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NFRA changes tack, ramps up focus on supervision to boost audit ecosystem: Chairman AB Pandey

Mar 6, 2024

The National Financial Reporting Authority (NFRA) in India has shifted its approach from a predominantly enforcement-driven regulator to one with a judicious approach towards both enforcement and supervision, according to its Chairman Ajay Bhushan Pandey. He highlighted new initiatives, including firm-wide audit quality inspections and engagement with audit panels, independent directors, and boards of listed companies.

The National Financial Reporting Authority (NFRA) has transformed from a predominantly enforcement-driven regulator in its early days to one with a judicious approach towards both enforcement and supervision, its chairman Ajay Bhushan Pandey said on Tuesday, listing out new initiatives to further bolster its supervisory role.

“When NFRA began its operations (in 2018) we started with focus on the enforcement approach rather than the supervisory approach as the prevailing scenario demanded that kind of medicine,” Pandey said.

Pandey was speaking at the inaugural session of a two-day international conference on Transparent Financial Reporting and Audit Quality—Pillars of Corporate Governance, organised by the NFRA in the national capital. This is a first-of-its kind gathering in India of senior representatives of the audit regulators across countries, auditors, accountants and legal practitioners, among others.

The audit regulator started operations in November 2018, a few weeks after the IL&FS scandal, the biggest in the country’s shadow banking sector, had flared up.

As part of its enhanced focus on supervision, Pandey said the regulator last year added a new regulatory tool--“firm-wide audit quality inspections”. It now aims to conduct annual inspections of major audit firms to gauge their compliance with stipulated standards and processes.

The move will be in sync with “one of our functions to drive a systemic improvement in the audit quality and provide an opportunity for remedial actions by the audit profession”, he added.

Meetings with listed companies
The NFRA will also engage audit panels, independent directors and boards of listed companies, wherever required, to “better understand their side of the story”, Pandey said.

“It will strengthen the hands of the auditors, improve audit quality and broader corporate governance,” he said.

ET had on January 18 reported the NFRA’s plan to engage such key persons of listed companies as they are "charged with the governance" of these entities.

People familiar with the regulator’s plan had then said auditors sometimes hand over their reports/presentations to the audit committee of a company at the last minute. So, the committee, strapped for time, endorses the auditors’ reports in a hurry and doesn’t properly scrutinise them.

The regulator's plan will help auditors as well. If the auditors keep flagging certain issues, the audit committee or the board or the management won’t be able to ignore these issues, they had said.

Elaborating on the issue in an interview to ET this month, Pandey said: “Auditing standards require that there should be an effective two-way communication between the auditor and those charged with governance of a company, which is usually the audit committee and the board.”

“We have found that in many cases of corporate failures, audit committees/boards did not exercise requisite oversight and also there was no such effective two-way communication. In some cases, we found the meeting between the auditors and the audit committee is reduced to a formality—that is, before the board meeting to approve the financial statement, the audit committee meeting is held for 15-20 minutes,” he had added.

[The Economic Times]

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