NFRA aligning to global standards but industry awaits more clarity

Experts want the authority to set some limit on the time it would spend on on-site visits

The National Financial Reporting Authority (NFRA) has moved a step closer to international audit regulations with its latest inspection guidelines, but the audit community is awaiting clarity on finer details on how the authority will execute its plan.  

NFRA has said that it will select firms on the basis of several risk principles including such as the size, composition and nature of the firm, and the number of audit engagements completed in the year under review. The complexity and diversity of financial statements audited would also be taken into account. However, what is unclear is whether these inspections would be conducted on a single auditor for consecutive audit cycles or the firm would not be inspected for the next two or three years once an inspection is done.

“Internationally, that is the practice. Currently, NFRA does inspection by selecting an audit engagement which means that one firm can get inspected year after year,” a senior auditor said.

He said that the new approach seems to be more rational and more aligned with global standards.

In a departure from current strategy, NFRA has said that it would conduct on-site inspections and meet the senior management of the firm as well. This move has been welcomed by auditors. Industry experts however, said that the authority should set some limit on the time it would spend on these on-site visits, so both parties can then get on with their day to day business.

Globally, audit regulators also set the focus areas of their inspection such as fixed assets, deferred tax, purchase cycle. It not yet known if NFRA would follow the same process or do an inspection covering all areas.

“Clarity and finality in these guidelines is awaited. There has to be some consistency in which NFRA will conduct these inspections,” a senior industry expert said.

The big audit firms said that they are already exposed to such inspection in other jurisdictions by bodies such as the US’s public company accounting oversight board and the financial reporting council of the UK, but those who have not may find it difficult at the start.

“We strongly support the enhanced proactive monitoring and building of institutional capacity within NFRA, which will help enhance Audit Quality across the Indian profession,” said Vishesh C. Chandiok, CEO, Grant Thornton Bharat.

NFRA’s guidelines have broadly taken from the regulations of jurisdictions which are part of the international forum of independent audit regulators (IFIAR).

Current Board Members of IFIAR as of April 2022 are Australia, Brazil, Canada, Chinese Taipei, France, Germany, Greece, Ireland, Japan, the Netherlands, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the United States.

“The Indian economy is not at par with countries mentioned above, it is now suggested to benchmark audit quality standards with these countries.” said Maneet Pal Singh, Partner, I.P. Pasricha & Co said.

NFRA was constituted on October 1, 2018 to monitor and enforce compliance with accounting and auditing standards.