NFRA Introduces Revised Audit Standards to Enhance Quality and Compliance
The National Financial Reporting Authority (NFRA) has unveiled revised Standards on Auditing 600 (SA 600) aimed at improving the quality of group audits in India. This initiative, which is open for public consultation, seeks to address significant deficiencies and lack of due diligence identified in current practices.
These new standards are designed for the audits of listed companies and public interest entities, excluding public sector enterprises and banks. The NFRA emphasized that the complexities of modern group structures cannot be effectively managed under the existing 2002 version of SA 600. In contrast, the international standards were updated in 2009 to meet evolving financial environments.
“The primary goal of these revisions is to protect public interest and enhance investor confidence by creating a robust framework capable of tackling the challenges posed by intricate financial systems,” stated the NFRA. The revised standards clarify that the group auditor bears ultimate responsibility for the audit, which includes evaluating the component auditor's communications and the adequacy of their work.
This move comes in response to concerns from the Institute of Chartered Accountants of India (ICAI) regarding the concentration of audit work among a few large firms. The NFRA pointed out that entities within its oversight represent only about 1.8% of active companies in the country, indicating that the majority of audits—approximately 98%—will not be significantly affected by these changes.
ICAI has expressed apprehensions that implementing ISA 600 could lead to an undesirable concentration of audit engagements among larger firms, potentially sidelining small and medium practices crucial to the growth of India's economy. The NFRA has received in-principle support for the revisions from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
The Comptroller and Auditor General of India (CAG) has recommended stakeholder consultations and a phased approach to implementing the new standards, citing instances of significant financial fraud in companies such as Reliance Capital and Dewan Housing and Finance Limited. The CAG highlighted cases where auditors failed to adequately assess the risks associated with subsidiaries and related-party transactions.
A senior partner from a Big Four audit firm stressed the importance of aligning with global standards, especially as many Indian companies expand internationally and attract foreign investment. “With a well-structured regulatory framework, we can ensure that fairness and transparency are upheld,” he remarked.
The NFRA’s decision to adopt ISA 600 was discussed in a recent board meeting that included various regulatory bodies, including RBI, SEBI, ICAI, and representatives from the Ministry of Corporate Affairs.
