Editorial. Holding to account – The Hindu BusinessLine
India is yet to adopt its version of an international auditing standard that places greater responsibility on auditors of a holding company (group or principal auditor) in presenting a transparent, consolidated picture of the entity’s operations. The National Financial Reporting Authority (NFRA), India’s sole independent audit regulator, supports the shift; it is of the view that principal auditor must take responsibility for the actions of the component auditors (auditors of the subsidiaries). It says that India’s standard in this respect, Standard on Auditing (SA) 600, should be aligned with international norms (ISA 600).
Under this, principal auditors will have to go beyond merely relying on the reports of the component auditors. However, the principal auditors argue, rather unconvincingly, under the banner of the Institute of Chartered Accountants of India (ICAI), that under the current SA 600 they cannot access the books of group entities audited by others. The Chartered Accountants Act supposedly does not allow sharing of working papers. Therefore, runs the ICAI view, the principal auditors cannot take responsibility for actions of component auditors. ICAI’s two main concerns in completely aligning with ISA600 are: One, the principal auditor, usually a bigger firm, will prevail over the component auditors by having access to their work papers, giving rise to professional friction. Two, the group auditor could take away the work of component auditors.
These concerns have been squarely addressed by NFRA in its consultation paper (September 17) and its recent circular. NFRA has highlighted that Section 143 of the Companies Act, 2013, specifies unequivocal rights of the principal auditor to access records of holding company, subsidiaries, associates, joint ventures and branches. Though SA600 does not specifically require review of component auditors’ work papers, such a review could be required in appropriate cases, according to NFRA. Also NFRA has noted that there is no bar on sharing of work papers by auditors; it is a practice accepted globally and is consistent with the obligations of the principal auditor in SEBI’s LODR. The issue of level playing field in the profession is a matter for the competition regulator.
The NFRA circular highlights several cases of lapses by principal auditors, such as Reliance Capital, Coffee Day Enterprises, Dewan Housing and Finance, among others. Principal auditors here failed to address issues of fund diversion. The consultation paper proposes that the revised SA 600 would apply only to listed companies and unlisted companies with paid-up capital of more than ₹500 crore; or turnover more than ₹1000 crore; or loans, deposits and debentures exceeding ₹500 crore. The standard would not apply to public sector units. NFRA estimates that 17,450 companies including subsidiaries would be covered under the revised standard. ICAI must welcome the proposed change. This is its chance to bolster its image and relevance.
