The Institute of Chartered Accountants of India (ICAI) is in a standoff with the National Financial Reporting Authority (NFRA) over a proposed revamp of the auditing standard SA 600, which deals with the "Use of the Work of Another Auditor." A special Central Council meeting of the ICAI has been scheduled for September 17 to thoroughly debate this matter, which could reshape the auditing landscape in India.
The conflict stems from NFRA’s plan to mandate that the principal auditor (typically the auditor of a holding company in a corporate group) takes full responsibility for the work of component auditors (those auditing the subsidiaries). Currently, principal auditors rely on component auditors but do not hold accountability for any misconduct or errors committed by them.
ICAI President Ranjeet Kumar Agarwal has voiced strong opposition to these changes, arguing that they would disproportionately impact small CA firms, potentially leading to a concentration of audit work among a few large firms. With over 96,000 CA firms in India, most of which are small proprietorships, Agarwal believes this overhaul could harm the economy by limiting competition.
"We are not in favor of this as it will affect small practitioners and virtually kill the majority of CA firms in the country," said CA Ranjeet Agarwal. He stressed that the proposed changes would hurt the livelihood of small practitioners and limit diversity in the audit sector.
The NFRA's proposed changes aim to address the shortcomings in the current auditing system, which were exposed by high-profile corporate failures such as DHFL, IL&FS, and Coffee Day Enterprises. These cases revealed gaps in accountability, with principal and component auditors blaming each other for oversight failures. NFRA seeks to hold principal auditors accountable by granting them access to the working papers of component auditors and making them responsible for their actions.
Amarjit Chopra, former ICAI President, proposed a middle ground, suggesting that principal auditors should only request working papers on critical areas, such as related-party transactions or loan utilization, rather than the entire audit.
As the debate intensifies, the ICAI fears the proposed changes could stifle competition and negatively affect smaller firms, while NFRA argues that investor and public interests should take precedence over business concerns. The NFRA plans to issue a consultation paper on this matter for public and stakeholder input, making the next steps in this clash crucial for the future of audit standards in India.
The outcome of the September 17 meeting will likely shape the future of the auditing profession, particularly for small and medium-sized CA firms, as India grapples with balancing regulatory oversight and maintaining a competitive audit market.
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