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The National Financial Reporting Authority (NFRA) is all set to conduct annual inspections of major audit firms, including the Big Four, to ensure compliance. In December 2023, the regulator released inspection reports highlighting deficiencies in the audit processes of major firms like BSR & Co, Deloitte Haskins & Sells, SR Batliboi & Co, Price Waterhouse Chartered Accountants LLP and Walker Chandiok & Co. NFRA has now announced a plan to address these issues.
This oversight mechanism is being put in place for the first time to discourage auditors and accountants from deviating from stipulated standards and processes. The aim is to help curb corporate fraud by ensuring that auditors adhere to the required standards and procedures.
The audit watchdog is considering a move that aligns with global best practices. For instance, in the United States, the Public Company Accounting Oversight Board inspects each public accounting firm either annually or once every three years, depending on the number of companies they audit.
This plan comes after the regulator released reports in December 2023, detailing deficiencies in the auditing processes of major firms such as BSR & Co, Deloitte Haskins & Sells, SR Batliboi & Co, Price Waterhouse Chartered Accountants LLP and Walker Chandiok & Co.
NFRA is planning to conduct an annual inspection to assess a group of auditors who provide professional services to large public companies, both listed and unlisted. According to a source aware of the matter, the regulator will carefully select a mix of audit firms every year for the inspection, based on criteria such as the number of companies they audit, the size of their auditees and other factors. The selection process will utilize data analytics to ensure a fair and comprehensive assessment.
It has been reported that inspections of audit firms will not always lead to investigations. The inspections are not intended to be a regulatory crackdown on auditors, but rather an attempt to ensure more transparency and strength in the way accounting is carried out.
Nonetheless, if any instances of ‘gross negligence’ are found during the inspections, further investigation may be necessary.
Importantly, regular inspection will ensure swift remedial measures in case of lapses. Moreover, it will help both the regulator and auditors to remain engaged on key issues, according to those in the know.
The regulator has recently identified that some non-audit services that are prohibited have been rendered by certain entities, as per its inspection reports. The NFRA is responsible for enforcing provisions of the Companies Act 2013 and audit standards issued by the Institute of Chartered Accountants of India. It has the power to take action against auditors of all listed and large unlisted public limited companies for professional lapses and can also investigate any audit case referred by the government.
The Institute of Chartered Accountants of India (ICAI) is authorised to suggest accounting and auditing policies and standards for adoption by the government. Prior to its establishment, ICAI held almost exclusive jurisdiction over disciplining auditors. The Ministry of Corporate Affairs and regulators like Sebi had limited oversight over auditors.
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