‘Auditors must display professional scepticism’: NFRA Chairperson
Interview: Ajay Bhushan Pandey, chairperson, NFRA
January 18, 2024
The National Financial Reporting Authority (NFRA) has detected an absence of “professional skepticism” by auditors in several cases during its inspections, chairperson Ajay Bhushan Pandey tells Priyansh Verma. He said some auditors or their associate firms are found to be involved in providing non-audit services either to the same client or related companies leading to conflict of interest. The roles of Institute of Chartered Accountants of India (ICAI) and NFRA are clearly defined, and both are two-wheels of the same regulatory system, Pandey said. Edited excerpts:
What are the major issues plaguing auditors? Where are the lapses?
In the larger context of corporate governance, in the last few years we’ve seen several issues that need to be addressed — both by companies’ directors and auditors. First of all, auditors should challenge the management assertion and give their objective opinion on the state of affairs. These assertions in financial reporting involve estimation and judgments by management in many areas. These could be affected by “management bias”, which could be unintentional or intentional, to achieve a desired management result. Standard on auditing requires evaluation of these management judgments without bias.
However, this principle is not applied by auditors in its true spirit due to lack of independence. This is because auditors or their associate firms are involved in providing non-audit services either to the same client or associate companies or both. This leads to several conflicts, such as self-review threat, financial threat or self-interest threat. All of these are listed in the code of ethics.
Auditors must document the basis on which they have arrived at a certain judgement. The documentation should be such that anyone who is not involved in the process should be able to figure out the rationale behind the audit conclusion. But auditors have been treating this as routine casual activity.
Another area is inadequate or absence of effective communication with the those charged with governance (TCWG), in particular, independent directors. Of course, in many firms a critical quality control process called engagement quality control review by an independent partner also needs more attention.
What measures should the auditors take to minimise errors in auditing?
We’ve seen in terms of reporting of the fraud, in some cases, if an auditor has “reasons to believe” that a fraud has occurred in the company, then he/she has to immediately report to the ministry of corporate affairs. But in many cases, frauds were not reported as per prescribed rules and on time.
Also, we’ve found that an appropriate degree of communication between the auditor and the company’s TCWG should take place. In several cases, communication happens at the lower level and not with directors. This is what the audit standard demands. These are the areas of improvement. If all these points are taken care of then many corporate failures that we saw in the past could’ve been avoided.
On an overall basis, perhaps it is time to think of some robust comprehensive training programmes or post CA qualification certification courses in the areas of audit of public interest entities. Continuing professional education (CPEs) needs an overhaul.
Should the Companies Act be amended to bar auditors from providing non-audit services?
Code of ethics for professional accountants is a fundamental charter in this area. Of course, the Companies Act, 2013, has specific provisions prohibiting non-audit services for auditors. These prescribe certain cardinal principles and an auditor has to judge whether it has complied with provisions in a way that the “professional skepticism” is not compromised. Both the Act and code of ethics provide a fair degree of clarity regarding the issue. If auditors comply with such provisions, it would lead to major improvement and enhance the quality of audit.
How many firms are not complying with the standards of quality control (sqc-1)?
The five firms that we inspected last year, variation has been found in the degree of compliance. Those who haven’t performed well, we’ve pointed that out. This is all mentioned in the report that we have prepared. Inadequate control of integrity and safety of audit documentation, adequacy of sample sizes and, of course, provision of non-audit services, clarity around firm’s governance and management need attention. The firms have acknowledged our findings and committed to make improvements. I hope these issues will be addressed before we inspect them again.
Has the National Company Law Appellate Tribunal ruling on NFRA’s retrospective jurisdiction diluted ICAI authority?
I don’t see it that way. Both NFRA and ICAI are two wheels of the regulatory system. Certain categories of auditors have to be regulated by NFRA and others by ICAI. Over 400,000 CAs are in India who can audit any the company whose number would be more than 1.5 million. NFRA’s jurisdiction is only with respect to listed firms and some public interest entities whose number would be around 9,000. Audits of the rest is under ICAI’s purview. Roles of both are very clear as per law.
[The Financial Express]
