The role of audit failures in recent scams had exposed the need for an independent audit regulator. In this context, how far the recently proposed National Financial Reporting Authority (NFRA) can enhance audit quality in India? (200 words)
Refer – Business Line
Enrich the answer from other sources, if the question demands.
IAS Parliament 7 years
KEY POINTS
Need for an Independent Audit Regulator
· Since 1948, India’s finances and audit have been left to the care of the Institute of Chartered Accountants of India (ICAI).
· The Joint Parliamentary Committee indicted chartered accountants for their role in the stock market scam of 1992.
· Harshad Mehta, Ketan Parikh, the Satyam imbroglio and the latest scam in PNB — all exploded in public view, proving that all was not well with the way audits were being conducted.
· It indicates a certain lack of trust in ICAI to effectively address malpractices indulged in by recalcitrant members.
National Financial Reporting Authority
· Union cabinet approved to establish a NFRA as an independent regulator for the auditing profession, in an attempt to tighten the regulatory oversight over chartered accountants and plug loopholes.
· NFRA aims
a) to establish independent regulators, independent from those it regulates
b) to enforce audit standards
c) to ensure the quality of audits
d) to strengthen the independence of audit firms
· The decision is expected to result in
a) Improved foreign/domestic investments
b) Enhancement of economic growth
c) Supporting the globalisation of business by meeting international practices
d) Assist in further development of audit profession
· Operationalisation of NFRA is a step in the right direction and will help in reinstating the confidence of stakeholders and regulators.
· But, NFRA’s extensive powers in terms of its ability to investigate; impose penalty and banning operations of auditors and audit firms is not the only objective of setting up an independent audit regulator.
· The overarching objective is to enhance audit quality which, in turn, will enhance investor protection and public interest.
Way Ahead
· The Government in the process of defining the role of NFRA need to provide enough and equal attention to the other objectives, such as
a) Setting standards
b) Monitoring compliance
c) Suggesting measures for improvement in quality of audits
· While we have witnessed penalisation of auditors as well as audit firms we are not yet seen any regulator in India prescribing remedial measures.
· For example, PCAOB of USA not only finding deficiencies but also enforcing remedial measures.
· Given the ambitious target of setting up large audit firms with global standards, bringing in this approach of positive support from the regulator in addressing deficiencies will be key to the success of NFRA.
