NFRA
National Financial Reporting Authority, also known as NFRA, is an independent regulator managed by the Ministry of Corporate Affairs, Government of India.
It was formed in October 2018 under the Companies Act 2013, to oversee the auditing profession and Indian Accounting Standards.
NFRA has all the listed companies in India or outside India, as well as unlisted public companies, under its jurisdiction;
There have been several cases where auditors and audit firms have come under the scrutiny of regulators for failure in their conduct. NFRA doesn’t condone such unjust acts of auditors.
It has come out with various Audit Quality Review (AQR) reports.
NFRA is to protect the public interest, and interests of investors, creditors, and others associated with the companies or corporate bodies governed by the Authority.
The regulator published its audit quality inspection guidelines in November with the objective to improve the quality of the profession. The guidelines are quite similar to that of the best practices, the international audit regulators follow.
Its inspections will identify areas and opportunities to improve the audit firms’ system of quality control.
NFRA checking audit quality of five firms
NFRA has commenced its probe on five audit firms, to check their audit quality. These are mostly going to be onsite inspections.
The report is expected to be announced by the end of this financial year.
Ajay Bhushan Pandey, Chairperson of NFRA and Former Finance Secretary, Ministry of Finance, Government of India, had told the media that the firms in question would be;
- Deloitte Haskins & Sells LLP
- SRBC & Co LLP
- Price Waterhouse Chartered Accountants LLP
- Walker Chandiok & Co LLP
- BSR & Co LLP
First, the regulator will try to understand the firms’ governance/management structure, and policy manuals. It will then review the quality control system of the entire firm, and a select audit file review in the selected audit areas.
NFRA is to pick 4-5 companies that have been audited by the abovementioned audit firms and look at their respective financial statement audits for FY2020-21.
In India, regulations do not permit foreign auditing firms to operate. Hence KPMG carries out audits in India under the name of BSR & Co, an auditing firm it bought. BSR & Co was an auditing firm founded by B.S. Raut in Mumbai. Deloitte carries out audits in India under the names of C.C. Chokshi & Co, Fraser & Ross, PC Hansotia & Company, SB Billimoria & Company, and Deloitte Haskins & Sells. Price Waterhouse is the Indian affiliate of PwC. EY carries out its Indian audit operations through SR Batliboi & Associates.
Improving Audit Process
It’s an important step taken by the NFRA that will inspect the firm’s internal controls, governance structure, audit methodology, team members, and more relevant aspects to assess its quality of service.
Mr. Pandey also told the media that they would focus on improving the auditing processes.
They wouldn’t take drastic measures unless the audit firms under scrutiny have made some significant mistakes, been non-compliant with SQC (Standard on Quality Control), conflicts of interest, or accounting standards.
The chairperson of NFRA further explained that the goal of having a regular audit inspection structure is to give constructive feedback on the audit quality of firms.
This will in turn would avoid serious audit failures. Audit quality inspections are integral to the functioning of independent audit regulators, worldwide.
It was also mentioned in (Press Information Bureau) PIB’s press release that in response to NF RA’s consultation paper “Enhancing Engagement with Stakeholders’ in 2021, many stakeholders had suggested onsite inspection of audit firms by the regulator.
They wanted the audit firms to comply with auditing standards and guidance.
Scrutiny of the Audit quality of a firm can be advantageous to both NFRA and the firms.
