Auditing the Auditors

By Pilli Chaudhari

“Good auditors are the bedrock of fair and transparent financial markets”– New York Times.

The talks of auditing shortcomings is not a recent phenomenon. Over the last few years, several auditing firms have been hit by scandals, and caught in legal crossfire.

Following the aftermath of many scandals, the parliament suggested the formation of a regulatory body governing the auditing firms. In 2013, section 132 of Company’s Act empowered the government to set up a regulatory body called National Financial Reporting Authority (NFRA) to provide for Accounting and Auditing Standards.

But why is the formation of NFRA being implemented as late as 2018? The answer to this is the unfortunate array of corporate frauds the country has been seeing in recent years. The biggest of them being the PNB fraud of Rs. 12,700 crore, where several layers of audits were side stepped.

So, what will the NRFA exactly do? NFRA will regulate the corporate misdoings of the regulators. It will improve transparency and reliability of financial statements and other information presented by listed companies and large unlisted companies (above a threshold). The inherent role of The Institute of Chartered Accountants of India (ICAI) and the role of Quality review Board will remain the same below the threshold. In accordance with the Prime Minister’s call to Chartered Accountants in July last year, wherein Mr Narendra Modi had laid great emphasis on weeding out corrupt practices and persons from the auditing fraternity, the Union Finance Minister, Mr. Arun Jaitley, declared the formation of NFRA in March 2018. The Government advocates that this measure is taken in accordance with international norms like the Public Company Accounting Oversight Board in the Unites States. The US has also suffered though similar cases such as Wells Fargo and the KPMG scam, in the past, and now relies on institutes like PCAOB for auditing the auditors.

There are multi-faceted expectations from the NFRA that need to be met:

Improvement of foreign and domestic investments
Economic growth
Meeting international standards and thereby globalize businesses
Assist in further development of the auditing system
(The Hindu-BusinessLine)

Having said this, the move has drawn severe criticism from the auditing fraternity. Several cases of auditing personnel resigning from their posts are being seen. The reason may be that in case of individual breach of rules, a fine of Rs 10,000 will be levied. In case of non-compliant entries, a penalty of Rs 1,000 for every day after the violation will be due. Another major issue is the introduction of auditor rotation norms. Significant fees are being lost in the process (Rs 100 crore estimate for big auditors). The pressure of fresh audits in new companies puts a demand for increased manpower, thereby, reducing profits for the firms.  Over and above this, promoters may be able to influence such new appointments based on their preference, thus, negating the sole purpose of rotational norm.

“So far in 2018, auditors in 30 listed companies have quit before completing their assignments. That is double the number for the full years of 2016 and 2017. Several resignations were in May 2018 alone” (Economic Times, June 24, 2018).  Source:


The auditors present their case by saying that the current system already has an adequate oversight mechanism. According to them, there is a misconception that ICAI and The Institute of Company Secretaries of India (ICSI) – the current, auditing regulatory bodies, are self-regulated. There are Government nominees on Board of Discipline and disciplinary committee to keep check.

The auditors are posing doubt on the NFRA’s (super-regulator) ability to act as an independent body. Since, the composition will be of one chairperson, three full time members, one secretary and nine part time members; they fear that the NFRA will soon become a dwelling body for the bureaucrats.

The responses from the professionals are quite critical. Amarjit Chopra, past President of Chartered Accountants Institute and current chairman of NACAS (National Advisory Committee on Accounting Standards), states that delays in most cases are because of bodies like RBI and courts and not because of professional bodies. Nesar Ahmad, past President, ICSI, now actively dealing with insolvency cases, feels that the Government is trying to mimic US practices without taking into consideration in-house complexities. (The Hindu-BusinessLine).

Some interesting insights came up when Mr. Sandeep Jain, ex-Regional Finance Director (Asia Pacific) for Perfetti Van Melle Group, and, now, an independent Strategy Consultant with IndusGuru Network Partners answered some of the most thought provoking questions.

On asking, what would be the role of ICAI after NFRA comes into force? He replied, “Certainly ICAI will lose its prestigious status as the apex authority framing accounting and auditing standards and also maintaining the professional conduct of its members. ICAI at best will become an advisory body, which if requested by NFRA may make some recommendations, etc. The draft rules seem to suggest that lot of powers, including registration of auditors, will be with NFRA for larger listed companies. Clearly, NFRA will become the ‘regulator’ while ICAI will now be the ‘regulated’ which will have to focus more on professional development and administration of its members.”

His views on whether the NRFA will be adequate in addressing the fraud issues or some other approach or actions may prove to be more effective? He says, “While it is true to some extent that there have been oversight lapses from ICAI, but I am not so sure that this warrants a completely new Regulator to be set up.  The Government has enough laws, powers and regulations which can help address fraud issues, provided there is enough will to systemically address these issues. To what extent NFRA will be effective will depend on how the same is eventually implemented; one possibility would be expand the scope to include, besides CAs, various other professionals (CS, ICWAI, actuaries, valuation professionals etc.), this would then mean that NFRA will become a regulator with much wider powers and hence will help address fraud issues from various dimensions.”

Thus, according to the auditors, it is very unlikely that the idea of NFRA will be effective upon implementation. Only time will tell whether this approach will be a hit or just another election centric agenda.


Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of IndusGuru Network Partners