ICAI will frame the standards, which will be appraised by National Financial Reporting Authority
Ministry of Corporate Affairs (MCA) has asked National Financial Reporting Authority (NFRA) to review Auditing and Assurance Standards for auditors, people familiar with the development said.
The ministry is mulling various options to strengthen the current audit framework in the wake of the recent financial fraud involving Infrastructure Leasing & Financial Services (IL&FS).
"Though we have a robust framework for ensuring quality audit, in certain matters there can be a tick-box compliance," said a senior official, adding that compliance is in form but not in substance.
"NFRA has been informally told to review the existing standards for auditing. We will also ask them in writing to take a relook at the audit standards," the official said.
No tick-box compliance
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The government is considering tightening rules for audit firms offering non-audit services to their clients THE OPTIONS
- Extending the negative list of non-audit services that auditors can provide
- Putting a cap on the revenue generated through non-audit services as a percentage of audit services
- Imposing a complete ban on non-audit services an auditor can offer to the client firm
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NFRA, the new regulator with a mandate to regulate accounting and audit standards as well as the quality of service of auditors, is likely to take it forward. The Institute of Chartered Accountants of India (ICAI) is the recommending body which has to frame the standards. NFRA will appraise the recommendations once ready and send the proposed audit standards to the MCA for final approval.
Meanwhile, the government is considering tightening rules for audit firms offering non-audit services to their client firms, subsidiaries and related companies.
"We have three options. One is to extend the negative list of non-audit services that auditors can provide. The second is to put a cap on the revenue generated through non-audit services as a percentage of audit services. The third is to impose a complete ban on non-audit services an auditor can offer to the client firm, its associates and subsidiaries," the official said.
As per Companies Act, 2013, while statutory auditors are barred from offering to their clients eight services that include internal audit and actuarial and investment banking, they are allowed to provide services such as tax audit, secretarial services, advising on mergers and acquisitions and transfer pricing-related services.
It has been seen that the audit firms offer non-audit services through other companies in their network. This becomes a case of conflict of interest like it happened in IL&FS.
"The auditor is supposed to be a gatekeeper, and for that whatever changes are required in the framework should be pursued," said the official, adding that this is a high priority area for the ministry at the moment.
"We have to converge with the best international practices. There is a churning process for audit framework happening worldwide," the official said.
The government is working on ensuring that all the checks and balances of corporate governance function effectively.
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