Strengthening oversight: Why audit companies must improve governance

The latest inspection reports released by the National Financial Reporting Authority (NFRA) bring to light structural weaknesses in some of the country’s top audit firms, including Price Waterhouse Chartered Accountants, BSR & Co, and SRBC & Co. In 2025-26, the NFRA expanded its audit inspection programme to cover 35-40 firms, up from about 25 earlier. The regulator has flagged deficiencies in audit independence, documentation, fraud-risk assessment, and scrutiny of related-party transactions. These findings are not routine technical observations but reflect deeper governance and process deficits. For instance, the NFRA noted cases where audit firms failed to adequately assess whether loans to subsidiaries were at arm’s length. Such firms were also found to have failed to satisfactorily evaluate the impact of ongoing investigations such as those by the Central Bureau of Investigation. Some of them even delayed verifying employee credentials — allowing a fake chartered accountant to work on audits for a significant period. 

In addition, concerns over independence breaches, such as partners holding financial interests in audited entities, further underline systemic lapses. These developments come amid heightened regulatory scrutiny, with the NFRA expanding inspection across major firms and coordinating more closely with the Institute of Chartered Accountants of India (ICAI) to strengthen oversight. The broader challenge lies in the growing complexity of modern corporate structures and the pressure on audit firms to balance commercial interests with professional independence. Large business groups today operate through intricate networks of subsidiaries and cross-border entities, and undertake related-party transactions, making it harder for auditors to verify financial statements with precision. Capacity constraints also play a role: Lack of professionals leading to weak supervision, poor documentation, and gaps in assessing fraud risk. Moreover, as seen globally, concerns on audit quality are not unique to India, but the stakes are higher in a fast-growing economy where investor confidence depends heavily on credible financial reporting. 

Addressing these challenges requires a systemic and forward-looking response. First, audit firms must strengthen internal governance by creating independent quality-control mechanisms and ensuring accountability from partners. Second, investment in human capital is essential, such as rigorous recruitment-verification processes, continuous professional training, and specialisation in complex areas such as forensic accounting and valuation. Third, technology must become central to auditing: Advanced data analytics, artificial-intelligence tools, and real-time risk-monitoring systems can significantly improve audit quality and reduce human error. Fourth, there must be a clearer separation between audit and non-audit services within firm networks to preserve independence in both letter and spirit. Fifth, regulatory coordination between the NFRA and ICAI should be institutionalised to avoid overlaps and ensure consistent enforcement — a step already being explored. Finally, audit committees within companies must become more proactive, demanding higher standards of scrutiny and transparency from auditors. 

Ultimately, the NFRA’s findings should not be seen merely as a critique of individual firms but as a wakeup call for the entire profession. With India aspiring to attract large investments, the credibility of its financial reporting framework must be improved. Strengthening audit quality through better governance, technology, and regulatory coordination is essential to building economic trust and stability.