvantage smaller firms and may not necessarily lead to improved audit quality. Moreover, comparing the Indian audit market to the international context may not be entirely appropriate.”
Q. Can you cite an instance that could have heightened NFRA’s concerns?
Robin Banerjee: “A notable case is the Coffee Day Enterprises issue from FY 2018-19, where NFRA uncovered potential fund diversion of Rs 3,500 crores through subsidiaries. The principal auditor was criticized for inadequately addressing issues due to reliance on subsidiary audits. This highlighted lapses in component audits and likely intensified NFRA’s push for stricter standards. Key findings showed that the principal auditor failed to ensure compliance with SA 600, neglected to verify significant transactions, and did not question unusual financial entries that could have been identified by ‘other auditors.’”
Q. What steps could small audit firms take to adapt to the new requirements?
Robin Banerjee: “If SA 600 is amended, small audit firms might face challenges. They should focus on diversifying their services and enhancing their value proposition. Small firms should consider expanding into comprehensive consulting services such as financial advisory, internal controls improvement, and cost optimization. Embracing technology like artificial intelligence (AI) and data analytics can add significant value. Developing expertise in niche areas or specific industries could help small firms stay competitive and seize new opportunities.”
Q. In your opinion, what solutions could NFRA consider? What should ICAI propose?
Robin Banerjee: “NFRA’s mission to enhance audit quality is crucial. ICAI needs to address any outstanding issues to build confidence. Suggested solutions include granting principal auditors full rights to review audit working papers from ‘other auditors,’ implementing mandatory risk-based questionnaires, and phasing the revised SA 600 implementation, starting with the top 1000 companies. This phased approach would allow for an assessment of impact before broader application.”
Q. What are your final suggestions for resolving the current dispute over SA 600 between NFRA and ICAI?
Robin Banerjee: “Both NFRA and ICAI share the objective of improving the quality of audited financial statements. While disagreements are inevitable, constructive dialogue is essential. Both bodies should engage in discussions to resolve their differences. By collaborating, they can strengthen the audit system while considering practical implications for all stakeholders, ultimately enhancing India’s reputation as a reliable destination for investors.”
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