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Auditors must remain sceptical, challenge management views: Ajay Bhushan Pandey, Chairman, National Financial Reporting Authority

December 9, 2022

Since NFRA legislation is relatively new and as happens with any new law, there are multiple litigations in various high courts on the role and actions of NFRA.

The National Financial Reporting Authority (NFRA), India’s fledgling regulator of the auditing profession, is getting into its stride. It has started with inspections of the top five audit firms and is firming up a plan to extend regulatory oversight to other firms subject to a threshold. A system of periodic inspections is being put in place. In an interview with Surabhi, NFRA chairman Ajay Bhushan Pandey stresses how the regulatory review of audits will “restore and improve” the credibility of Corporate India’s financial reporting and ability to draw investments of assorted variety.

What will be your key priority areas?

Our key priority is to restore and improve credibility of the financial reporting framework as well as audited financial statements of listed and other public interest entities, and protect the interests of their shareholders, investors, banks, creditors and other stakeholders, who should be able to trust the financial figures reported by their companies and audited financial statements. Trust is very important if we want investments to come to these companies.

We are working to develop a system … for conducting robust and quality inspections of audit firms and reviews of financial statements of public interest entities. The companies and the audits that we will select for inspections, audit and reporting quality reviews will be based on the risk parameters. We will get data from the other regulators and agencies such as SEBI, IBBI, ROC, banks, CBDT, GST, customs authorities and CEIB. The idea is to work with the companies’ managements, their CFOs and audit committees so that quality of their financial reports improves.

We will also closely work with auditors to ensure that they perform the audits with professional scepticism, challenge management assertions on their financial figures, look at related parties’ transactions closely and seek independent confirmation and validations of the transactions.

Another area will be the legal framework. Since NFRA legislation is relatively new and as happens with any new law, there are multiple litigations in various high courts on the role and actions of NFRA. We have moved the courts and filed our replies. We will try to get these issues settled in the courts at the earliest.

Recently, you said NFRA has started audit of the five large audit firms.

Yes, we have chosen five audit firms in this cycle of inspections, namely SRBC & Co, BSR & Co, Deloitte Haskins & Sells, Price Waterhouse Chartered Accountants and Walker Chandiok. We will attempt to bring our inspection report by March-end 2023. We will also be taking up audits of certain companies audited by these firms based on the risk parameters to verify and confirm whether their policies relating to internal quality control, monitoring, supervision and independence have actually been implemented or whether there are some gaps.

Do you plan to audit smaller audit firms also?

It is not that only the large audit firms will always be audited. We hope to bring a schedule such that an audit firm of a certain size based on the number of audits done by them get audited at a certain interval. That interval could be one year, two years, or three years. This is [what] most of our international counterparts do in their jurisdictions. At present, we have started with five firms. We also want to understand and assess how much time and effort each inspection takes. Based on the outcome, we will need to build and enhance our team strength to match the requirement of our mandated tasks in line with the international benchmarks.

Is the NFRA working on any other guidelines?

During our financial report or audit quality reviews or disciplinary proceedings, if we find that a certain type of wrong is being repeated across various companies or audits, we come out with certain general guidelines and circulars for companies and auditors. Recently, we issued a guideline about recognition of interest on the loans which have become NPAs. We also try to write our reports or orders in such a manner that it is not only applicable to the parties concerned, but is also helpful to the larger accounting and audit communities as well as the companies so that they can be watchful and take corrective actions in respect of their companies or clients on those issues.

When NFRA was set up, it seemed that there was a turf war with ICAI on various issues. Has that been resolved?

I don’t see any turf war. Each authority has to work as per the provision of the law passed by Parliament. Section 132 of the Companies’ Act, and the rules framed there under, define the responsibilities and jurisdiction of NFRA. NFRA’s jurisdiction and its tasks are in relation to public interest entities only and are exercised through the executive body, which consists of a full-time chairman and members. Tasks in relation to all other companies, which are not public interest entities, continue to be governed by the ICAI. So, there is no overlap. As far as the framing of accounting and auditing standards for all companies u/s 132 read with 133, 143 (10) are concerned, these are dealt by the full board of NFRA, where in addition to other part time members the ICAI’s president and its nominee are on the board as part-time members. The ICAI initiates the proposal for framing of accounting and auditing standards, which are discussed in the full board of the NFRA. And then a final recommendation is sent by the NFRA to the government for further action. In the beginning, there may have been an apprehension of conflict or overlap of jurisdictions in few quarters but they have been dispelled in view of the clear provisions of the law. I see NFRA and ICAI performing complementary roles.

[The Financial Express]

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