Each NFRA order a case study for audit committees: Ajay Bhushan Pandey

Every order passed by the National Financial Reporting Authority (NFRA) in the last two years can be studied by audit committees of companies as a case study to help in the early identification of corporate failures, Ajay Bhushan Prasad Pandey, chairperson of the regulator, said on Friday.

"In the last two years, we have passed a couple of dozen orders. Each order is a case study," Pandey said at a conference organised by ASSOCHAM in New Delhi on "Effective Audit Committee: Enhancing Governance".

"We see a constant pattern in our orders. At least if those patterns are taken cognisance of by the audit committee, you will be discharging your responsibility."

NFRA has issued orders against several audit firms in India in the past, including the "Big Four", around the auditors' independence and their non-audit work. It was found that large auditors were providing non-audit services to the clients, leading to a conflict of interest.

This year, media reports indicate that more audit firms may come under the regulator's radar. According to people aware of the matter, the inspections for the current year have already started and the reports are likely to be made public in December.

Pandey on Friday said that the audit committees must take an active part and ask the auditors to prepare a list of major lapses reported by NFRA in these orders and ask them if they have looked at their companies from those points of view.

"There are a number of lessons to be learned. Audit committees must ask auditors to list issues reported by NFRA and how they have addressed those in their company audit," he said.

Pandey also advocated for better communication between audit committees and auditors.

"Audit committees and auditors' communication needs more time and engagement," he said.

"Making one or two-hour presentations to the audit committee is not enough. The committees should have more frequent meetings and extensive discussions with auditors."

Pandey also pointed out that India has been witnessing an exponential rise in the number of retail and institutional investors and it is necessary for them to have trust in the financial reporting system.