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NFRA has no jurisdiction over small, medium cos; no direct nexus between quality, cost of audit: ICAI

Coming out strongly against certain recommendations made by NFRA, chartered accountants’ apex body ICAI on Sunday said the watchdog does not have jurisdiction over micro, small and medium companies, and asserted that audit helps in mitigating the risk of corporate governance lapses. The Institute of Chartered Accountants of India (ICAI) also stressed that “there is no direct nexus between the quality of the audit and the cost of conducting the audit as is mentioned in a consultation paper by NFRA as the auditors have to comply with the standards in auditing and other relevant standards while conducting an audit”.

The latest comments from ICAI President Nihar N Jambusaria come less than two weeks after the National Financial Reporting Authority (NFRA) came out with a consultation paper on statutory audit and auditing standards for micro, small and medium companies (MSMCs).

In the consultation paper, for which public comments have been sought till November 10, NFRA said it was appropriate to revisit the requirement of compulsory statutory audit for all companies irrespective of their size and/or public interest.

Besides, the watchdog cited its preliminary analysis on the key financial parameters of the companies and said the fees paid to auditors by a large majority of MSMCs are way below what an audit, when performed in compliance with the letter and spirit of the standards of auditing, would require.

Against this backdrop, Jambusaria said NFRA does not have jurisdiction over MSMCs.

“It is not within its purview to propose whether audit of a particular class of companies is required or not. However, we may look at merits in having audits of these companies,” he said, adding that audit also helps in mitigating the risk of failure in implementation of corporate governance.

Noting that preparation of financial statements and audit need to be regulated through law, the ICAI President in a statement, also said the institute is of the view that the provisions relating to mandatory statutory audit under the Companies Act, 2013 should remain the same as they are today.

According to him, ICAI has proactively addressed the issue of fees and has issued a minimum scale of fees, which are reasonable and current.

“This is true that CAs are not getting true worth of the fees for their work. There is also no consistency in the fees.

“However, an auditor would not compromise on audit quality on account of low scale of fees. The scale of fees is also very low in case of some PSU audits and bank audits. Auditors have done their work with integrity and honesty in spite of low scales of fees,” Jambusaria pointed out.

Further, ICAI suggested that the government can introduce single platform for reporting by the companies so that the same information is not required to be filed with various regulators.

“It is important to note that India is a developing country and the GDP of India and such other countries are not at par with each other. It is not advisable to benchmark audit necessity in India with that in other countries,” the statement said.

Regarding NFRA’s suggestion on having other criteria for deciding applicability of the Indian Accounting Standards, the ICAI President said the current criteria of listing and net worth were decided after thorough discussions and examination while implementing Ind AS in 2015.

Last month, NFRA recommended to ICAI to carry out a regulatory impact assessment with respect to proposed revision to certain accounting standards.

ICAI had submitted to the regulator an approach paper for revision of existing accounting standards of companies that are not required to follow Ind AS.

Union Cabinet clears signing pact between ICAI, CAAR

The Union Cabinet on Wednesday approved the signing of a memorandum of understanding between chartered accountants’ apex body ICAI and Chamber of Auditors of the Republic of Azerbaijan (CAAR). The signing of the MoU would help in establishing mutual cooperation in the areas of member management, professional ethics, technical research, professional accountancy training, audit quality monitoring and advancement of accounting knowledge, among other areas, an official release said.

The Institute of Chartered Accountants of India (ICAI) is a statutory body. The CAAR was set up to regulate the audit profession in Azerbaijan.

The signing of the MoU was cleared by the Cabinet, chaired by Prime Minister Narendra Modi.

Both ICAI and CAAR intend to strengthen cooperation in the areas of training of audit, finance and accounting professionals.

Further, the two entities intend to cooperate in the fight against corruption and money laundering, the release said.

“ICAI and CAAR also intend to undertake a study on application of new innovative methods in the field of audit and accounting, including application of blockchain, smart contract system, transition from traditional accounting to cloud accounting,” it added.

Not possible to conduct upcoming Chartered Accountant exams online, ICAI tells SC

The Institute of Chartered Accountants of India (ICAI) told the Supreme Court on Wednesday that it cannot hold the upcoming CA exam online as suggested by some of the candidates, in view of COVID-19, as it tests the analytical capabilities of the examinees. The ICAI said its 3-hour exam is of a different pattern altogether, which have descriptive answers and not tick marks.

A bench of Justices A M Khanwilkar, Dinesh Maheshwari and Sanjiv Khanna asked the ICAI to publish on its website the steps taken for students welfare with regard to COVID-19 and disposed of the petition seeking a detailed Standard Operating Procedure (SOP) for the examinees in the upcoming CA exams.

The Chartered Accountant exams are scheduled to be held on November 21 to December 14.

During the hearing, senior advocate Ramji Srinivasan, appearing for the ICAI, said that they don’t have any isolation room as examination centres and don’t have the facilities for doctors.

He said that as directed by the top court in its last hearing, they have examined all the suggestions given by advocate Bansuri Swaraj, representing the petitioners.

“There was suggestion that can we hold an online exams. Ours exams has different pattern and therefore we cannot hold the online examination”, he said, adding that they test the analytical capabilities of examinees.

The bench then told Swaraj that petitioners need to be reasonable in their demands and it was not satisfied with their responses.

Srinivasan further said that transport and accommodation was also sought by the petitioner but that is not possible.

He submitted that ICAI may request Ministry of Home Affairs to allow e-admit cards to book hotels.

The bench said that it is a state specific issue as earlier when such suggestions were made, the state governments have agreed to do so.

It told Swaraj that how can online exams be allowed when the answers are required to be descriptive.

“How can this be allowed? Just because courts are allowing many things, you cannot keep on asking what you want. Be reasonable in your demands,” the bench told the petitioner’s counsel.

It asked ICAI to put all the information on the grievances raised by the Petitioners on the website and disposed of the plea saying if there is any lapse it will be addressed but exams in the past have been handled well.

The petitioners have contended that despite less than a month left for the commencement of examination, no steps have been taken by the authorities with respect to safety of examinees.

They have claimed that no safety guidelines have been issued by ICAI on how the examinations will be held amid COVID-19 pandemic.

The plea alleged that the examination will be in violation of central government guidelines which prohibits congregations of more than 100 persons at an academic institution.

ICAI asks Big Four audit firms not to buy out Indian cos

NEW DELHI: Amid concerns of alleged ‘surrogate practices’ of ‘Big Four’ accounting firms,regulator ICAI has asked PriceWaterhouseCoopers, KPMG, Ernst & Young and Deloitte to desist from acquiring Indian audit outfits.

“Worldwide, there is a talk that there should be decongestion of the accounting profession…So that’s what we have suggested them (Big Four)… instead of acquiring firms please provide work to small and medium practitioners and go in for quality control,” ICAI President Amarjit Chopra said.

Chopra made these comments days before the regulator is set to submit its third report on the Satyam scam to the Ministry of Corporate Affairs. This report pertains to the alleged ‘surrogate practice’ of the global auditing firms in India.

Chopra, who is about to demit office on February 11, recently met representatives of the Big Four.

“We advised them that rather than acquisition of Indian firms, go in for hand holding. It means they identify firms in each region and do the quality control,” he said.

Foreign accounting firms are not allowed to practice accounting in India, as Foreign Direct Investment (FDI) in accounting, auditing and book keeping, taxation and legal services is not permitted.

However, the foreign firms are known for establishing presence in India through local partners firms, lending them their names through non-transparent arrangements.

These accounting and consultancy firms have been under public eye after the Rs 14,000-crore accounting fraud at Satyam Computer Services came to light in January 2009.

Two of the partners of Price Waterhouse, Bangalore, were allegedly found negligent in auditing of Satyam.

Full accounting shift for hedging tools on hold

NEW DELHI: India’s accounting rule-setter has said that most Indian companies, barring a few big ones, will not have to follow a stringent rule that mandates incorporation of valuation gains or losses on complex financial instruments, such as derivatives, in their income statements.

The Institute of Chartered Accountants of India (ICAI) has deferred accounting standard (AS) 30 that operationlises this requirement for companies that are not in the first phase of convergence of Indian accounting norms with globally recognised international financial reporting standards, or IFRS.

Originally issued by the ICAI in 2007, these standards were made applicable from April 1, 2009, on a recommendatory basis and were to become mandatory from this April.

The 300-odd companies, including those in stock market benchmarks sensex and the Nifty and those that have net worth of more than Rs 1,000 core, will have to report their financials according to IFRS starting April 1.

They will have to follow an equivalent international accounting standard (IAS-39) to AS-30 . Companies across sectors were sceptical of AS 30 because of its impact on bottom lines. The standard recognises notional gains or losses arising out of fluctuations in the value of assets, making profit-and-loss statements volatile.

“If Indian companies were to apply AS 30, in most cases, the impact would be very significant and mostly adverse in the financial statements,” said Dolphy D’Souza, partner, Ernst & Young.

The standard, first issued in 2007, was put on hold after the financial crisis showed the impact such valuation gains or losses could have on profit-and-loss accounts.

“Subsequent to the issuance of this standard, the world witnessed financial crisis which raised issues with regard to accounting treatment of financial instruments,” the regulator said in a note.

In its note, the institute says that companies which are going for IFRS-compliance from April this year will follow converged Indian standard on financial instruments, which is in line with the global best practices.

ICAI’s decission will remove doubts about the applicability of these standards. For banking and insurance sector companies, sectoral norms by their respective regulators will apply, it says.

As per the road map issued by the ministry of corporate affairs, insurance and banking companies will converge their accounting format as per IFRS from April 2012 and April 1, 2013, respectively.

Experts have welcomed the step, even though they agree that it delays some key changes in respect of bringing transparency in the way companies report their gains and losses.

“Adoption of these standards would have been a bold positive step to improve financial reporting. However, the deferral is not unexpected, as it is consistent with the phased approach being adopted for transition to IFRS. In substance, these standards are a part of the convergence initiative, and hence the approach for deferral is logical and consistent,” said Jamil Khatri, partner, KPMG.

Under AS-30, all derivatives must be fair valued and recorded as an asset or liability on the balance-sheet-a process unfamiliar to many domestic companies. The process is significant because derivative fair values are at the whims of the markets, the more volatile the currency, interest rates or commodity prices, the greater the swings in fair value. This means that inconsistency in accounting practices will continue for the companies that are not moving to IFRS.

“Many companies do not mark to market derivatives that are not foreign currency derivatives. Further, even for foreign currency derivatives, while several companies record mark-to-market losses; some companies don’t. Mark-to-market gains are never recorded in profits,” said Mr Khatri.

Forged audits at SMEs; ICAI tracks spread

NEW DELHI: The Institute of Chartered Accountants of India (ICAI) has unearthed cases of financial statements and audit reports of certain companies with forged signatures of auditors, sparking off fear of a larger menace that may have hit the country’s auditing fraternity.

At a time when the government is going all out to set right the audit profession, cases of forged audit reports have put the regulator on the defensive.

The cases reported so far relate to forged signatures and misuse of the seal of chartered accountants in annual accounts and tax audit reports of companies, said an ICAI official. ICAI is the country’s apex body looking into the functioning of auditors. While the cases include names of small and mid-level firms, the regulator is exploring chances of a larger spread of the forgery network.

The cases, though limited in number, have raised doubts over authenticity of financial reports, the official said, requesting anonymity. However, he refused to share details of the firms whose name and seal have been compromised due to the scam.

A special group has been constituted to look into the cases and suggest measures that can effectively handle such fraudulent practices. The matter, which was also discussed at the institute’s council meeting, has highlighted the need for stringent action against those found guilty. The law provides for penalty for a person who falsely represents himself as a member of the ICAI. “The council has proposed imprisonment of up to five years for any person found guilty of such a practice,” said the official.

The regulator is also planning to expand its random scrutiny for company audit statements in order to find out the veracity of the statements. The ICAI already has in place the process of random checks of financial statements of companies.

The ministry of corporate affairs, which is the administrative ministry for the ICAI, is mulling extensive reforms to bring more transparency in the auditing process and make auditors more accountable for their work.

ICAI recommends action against erring audit firms: Govt

NEW DELHI: The government on Thursday said the accounting regulator ICAI has suggested that action can be taken against both erring audit firms and chartered accountants.

The ICAI “has recommended to the government for amendments in the Chartered Accountants Act, 1949, so that action can be taken against firms of chartered accountants themselves, in addition to inpidual chartered accountants, for misconduct,” Corporate Affairs Minister Salman Khurshid told the Lok Sabha in a written reply.

The Institute of Chartered Accountants of India (ICAI) has submitted the first part of its report, which also includes provisions for punishing erring audit firms whose chartered accountants are found guilty of misconduct.

The first part of the report submitted by ICAI is under consideration on the government, he added.

Khurshid said the other major recommendations in the ICAI report are strengthening mechanism to monitor compliance with ICAI regulatory requirements, seeking empowerment to scrutinise financial statements of public interest entities.

It also includes “introduction of a system by the Reserve Bank of India whereby direct external confirmations on specified items like bank balances or advances or deposits can be given the statutory auditors by the banks concerned.”

At present, according to the Chartered Accountants Act, members found guilty of professional misconduct could be barred from practice for up to five years or a fined as much as Rs 5 lakh.

The role of auditors came under scrutiny, after Satyam founder Ramalinga Raju confessed in January last year of having cooked the account books of the IT firm for years.

ICAI issues guidance note on internal financial controls

NEW DELHI: The apex body of chartered accountants’ ICAI has issued detailed guidelines on audit of internal financial controls over financial reporting as required under the new companies law.

According to the guidance note, the auditor needs to obtain reasonable assurance to state whether an adequate internal financial controls (IFC) system was maintained and whether such internal financial controls system operated effectively in the company in all material respects with respect to financial reporting only.

Under the Companies Act, 2013, auditors are required to separately opine whether the company has adequate internal financial controls system in place and the operating effectiveness of such a framework for the year ending March 31, 2016.

In foreword to the more than 200-page guidance note, the Institute of Chartered Accountants of India (ICAI) has said the requirement under the Act has “cast onerous responsibilities on the statutory auditors”.

This is because reporting on internal financial controls is not covered under the standards on auditing issued by the ICAI and also because of the fact that no framework has been prescribed under the Act and the rules thereunder for the evaluation of internal financial controls, it said.

According to Sumit Seth, Partner at Price Waterhouse & Co, the note explains that for auditor reporting, the term IFC is restricted to internal financial control over financial reporting only (ICFR) as of the balance sheet date.

“It (note) also makes clear that such reporting will be applicable for both listed and unlisted companies, including standalone and consolidated financial statements (to the extent of Indian companies within the group),” Seth noted.

ICAI pitches for powers to act against audit firms

(This story originally appeared in on Jul 31, 2017)

NEW DELHI: The Institute of Chartered Accountants of India (ICAI) has defended its disciplinary record, arguing that decision making has been speeded up and it was looking at ways to strengthen its efforts – including pitching for powers to act against audit firms -to clamp down on errant professionals.

Prime Minister Narendra Modi had asked the institute to step up its efforts to clean up the profession and aid the government in its fight against wrong doers, especially those with illicit wealth.

Sources in the institute told TOI that it had submitted a road map to expedite cases to a panel constituted by the ministry of corporate affairs. However, following the PM’s statement on July 1, an internal group has been reconstituted to ensure if further steps were required. “We are making an all-out effort to act against those who are not following the rules and laws and there is no slip-up at our end. We are much more proactive in acting against wrong doers than other professional bodies," said an ICAI office-bearer in what was probably a reference to the Medical Council and the Bar Council.

Over the last three years, ICAI’s disciplinary committee and the board of discipline has found 402 chartered accountants guilty. While ICAI’s track record has faced criticism amid suggestions that the process was slow due to the self-regulatory nature, sources said that there are government nominees in the entire process and a case is closed only after it has been reviewed after prima facie investigations. "There is enormous oversight and by and large cases are decided unanimously," a source said.

Asked about the concerns expressed by government agencies over even their cases not been decided expeditiously, the sources said that in several cases the agencies only passed on information and did not lodge a complaint. As a result, these were treated as information. "In several cases, the agencies do not participate once the officer-concerned is transferred. In addition, they seek repeated adjournments, which delay the process," a source said.

ICAI ask members not to air personal views on new cost rules

NEW DELHI: The apex body of cost accountants ICAI has asked its members to restrain from airing their “inpidual interpretations” about modified norms pertaining to cost records and audit.

The Institute of Cost Accountants of India has said that it would be coming out with clarifications and guidance with regard to the new rules.

Earlier this week, the Corporate Affairs Ministry notified various amendments to the Companies (Cost Records and Audit) Rules.

Under the revised norms, entities having annual turnover of Rs 35 crore and above have to mandatorily maintain cost records.

“I…request all members to refrain from airing and circulating their inpidual interpretations of the rules and await clarifications from the institute,” ICAI President A S Durga Prasad said in a message to the members.

The original rules, notified in June 2014, have been modified extensively following deliberations between stakeholders and the ministry.

ICAI’s Technical Cell is analysing the rules in detail and would be providing guidance and clarifications to the members and industry.

“The amendment rules have now removed the ambiguity of identification of different sectors… The threshold limits of applicability have also been changed to a more practical approach,” said the President’s message, dated January 2.

“I thank all my council colleagues and other members of the profession for their continued support and guidance which enabled us to bring in modifications in the rules and providing clarity to the rules,” it noted.

Besides, ICAI is in touch with the ministry for ironing out “certain errors that have crept in the notified rules”.

As per the amended rules, the requirement of maintaining cost records would be applicable to certain class of companies that meet the threshold level of Rs 35 crore. Such entities have been broadly classified into ‘regulated’ and ‘unregulated’ sectors.

Entities engaged in six sectors have been brought under the regulated category. They are telecommunication services; power generation, transmission, distribution and supply; petroleum products; drugs and pharmaceuticals; fertilisers; sugar and industrial alcohol.

Those coming under these categories would also be required to carry out cost audits, if their overall annual turnover is Rs 50 crore or more and the aggregate turnover of the inpidual products or services — where cost records are required — is at least Rs 25 crore.

In the case of unregulated category, the Ministry has named 33 “industry/sector/product/service”. The newly introduced ones include coffee and tea; milk powder; plastics and polymers; glass and textiles.