Big auditors now move away from non-audit work
October 3, 2024
The law requires NFRA to supervise and regulate listed companies and other PIEs whereas the ICAI will have supervision over rest of the companies.
In the last six years, the National Financial Reporting Authority (NFRA) has made a name for itself as a regulator intent on making audit quality rigorous. Its numerous inspections of the Big Five, and struggle to define its mandate, where some conflicts occur with the Institute of Chartered Accountants of India (ICAI), have drawn much attention. Recently, the regulator has been in the news for the move to improve quality of group audits. NFRA chairman Ajay Bhushan Pandey spoke to FE on the attempts to bring down instances of corporate frauds on the back of overall improvement in the audit standards.
Edited excerpts:
A: In the past six years, how far has NFRA been able to improve audit standards in the country?
Ajay Bhushan Pandey: We have worked on multiple fronts. NFRA is involved in setting the auditing and quality management standards. The old standards which were issued by the ICAI are valid till ministry of corporate affairs (MCA) notifies new standards based on NFRA recommendations. We have emphasised on updating and adopting international standards in critical areas like risk assessment (SA 315), fair value (SA 540), quality control (SA 220), and expected credit loss.
After follow-ups, the ICAI has just recently given us their revised drafts on these. We are in discussions with them. We have also issued a revised draft on auditing standards for group audits (called SA600) which is a critical piece, and the current version is completely at variance with today’s international standards. It’s now open for public comments at the moment.
On the monitoring and enforcement side, we have issued 70-plus disciplinary orders in the last 30 months, wherein 95-plus chartered accountants (CAs) in 50-plus audit firms were held accountable for misconduct. These orders are pertaining to the listed companies and public interest entities (PIEs) where we have pointed out instances of severe audit failures. Many of these orders relate to high-profile audit failures like DHFL, Reliance Capital, Cafe Coffee Day and IL&FS. Despite a limited manpower, the number of orders issued by NFRA is comparable to the orders of our international counterparts who are working with a much large workforce.
We are also doing annual inspection of audit firms which was started last year. We have started with Big Five firms initially, and this year, we are adding three more firms to the list. Through inspections we evaluate their processes and whether the fundamental principles of standards and codes have been applied or not. We also select some audit work done by these auditors of listed companies, and scrutinise them. In the last round of inspection, we found that the network firms of some of the Big Five audit firms were handling non-audit work for the same clients. We pointed out these issues to them. A majority of them have voluntarily stopped taking non-audit work for the companies where a network firm is doing audit work. It is a good sign.
FE: Do you think large-scale frauds in Corporate India are on the decline?
Pandey: Our orders during last 30 months covered audit firms across different sizes and across India. Major audit failures like DHFL, Reliance Capital, etc have been penalised. Also, we have conducted inspections of major audit firms which audit large number of companies in India. Such interventions across different segment of auditors help drive systemic corrections and lead to overall improvement in the auditing quality in India, and if the auditors are able to make right disclosures at the right time, then there are higher chances of frauds and irregularities getting detected at an early stage.
FE: In case of revised SA600 standards, what’s the feedback you are getting from the stakeholders?
Pandey: It’s too early to talk about the response. In some social media platforms, experienced CAs have welcomed this public consultation. The current standard, which is in force, is two-decades old. In our enforcement orders, we have seen how major corporate failures and siphoning off funds through subsidiaries and related party transactions went unreported because the principal auditors took the plea that they relied on the work of component auditors. Unfortunately, neither of them worked as cohesive team of auditors which is essential in group audits.
FE: How do you think instances of alleged regulatory overlap with ICAI could be handled better?
Pandey: As I have said repeatedly, there’s no overlap between us and ICAI. The law makes it clear that our roles are unambiguously enshrined in law, and are complementary. The law requires NFRA to supervise and regulate listed companies and other PIEs whereas the ICAI will have supervision over rest of the companies. For instance, there are about 9,000 listed companies and PIEs out of the total universe of 1.7 million registered companies in India.
FE: What are your views on India having large audit firm/s competing with the Big Four audit firms?
Pandey: It’s desirable for India to have large audit firms. We have a large pool of talent available in the audit profession. India has a total of 0.5 million CAs, and a large number of new CAs are entering the profession every year. There are many foreign audit firms who have back office in India. We should create an environment where homegrown firms are able to improve their capability and compete with the global audit firms.
FE: How well is NFRA equipped to adopt new-age technologies that are making their way to the audit and accounting profession?
Pandey: The way technological development is taking place, the auditing cannot remain untouched. NFRA is using the latest tech tools and we will continue to add more to find early warning signs of audit failure. With tech, the instances of frauds can be detected early on. We also want the audit firms to use India’s digital public infrastructure like DigiLocker to enhance integrity of the audit work papers and capital market depositories to ensure compliance with independence norms.
[The Financial Express]
