The National Financial Reporting Authority’s ongoing inspections of major audit firms have prima facie revealed some audit quality issues, for which the regulator is in talks with them, NFRA chairman Ajay Bhushan Prasad Pandey has said.

The top five audit firms – BSR & Co, Deloitte Haskins & Sells, SRBC & Co, Price Waterhouse Chartered Accountants, and Walker Chandiok & Co LLP – that were inspected last year have introduced some positive changes, but a lot more needs to be done, Pandey told ET’s Banikinkar Pattanayak in an interview. Edited excerpts:

What is the status of your annual inspection of audit firms this year? Do you notice any change this time around in the standards and processes followed by the auditors you inspected last year?

In this round of inspection, we have divided our work into two parts. First, we have taken some firms that were not inspected by us last year as per our rotation policy. We have found that after we published our inspection reports last year, there is some improvement this time. But at the same time, I must say, prima facie, there are some issues with respect to the quality of audits.

After giving them the full opportunity to respond, we will be in a position to form any concrete opinion. In the audit firms that we inspected last year, we had identified certain issues, including their independence and conflicts of interest. So, this time around, what we have found is that these firms, barring one or two, have introduced policies that they won’t provide non-audit services to the same clients or their subsidiaries or their group companies, of which they are statutory auditors.

This will avoid the conflict of interest. This is a welcome step. Our expectation is that the audit firms that we haven’t inspected so far, too, will take the cue from their larger peers and avoid conflict of interest.

I must say we find certain things are moving in a positive direction. However, a lot more needs to be done by the audit firms, especially those auditing firms where public interests are at stake. Such audit firms would need to enhance their capacity, knowledge base and expertise of their engagement partners and members of the engagement teams.

On the second aspect, we are emphasising a lot on the regular and meaningful communication between auditors and the audit committees of listed companies. We are doing it through our inspections, public pronouncements, and orders.

How many firms are you inspecting this year?

We are inspecting seven audit firms this year and we are planning to raise the number further in the next year. Last year, we inspected top five firms. As we build more capacity, the number of audit firms that will be inspected will rise.

But I must add that each of the firms (that we inspect) audit dozens of listed companies. So, the inspection of one large audit firm actually goes a long way in improving the quality of financial statements and audits of a much larger number of listed companies.

You had planned to engage audit panels and top executives of large, listed companies. What’s the update on that front?

We have started this through the Indian Institute of Corporate Affairs (IICA), which conducts various training programmes meant for board members, many of whom are members of the audit committees. So, through IICA, we are conducting more such training programmes and interactions. As we go along, we will further strengthen this mode of communications with the board of directors.

How many listed companies have been covered this year through such programmes and how many more would you cover in the coming years?

So far this financial year, IICA programmes have covered representatives of approximately 256 companies. We plan to cover around 500 companies more during the remaining part of this fiscal. In FY24, about 780 companies were covered.

Also, during the course of our inspection of audit firms, if we find any issue with their audit of any listed company, we want to convey it to the audit committees of that company. We will schedule some of these meetings once our inspections (of audit firms) reach a certain level.

So, basically, our interaction with the audit committee and board members of listed companies will be through two channels – inspections and the IICA programmes.

In some advanced countries, audit firms of large public interest entities (PIEs) are registered with their audit regulators for better oversight. Is there any plan to implement it in India?

It is correct that in advanced countries like the US, Australia, Canada, South Africa etc., audit firms of PIEs are registered with the independent audit regulators. Since December 2023, the UK has also introduced this requirement of registration of audit firms with the FRC, the UK’s independent regulator.

NFRA is a new entrant in this global family of independent audit regulators and has now obtained the membership of the global forum called IFIAR.

The idea of registration is to gather information about the audit firms of PIEs. Currently, the required information and data about the audit firms of PIEs are obtained by way of annual filing of the NFRA 2 form.

  • Published On Aug 14, 2024 at 08:51 AM IST

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