NFRA to engage with companies for better insights: Ajay Bhushan Pandey

To refer the matter to regulator if lapses found

The National Financial Reporting Authority (NFRA) has decided to directly engage with companies, not just auditors, in cases where it finds issues with financial statements, Chairman Ajay Bhushan Pandey told Business Standard.

The authority’s mandate is to inspect auditors. However, in certain cases, NFRA officials will engage with chief financial officers and audit committees to get a comprehensive understanding of the issues. If any lapses are found, the NFRA will refer the matter to the appropriate regulator.

“The NFRA’s mandate is to enforce accounting standards. Dialogue with audit committees and independent directors will help the inspection process and get their input, and not just the auditor’s version of things. After all, company is the issuer of financial statements,” Pandey said. He said it was necessary to understand the communication between auditors and firms.

In an earlier interview with Business Standard, the NFRA chairman had highlighted the significance of effective two-way communication between those charged with governance (TCWG) and auditors. “The audit committee and independent directors should ask auditors the right set of questions instead of simply accepting what they say. Auditors should display professional scepticism. This kind of robust interaction between the auditors and TCWG will enhance the confidence of stakeholders and shareholders in the financial statements accounts of the corporate sector,” he had said. 

Constituted in October 2018 under Section 132 of the Companies Act, 2013, the NFRA’s functions include setting accounting and auditing policies and standards for adoption by companies and their auditors. The authority also oversees the quality of service of professions associated with ensuring compliance with such standards, and recommends measures to improve quality of service. The NFRA’s mandate is limited to listed companies.

On December 22, 2023, the NFRA released inspection reports for audit firms BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants, followed by a report on Walker Chandiok & Co.

One of the key issues raised by the NFRA in its reports is related to violations of Section 144 of the Companies Act, which prohibits firms from providing certain non-audit services to audit clients. 

The NFRA will reinspect the “big four” firms this year to assess internal changes and improvements following its recommendations.

The NFRA is expected to conduct more inspections this year at audit firms beyond the “big four”. The firms are also expected to be selected based on various parameters, including the extent and significance of the public interest, such as the number of companies audited by the firm.