We have been able to stabilise auditing as an institution: NFRA Chairperson

Pandey says audit firms have taken corrective steps following the regulator's inspections, which are among the pivots the organisation is working on

With his three-year tenure as chairperson of the National Financial Reporting Authority (NFRA) ending on Monday, Ajay Bhushan Pandey, in an interview with Ruchika Chitravanshi in New Delhi, says audit firms have taken corrective steps following the regulator’s inspections, which are among the pivots the organisation is working on. Edited excerpts:

 

How do you look back at these three years?

  We have been able to establish and stabilise auditing as an institution. In the development cycle of any country you require investment — from public and private sources, or from abroad. This will require trust and good corporate governance. How do you ensure that the people who are putting in money are able to trust the financial figures being reported? The role of accounting and auditing, therefore, becomes critical. By 2047 we want to become a developed country. That will happen only if there is trust in the Indian financial reporting system.

 

What do you think of the latest High Court order (on the issue of division of functions at the NFRA)? 

We have challenged that part of the order in the Supreme Court, which, through its interim order, has allowed us to continue our proceedings and withhold the final orders till it decides on the matter, which is fair. We are sure we will be able to convince every level of the judiciary of the reforms we are trying to bring in to ensure transparency in corporate governance.

 

The NFRA has been put through a lot of hoops in terms of legal challenges over your functioning. How do you see it?

  The strength of our system here is that if any reformative law is brought in, it is not only discussed within government and Parliament, it is debated in the public domain and media, and many times in courts too. Some of us may get discouraged because we have to go through all these legal challenges. But be it Aadhaar, goods and services tax or the NFRA -- a system becomes strong because it has gone through not only the government’s due diligence and elaborate legislative processes, but also because it is widely debated in the public, and in various courts. 

And that is why Aadhaar today is strong. It has become a people’s programme, and we call it a digital public infrastructure. At some point or the other, every pillar of democracy was opposing Aadhaar. However, Aadhaar emerged stronger because it underwent intense scrutiny. In the case of the NFRA too it’s good that it is being debated at various levels of the judiciary now. 

 

You also brought in the practice of inspection during your tenure. What was the idea?

  The NFRA works on four pivots. One is setting auditing and accounting standards. We have tried to align ourselves with international standards. The second is building capability since you require a lot of people to enforce good standards. The third one is inspection. It is much more important to look at the system. This is true for any organisation, whether it is a restaurant, hotel or private company, or even the government. If your systems are good, the outcomes will be superb.

  And this is again based on good international practice. And what I have found is that many of them are part of Big Four or Big Six, and perform non-audit services. That was leading to conflicts of interest. We could have started proceedings against them. But during inspection, we discussed matters. I’m glad almost all of them have substantially changed their own policies and put them in the public domain, saying that neither they nor their network firms will provide non-audit services to their audit clients or their associates. 

The fourth is disciplinary action.

 

How many disciplinary orders did you pass in the past three years? 

More than 100. We shouldn’t go by the number. Ideally I would like to pass the least number of disciplinary orders and try and inculcate the sense of due diligence and responsibility among auditors through our various other actions. Chartered accountants are talented people who have gone through a rigorous curriculum. The number of disciplinary proceedings should reduce over time. We have started issuing technical reports in which we are saying the auditors should be ready for questions by audit committees. They come under the jurisdiction of the Securities and Exchange Board of India, so we are providing guidance to auditors so that as and when such questions are raised by the audit committee, the auditors should be prepared with their analysis and response. The ultimate result would be that the quality of deliberation in the audit committee and financial reporting will improve. And if there are any signs of corporate misdeeds or failure, they will get detected at a very early stage, saving the investors and banks huge losses. 

 

Do you think the NFRA should have a permanent cadre of skilled professionals?

  For any good organisation, there has to be a mix. The NFRA has a permanent cadre. We should get market experts from time to time. We also take people on deputation from government departments, institutions, or other regulators. We have taken experts, including young professionals. 

 

The Institute of Chartered Accountants of India (ICAI) and the NFRA have often been at loggerheads. How do you see their relations evolving? 

The ICAI and NFRA have been complimentary to each other. I have worked with four (ICAI) presidents and had excellent equations with them. Differences of opinion will be there, and we must respect that aspect. The structure of our board is such that there are three representatives from the ICAI. We have a representative from Sebi, the Reserve Bank of India, the Comptroller and Auditor General, plus two other independent experts. There were differences, but finally, as a board, we were able to make a decision.

 

Do you see the changing geopolitical situation affecting the auditing profession and its regulation?

  I see huge potential as far as India is concerned. We have more than 600,000 chartered accountants and in addition a lot of other finance professionals are coming into this. That is why if we adopt global standards our people will be familiar and comfortable with them. So India could become a global accounting and auditing hub, just like it happened in information technology. That was also one of the purposes of aligning our auditing and accounting standards with global standards.

 

What is next on the cards for you?  

I am happy that I’ve been able to contribute to national development in my own small way, be it Aadhaar, goods and services tax, faceless income tax, Unified Payments Interface, etc. There are ways to serve the nation and society in various capacities.