BS Manthan: Audit quality has improved in past few years, says NFRA chief

He further added that the regulatory body is not passing disciplinary orders in abundance and is instead focussing on inspections

The quality of audits has improved across the board over the last five years, which is leading to fewer disciplinary orders, said Ajay Bhushan Pandey, chairman, National Financial Reporting Authority (NFRA) on Thursday at the Business Standard’s Manthan summit. 

 

“If you just compare maybe four or five years back, the quality of audit has improved, and that is why I must, you know, compliment the auditing firms, whether they are the big ones or the medium ones or the small ones, we are seeing the, across the board, improvement in the auditing (which) is an encouraging sign,” he said in response to a query about the impact of the inspections that the regulatory body has been conducting on the Big Four accounting firms.

 

Pandey said that the regulatory body is not passing disciplinary orders in abundance and is instead focussing on inspections. 

 

“We say that, what are you doing? What is your process? How do you build the capacity? So ultimately, what we are finding is that if I go and visit one audit firm and that firm audits 100 companies, you will see that one inspection, which takes maybe 3 to 4 months, actually leads to the improvement of audit quality in about 100 firms,” he added.

 

On the issue of the resistance that the regulator faces from the Institute of Chartered Accountants of India (ICAI), Pandey said that it is part of the NFRA and we need to work very actively with them to remove their apprehensions.

 

“When we want to align ourselves with the global standards and achieve our 2047 goals of a developed country, we need to grow at the rate of at least, you know, 9 per cent. For that, you require a huge amount of investment. Investment from the domestic front, the institutional investor, retail investor, as well as the FDIs. And if you don’t have the trust in the financial reporting, if you don’t have the trust and also the, you know, the standard global reporting framework, how will people trust our figures,” he added.

 

In response to a query whether the NFRA is also looking at the Environmental, Social, and Governance (ESG) disclosures, even though they are voluntary in nature, the chairman said that globally, the importance of ESG compliance has grown significantly, with many investors emphasising the need for companies to adhere to ESG norms.

 

“However, a major challenge is the lack of standardised guidelines, as there are currently over 36 different ESG standards and reporting frameworks in use. This creates confusion when comparing companies. Investors face difficulty in determining which standard offers a more robust measure of ESG compliance,” he said.

 

He also added that the G20 has tasked the IFRS Foundation with developing global ESG reporting standards, similar to their work on financial reporting standards. This initiative is underway and represents a significant step toward creating consistency in ESG disclosures.

 

“Once these international standards are established, it will be crucial for countries, including developing ones, to align with these global norms as part of their growth strategy,” he added.