Context
India’s leading eight auditors will be inspected this year, with the financial statements of up to 60 of their clients being scrutinized, as the national audit watchdog intensifies its efforts to improve audit quality across the country.
NFRA Expands Audit Inspection to Eight Leading Firms, Scrutinizing Financial Statements of Up to 60 Clients
- Expansion of Auditing Exercise: The National Financial Reporting Authority (NFRA) which inspected five auditors last year, involving audit reports of 24 clients, is planning to expand the exercise.
- This year, inspections would be done on eight audit firms and in the case of audit firms inspected last year, audit documentation of a different set of audit clients will be examined.
About National Financial Reporting Authority (NFRA)
- Establishing Authority: The Companies Act of 2013’s Section 132 grants the Central Government the power to establish such an authority.
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Institute of Chartered Accountants of India (ICAI):
- About: The ICAI is the largest professional body of Chartered Accountants in the world, with a strong tradition of service to the Indian economy in public interest.
- Statutory body: It is established under the Chartered Accountants Act, 1949 for the regulation and development of the profession of Chartered Accountants in the country.
- Nodal Ministry: Ministry of Corporate Affairs, Government of India.
- Members: The Council consists of 40 members of whom 32 are elected by the Chartered Accountants and the remaining 8 are nominated by the Central Government generally representing the Comptroller and Auditor General of India, Securities and Exchange Board of India, Ministry of Corporate Affairs, Ministry of Finance and other stakeholders.
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- Composition: The Companies Act requires the NFRA to have a chairperson who will be appointed by the Central Government and a maximum of 15 members.
- Function:
- Ensuring Adherence to Audit Quality Standards: It inspects audit firms to verify their adherence to audit quality standards set by the Companies Act and the Institute of Chartered Accountants of India (ICAI).
- Key Areas Scrutinized: These include the audit firm’s compliance with independence norms, adherence to auditor disqualification provisions in the Companies Act, and the integrity of audit documentation.
- NFRA Report:
- Transparency Through Publication: The reports are published to provide both the audit firm and the industry with insights into deficiencies in financial statement preparation and auditing practices.
- Encouraging Corrective Action: While not a disciplinary action, the regulator’s report strongly encourages audit firms and their clients to address identified deficiencies.
- Confidentiality and Detail: The inspection reports do not disclose the auditor’s business client but detail the issues found in their accounts and audit processes.
May 24, 2024