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July 25, 2021 - SURESH & CO.

This article is PrimeGlobal Indian member firm Suresh & Co. contribution to the International Accounting Bulletin India survey, published in IAB's July newsletter. Please read the full article below and reach out to Vivek Davanam, Managing Partner regarding any questions in relation to the article and doing business in India.

Have there been any major regulatory developments affecting the Indian accounting profession over the last 24 months? 

The Ministry of Corporate Affairs (MCA) brought in major changes in March 2021 of which three are of particular importance.

1. Audit trail:

Companies have been mandated to use such accounting software which gives an audit trail and logs details of each and every change made, and such audit trail feature cannot be disabled. This is a big game changer to the Indian accounting software industry. Going forward, the auditors will have to comment on this compliance.

Predominantly, India uses a particular non-Cloud based software which majority of accountants in the sub-continent are well versed with. This software does not have this as a mandatory feature. Yes, it can be enabled on the software with an add on, but can also be disabled. Majority of users were not even aware of this feature till the announcement was made which demonstrates that it was not being used. With this new law being applicable from 1st April 2022, the way the accounting sector embraces the change would set the tone for future, Accountants and auditors would be forced to explore new age accounting software's. The government’s intention is quite clear.

2. Crypto currency:

Crypo and virtual currencies have made their way into the financial statement with disclosure norms being notified for them. Auditors need to equip themselves with the skill of validating the balances of Digital currencies and reviewing the transactions in digital currency. As these are pure digital assets backed by Private Keys, Exchange platforms/wallets etc, the skill sets required are different than what was required to validate Tangible assets. This can be complicated with assets in form of Non-Fungible Tokens (NFT).

3. CARO 2020 applicable from FY 2020-21 

This is a new step by MCA, for enhancing disclosure requirements by auditor 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.

What is the accounting profession's view of the new norms issued by RBI for the appointment of auditors of commercial and urban co-operative banks and non-banking financial companies?

RBI has come up with few important changes in auditor’s appointment, which includes:

  • Mandatory Joint audits for financial entities with assets size more than Rs 1,000 crore   
  • Maximum limit of 8 audits to be taken up by an Audit firm
  • Shorter maximum engagement period of 3 years and a cool of period of 6 years

At the outset, this appears very beneficial for many audit firms as it opens up the sector for others. However, this has been introduced in haste in mid-year with a retrospective effect. For a business to suddenly look out for capable new audit firms is not an easy task. Bank & NBFC sector requires more than ordinary audit skills and sector specific expertise. There may not be many audit firms with these capabilities and may very well lead to pursuit of talent with such expertise. The maximum engagement period of 3 years is not encouraging  for audit firms to set up and innovate client specific audit systems, tools and teams which need a longer period of continuity to get better Return on Investments. Technology innovation in this sector has set the tone for client specific audit approach as against a standardised one. This means new opportunities for mid sized firms but they need to upskill faster as well.

CPA Australia's 2020-21 Asia-Pacific Small Business Survey found that Indian business were particularly optimistic about their future prospects - is this optimism shared by your small business clients? Last September, the Institute of Chartered Accountants of India reported a large increase in demand for newly qualified chartered accountants - how has this affected accounting firms in terms of recruitment, salary expectations and staff turnover?

Is there potential for accounting firms to use artificial intelligence technology to identify non-compliance in financial statements?

The Indian Regulatory Framework is distinctly moving towards better reporting, which is evident from the increased reporting requirements year on year. This has increased the onus of the Auditor for a more diligent and truer and fair reporting. Manual reviews have become cumbersome and increased dependencies on the skill set of the reviewer.  With AI becoming part of all new age digital account software, drafting financials can become more simplified . We have started working on an OCR Data Extract tool that runs through pages of published financials and extracts relevant disclosures. As the system supported by AI matures it will not only extract data, but also alert if a specific disclosure is missed or if the data disclosed needs to be further examined. AI will play big role in analysis of financial statements. Though AI will be able to provide these solutions, the pricing of these products would decide usage by all auditors or only large firms. This has the potential to bridge the divide between large and small firms or can increase the divide , if not righty priced. The usage of AI would become inevitable if the wage cost of the skilled forces keeps increasing. We are witnessing this in India, sooner or later, one needs to adopt AI.

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SURESH & CO. was founded in 1968 by Mr. D. L. Suresh Babu and has been successfully serving clients for the last fifty years. SURESH & CO. operates from offices in Bangalore and Chennai, with a combined team of nine partners and over a hundred professionals and interns. Our diverse team of experienced partners and brilliant young talent, combined with the support of consultants and technical experts, ensures a high-standard of service delivery. SURESH & Co.'s customer-focused approach has been the secret of our success and we take pride in solving our clients' issues and contributing to their growth.

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