Rankings report – INDIA

MCA India mandates software use for audit trail

India’s accounting profession continues to grapple with regulatory changes designed to increase transparency and make it easier to do business in the world’s second-most-populous nation. Che Golden reports


host of regulatory developments have impacted accountants in India in the two years since we last profiled this market. Perhaps the most notable is the Simplification of Companies (Amendment) Act designed to make it easier to do business by decriminalising non-compliances of minor, technical or procedural violations.

As a part of this initiative, the government has deployed a new web form offering a range of services to reduce the procedures, time and cost of starting a business in India. “All these changes were brought in to enable India to compete with developed countries in terms of transparency, control and promotion of new investment,” explains Rishabh Jain, director at Allinial Global member firm Wipfli.

Rishabh Jain, director, Allinial Global member firm Wipfli

The Ministry of Corporate Affairs (MCA) introduced several major changes in March 2021 with implications for audit and the use of digital currencies. “Companies have been mandated to use accounting software which provides an audit trail and logs details of each and every change made, a feature that cannot be disabled,” says Vivek Davanam, managing partner at PrimeGlobal member firm Suresh & Co.

“India uses a particular non-cloud-based software application which does not have this as a mandatory feature – the majority of users were not even aware of it until the announcement was made, which demonstrates that it was not being used.”

The Company (Auditor's Report) Order or CARO applicable from financial year 2020-21 is another step from MCA to enhance disclosure requirements by auditors in their report. This now includes reporting on utilisation of borrowings, loan repayment capabilities, and efficiency of internal audit systems of the company. “This necessitates the need for embracing technology for performing audit procedures for improved reporting,” adds Davanam.

Crypto and virtual currencies have made their way into the financial statement. Auditors therefore need to equip themselves with the skills to validate the balances of digital currencies and review transactions in digital currency.

The Securities and Exchange Board of India (SEBI) is additionally proposing to amend rules around audit of subsidiary companies of listed companies and it is likely that there will be greater onus placed on the auditors of the parent companies to present a true and fair picture of the consolidated financial statements.

That is the view of Divakar Vijayasarathy, managing partner at MSI Global Alliance member firm DVS Advisors, who suggests these new regulations could result in regulatory turf wars owing to jurisdictional overlaps with the National Financial Reporting Authority (NFRA), Institute of Chartered Accountants of India (ICAI), MCA and SEBI in the audit governance space.

“With the increased overview of the NFRA, the roles and responsibilities extend even to the employees of audit firms wherein their accountability has the potential to be challenged,” he adds.

The profession has become more challenging due to the constant changes made through notifications and circulars by various statutory bodies on an almost daily basis according to Deepak Goil, partner at MGI Worldwide CPAAI member firm Tambakad & Goil.

“Compliance requirements continue to become more difficult,” he says. “An example of this is a recently enacted tax provision (Section 206AB) which requires higher withholding taxes on payments to vendors/service providers where they have not filed their tax returns within stipulated timelines for the previous two years.”

Goil says the position of the ICAI on member firms being associated with international networks remains a matter of concern and that recently released guidelines on this “have done little to clear the air.”

The new guidelines issued by the Reserve Bank of India (RBI) for the appointment of statutory central auditors and statutory auditors of commercial & urban co-operative banks and non-banking financial companies have been welcomed by most accounting firms says Mukesh Singh, executive director of Kreston SGCO Advisors.

“The prior approval of RBI for appointment of auditors for commercial and urban co-operative banks, provision of appointment of joint auditors for banks with asset size exceeding a specified value, limitations on the number of audits conducted by a single audit firm, and compulsory rotation of auditors after the period of three years will give smaller but reputable firms the capability to take up such assignments,” says Singh.

Aakanksha Solomon, director at Abacus Worldwide member firm Synergetic Reliable Advisors notes that the ICAI has set up a Sustainability Reporting Standards Board which is working to augment the culture of accurate and reliable non-financial reporting, develop reporting metrics for sustainable development goals, benchmark sustainability disclosures, and strengthen assurance frameworks for non-financial information and capacity building of the profession.

Vivek Davanam, managing partner, PrimeGlobal member firm Suresh & Co.

Dheeraj Rathi, managing director at ECOVIS RKCA Advisors, observes that the tax audit limit has been raised to INR50m while the requirement for businesses to get their accounts audited if their turnover exceeded INR50m ($669,000) has also been removed. “In terms of professional conduct, a new code of conduct was issued effective 1 July 2020 by the ICAI,” he adds.

Last September, the ICSI reported a substantial increase in demand for newly qualified chartered accountants. According to Davanam, the role of the chartered accountant has gained prominence with the increasing need for setting up processes to ensure adequate controls, better working capital management, and cost efficiency.

“With the rising disparity in remuneration packages, retaining talent has become challenging,” he says. “Firms need to adapt by investing in technology and setting up better learning management systems and better processes for quality delivery. The training time to enable new recruits to adapt to firms’ processes and systems should be reduced so that they can be productive even if they only stay for a shorter period.”

Jain agrees that demand for accountants is growing as firms need help complying with requirements of regulatory compliance and globalisation. “Expectations of accounting professionals have increased and they are looking for higher compensation, which results in high turnover,” he says. “The solution to this problem is to offer fair compensation and a strong corporate culture.”

Vijayasarathy notes that during the ICAI’s jobs drive for experienced chartered accountants held in September 2020, the number of recruiters doubled and listed vacancies grew fourfold compared to the previous year. “The pandemic has had an impact on staff turnover in accounting and audit firms over the last two years, but as the situation improves across the country and restrictions are eased demand will rise and additional manpower will required in the fields of accounts and finance,” he says.

Rathi observes that new chartered accountants are not particularly interested in starting public practices as the cost of starting a firm is high and the gestation period is lengthy. “Accounting firms are finding it difficult to recruit new chartered accountants as the salary structure in industry is substantially higher than that offered by public practice firms,” he says. “The practicing firms have started offering higher remuneration to attract talent, but salary expectations and staff turnover have increased substantially, partly masked by the Covid situation.”

According to Goil, chartered accountants tend to prefer a job in industry rather than working with a firm unless they have future plans for independent practice of their own - in which case many look at their tenure with a firm as a learning experience. He adds that staff turnover in his firm has been around 10-12% over the last few years.

In the first ever virtual campus placement programme last year, 2,923 jobs were offered for fresher chartered accountants compared to 2,135 in the previous year.

Dheeraj Rathi, managing director, ECOVIS RKCA Advisors

CPA Australia's 2020-21 Asia-Pacific Small Business Survey found that Indian business were particularly optimistic about their future prospects, even though they have been hardest hit by the pandemic.

The Indian government has implemented a variety of policies for the growth of micro medium small enterprises or MSMEs, including more than doubling the budget allocation for these businesses in financial year 2022, announcing more than $40bn worth of collateral-free automatic loans, and creating the guaranteed emergency credit line facility.

“These benefits have enabled small businesses - including our clients operating in industries such as FMCG, textiles and healthcare - to show resilience during the pandemic,” says Vijayasarathy. “Post lockdowns, these small businesses are looking for opportunities and restoration of business activities.”

Despite the havoc created by the pandemic, there is a great deal of optimism in the capacity of the economy to rebound. Goil says this was evidenced by the quick business recovery between the first wave of the pandemic that struck India in 2020 and the second wave that hit in March 2021.

Earlier this year the ICAI confirmed it was exploring the use of artificial intelligence to identify non-compliance in financial statements. Such a system would enable the automation of workflow of the Financial Review Reporting Board between various review levels as well as maintain a repository of non-compliances.

“It would help to scale up the number of cases being undertaken for review and strengthen financial reporting practices in India, which would promote stakeholder confidence in audited financial statements,” says Singh.

The Indian regulatory framework is moving towards better reporting, which is evident from the increased reporting requirements year-on-year says Davanam. “Manual reviews have become cumbersome and increased dependencies on the skill set of the reviewer,” he adds. “With artificial intelligence, drafting financials can become simpler.”

His firm has started working on an OCR data extract tool that runs through pages of published financials and extracts relevant disclosures. As the system matures it will not only extract data, but also create an alert if a specific disclosure is missed or if the data disclosed needs to be further examined.