The proposed draft of ISA 600, which places significant responsibility on the principal auditor for the entire group’s financial statements, has raised concerns among small and mid-size audit practices (SMPs) in India. Under this draft, the principal auditor could potentially influence the appointment of auditors for subsidiary firms, which may result in reduced business opportunities for SMPs, particularly those auditing unlisted companies, many of which are subsidiaries of listed entities. This shift could lead to the concentration of audit work among a few large firms, potentially undermining the diversity and health of the audit market in India. Critics argue that while audit standards need strengthening, the unique circumstances of the Indian market, including the important role played by SMPs, must be considered to prevent market consolidation and the marginalization of smaller firms. Moreover, the requirement for principal auditors to assess the competence of subsidiary auditors is seen as unnecessary, given that all auditors are subject to the same professional standards set by ICAI. The need for a balanced approach, with a clear division of responsibilities between principal and subsidiary auditors, is emphasized to protect the audit ecosystem and maintain the integrity of corporate audits.
As per draft standard of ISA 600, principal auditor is responsible for the opinion on the entire group’s financial statements.
Now for taking this huge responsibility, the principal auditor may:
1. Force the company’s management to replace the subsidiary auditors by principal auditors.
2. The principal auditor may also give the reasons such as overall savings in audit fees, uniformity in quality of audit, etc.
The facts are:
1. There are about 7,000 listed companies, and over 17 lacs unlisted ones.
2. More than half of the unlisted companies are subsidiaries of listed firms.
3. If the principal auditor of the listed company will decide on who to appoint the auditor/s for subsidiary firms, then it will take away the business from smaller and mid-size practitioners.
4. ICAI should definitely work on strengthening standards but at the same time protection of small firms and concentration of audit market in India should be taken care.
5. At the moment, many of these 17 lacs unlisted companies are audited by 96,000 small and mid-size practices (SMPs), comprising either sole proprietors or partnerships with 2-5 partners.
6. In countries that have adopted ISA 600, the number of audit firms tends to be limited.
7. It’s not as if the countries that have ISA 600 standards have not seen audit failure.
8. ISA 600 is not a remedy to all the problems.
9. Indian authorities must carefully assess international standards before adopting them.
10. The situation in developing economies like India differs significantly from other markets, and a thoughtful review is essential to ensure adaptability in local context.
11. Another contentious issue with the draft ISA 600 is that the principal auditor is required to assess the professional competence of component auditors.
12. All auditors are members of ICAI, and are being subject to the same education, training and licensing requirements. Therefore, there should be no need for the group auditor to assess the professional competence of the component auditor.
13. This requirement could result in principal auditors asking for replacement of component auditors with their own members citing competence issue.
14. This could badly affect SMPs.
There’s no doubt NFRA proposed standard ISA 600 which will be put to public platform for discussion before it being adopted had raised serious concerns on company audit by Small and Mid sized firms and concentration of work in few hands.
Auditing standard needs to be strengthened but protection of SMP cannot be ignored.
The SMP if ignored will impact the corporate culture of the economy and the preference will be shifted to more informal constitutions and might lead to lower taxation and black money generation.
*The way forward should be:*
1. Audit of listed company is a big task and whole sole responsibility cannot be fixed on principal auditor alone.
2. NFRA is working in macro parameters and clearly avoiding to investigate the micro parameters and real reasons of business failure.
3. The audit infact is an important and small part of the business cannot be made a scapegoat, this fact should be put forth and kept in mind by NFRA before adoption of any standard.
4. To reduce their work NFRA wishes to provide concentration of work to a limited few.
5. In fact the duties and responsibilities of both the principal auditor and subsidiary auditor rests on the same standards and fixing responsibility of only the principal auditor on the whole Group account is unwanted and unjustified. Neither the principal auditor is fair enough to judge competency of subsidiary auditor nor it will be practical to conduct quality audit themselves of subsidiaries.
6. The standard should be drafted in such a manner to provide reporting inputs on group account by principal auditor to fix responsibility of subsidiary auditors.
7. The principal auditor should under Key Audit Matters report on the major transactions relied by him on the basis of subsidiary auditor after obtaining written clarification/ communication in this regard.
8. In the same sense, the subsidiary auditor should give clear cut reporting on transactions with holding n group companies under key audit matters and mentioning the basis to be reported to principal auditor.
Therefore the way forward has to be the balancing approach and clear cut division of responsibility between principal and subsidiary auditor to protect the interests of the whole audit ecosystem.
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