NFRA proposes stricter audit rules

India’s National Financial Reporting Authority (NFRA) has taken a decisive step to tighten oversight of corporate audits, proposing that lead auditors bear ultimate responsibility for the accuracy of consolidated financial statements—even when subsidiaries are audited by separate firms. The draft rules, released for public consultation on Tuesday, seek to close a regulatory gap that has allowed business groups to obscure fund diversions through complex subsidiary structures.

Targeting public interest entities, avoiding market concentration

The revised Standard of Audit (SA) 600 will apply only to public interest entities (PIEs)—listed companies and large unlisted firms meeting specific thresholds—while excluding state-owned enterprises, public sector banks, and insurers, which fall under the oversight of regulators like the Reserve Bank of India (RBI) and the Comptroller and Auditor General (CAG).

A person familiar with NFRA’s deliberations noted that the move avoids excessive market concentration by limiting the rule to around 30,000 of India’s 1.8 million companies, preventing large audit firms from monopolizing subsidiary audits.

Closing the loophole on subsidiary audits

Under current rules, parent company auditors can rely on subsidiary auditors’ work without full accountability, creating opportunities for financial misreporting. The NFRA’s draft explicitly states that the lead auditor must ensure compliance with auditing standards, requiring deeper scrutiny of subsidiary audits.

The regulator’s concern stems from cases where funds were allegedly diverted from subsidiaries to group promoters without detection. The revised norms mandate two-way communication between lead and component auditors, along with stronger supervision mechanisms.

Mixed reactions from industry experts

Vijay Kapur, former ICAI director, welcomed the move but questioned the exemption for state-owned entities. “Investor protection is NFRA’s primary objective, so significant public interest entities should be included soon,” he said.

Vishesh C. Chandiok of Grant Thornton Bharat praised the alignment with global best practices, citing improved transparency in group audits. However, the Institute of Chartered Accountants of India (ICAI) had not responded to queries at the time of publication.

A shift towards stronger financial governance

The NFRA’s proposal underscores India’s push for greater audit rigor amid rising corporate complexity—some Indian conglomerates oversee over 300 subsidiaries and joint ventures. The revised SA 600, last updated in 2002, is seen as ill-equipped for modern financial ecosystems.

“This revision safeguards public interest and investor trust in an era of intricate financial systems,” the NFRA stated. Stakeholders have until October 31 to submit feedback before final implementation.

As regulatory scrutiny intensifies globally, India’s move could set a precedent for enhanced corporate accountability—balancing oversight with market competition.