Some positive changes by audit firms, but a lot more needs to be done: Ajay Bhushan Pandey
Aug 14, 2024
Synopsis
The National Financial Reporting Authority (NFRA) has identified preliminary audit quality issues in its ongoing inspections of major audit firms. NFRA Chairman Ajay Bhushan Prasad Pandey noted that while some positive changes have been made, particularly in addressing conflicts of interest, more improvements are needed. The NFRA is inspecting seven audit firms this year, with plans to increase the number further. The NFRA is also working with the Indian Institute of Corporate Affairs (IICA) to enhance communication and training for audit committees of listed companies.
The National Financial Reporting Authority’s ongoing inspections of major audit firms have, prima facie, revealed some audit quality issues, for which the regulator is in talks with them, NFRA chairman Ajay Bhushan Prasad Pandey has said. The major audit firms (BSR & Co, Deloitte Haskins & Sells, SRBC & Co, Price Waterhouse Chartered Accountants, and Walker Chandiok & Co LLP) that were inspected last year have introduced some positive changes, but a lot more needs to be done, Pandey told ET’s Banikinkar Pattanayak in an interview. Edited excerpts:
What is the status of your annual inspection of audit firms this year? Do you notice any change this time around in the standards and processes followed by the auditors you inspected last year?
In this round of inspection, we have divided our work into two parts. First, we have taken some firms that were not inspected by us last year as per our rotation policy. We have found that after we published our inspection reports last year, there is some improvement this time. But at the same time, I must say, prima facie, there are some issues with respect to the quality of audits. After giving them the full opportunity to respond, we will be in a position to form any concrete opinion.
In the audit firms that we inspected last year, we had identified certain issues, including their independence and conflicts of interest. So, this time around, what we have found is that these firms, barring one or two, have introduced policies that they won’t provide non-audit services to the same clients or their subsidiaries or their group companies, of which they are statutory auditors. This will avoid the conflict of interest. This is a welcome step. Our expectation is that the audit firms that we haven’t inspected so far, too, will take the cue from their larger peers and avoid conflict of interest.
I must say we find certain things are moving in a positive direction. However, a lot more needs to be done by the audit firms, especially those auditing firms where public interests are at stake. Such audit firms would need to enhance their capacity, knowledge base and expertise of their engagement partners and members of the engagement teams.
On the second aspect, we are emphasising a lot on the regular and meaningful communications between auditors and the audit committees of listed companies. We are doing it through our inspections, public pronouncements, and orders. These communications should centre around audit plans, processes involved and identifications of issues, including the related party transactions. The auditors should apprise the audit committees fully so that they can take an informed decision.
How many firms are you inspecting this year? Is there any plan to raise this number in the coming years?
We are inspecting seven audit firms this year and we are planning to raise the number further in the next year. Last year, we inspected the top five firms. As we build more capacity, the number of audit firms that will be inspected will rise. But I must add that each of the firms (that we inspect) audit dozens of listed companies. So, the inspection of one large audit firm actually goes a long way in improving the quality of financial statements and audits of a much larger number of listed companies.
You had planned to engage audit panels and top executives of large, listed companies. What’s the update on that front?
We have started this through the Indian Institute of Corporate Affairs (IICA), which conducts various training programmes meant for board members, many of whom are members of the audit committees. So, through IICA, we are conducting more such training programmes and interactions. As we go along, we will further strengthen this mode of communications with the board of directors.
How many listed companies have been covered this year through such programmes and how many more would you cover in the coming years?
So far this financial year, IICA programmes have covered representatives of approximately 256 companies. We plan to cover around 500 more companies during the remaining part of this fiscal. In FY24, about 780 companies were covered. Also, during the course of our inspection of audit firms, if we find any issue with their audit of any listed company, we want to convey it to the audit committees of that company. We will schedule some of these meetings once our inspections (of audit firms) reach a certain level. So, basically, our interaction with the audit committee and board members of listed companies will be through two channels – inspections and the IICA programmes.
Given the growing importance of ESG globally, are you suggesting any sustainability accounting standards to the government for adoption?
The ESG (environmental, social, and governance) or non-financial reporting is quite a wide and complex area, which has been receiving plenty of attention globally. No doubt, there has been a proliferation of reporting standards or frameworks globally. A recent study of the International Federation of Accountants indicated that the use of multiple frameworks/standards increased from 68% in 2019 to 80% in 2020.
In India, Sebi has mandated a framework called BRSR for certain top listed companies. This framework is flexible enough to accommodate incorporation of global standards and best practices.
In the November 2021 COP26 Glassgow summit, the IFRS Foundation has established a dedicated standard-setting board called International Sustainability Standards Board. This board has now issued two global baseline reporting standards and is working towards the harmonisation of various other global reporting standards on climate-related matters. As you may have observed, India’s national policy is to consider global standards and best practices on any subject.
In some advanced countries, audit firms of large public interest entities (PIEs) are registered with their audit regulators for better oversight. Is there any plan to implement it in India?
It is correct that in advanced countries like the US, Australia, Canada, South Africa etc., audit firms of PIEs are registered with the independent audit regulators. Since December 2023, the UK has also introduced this requirement of registration of audit firms with the FRC, the UK’s independent regulator. NFRA is a new entrant in this global family of independent audit regulators and has now obtained the membership of the global forum called IFIAR. The idea of registration is to gather information about the audit firms of PIEs. Currently, the required information and data about the audit firms of PIEs are obtained by way of annual filing of the NFRA 2 form.
In recent years, NFRA has been embroiled in litigation with auditors who have challenged NFRA’s authority over them and also questioned its power to deal with audit failures that occurred before the regulator came into existence in 2018. What’s the status of the litigations and how have they impacted NFRA’s authority to regulate auditors of listed companies?
Compliance with Standards on Auditing has been a requirement for the audit profession for decades, albeit with varying names. Previously, compliance with this family of standards and code used to be with the profession itself. But in view of the corporate scams and audit failures of high magnitude, which caused mammoth damage to public interest starting from the failure of Enron, the regulation of audit firms started shifting to independent audit regulators across the world. In India, too, the regulation of auditors and their firms engaged in the audit of public interest enterprises was entrusted to NFRA in 2018. So, this was only a change of forum and no new responsibility was imposed on the audit profession due to the creation of NFRA. The National Company Law Appellate Tribunal (NCLAT) recently upheld the jurisdiction of NFRA in three cases of audits done by DHFL auditors prior to the regulator’s formation in 2018. When the NCLAT order was challenged in the Supreme Court, the apex court dismissed the appeals. Therefore, in our view, based on the Supreme Court’s order and the so-called “doctrine of merger” (the decision of the subordinate forum merges with the decision of the superior forum and it is the latter that subsists), the issue of NFRA’s retrospective jurisdiction is now settled.
[The Economic Times]
