 "NFRA will enhance auditor independence: Vishesh C Chandiok")
Vishesh C Chandiok, National Managing Partner, Grant Thornton India LLP, one of the largest accountancy and advisory firms in India, spoke to Sudipto Dey on how the newly proposed audit regulatory body, the National Financial Reporting Authority (NFRA), will help improve governance standards within the audit community. Edited excerpts:
How will mandatory auditor rotation and setting up of a regulatory body in NFRA impact the audit industry?
We support mandatory firm rotation, but the universe of companies that it should apply to, should be looked at. My view is, we should try out each and every thing that has the potential to enhance auditor independence - whether it is mandatory firm rotation or joint audits or anything else. But we need to try them out in a small subset of companies, learn from the experience and then enhance the coverage. Monitoring the whole universe of companies can be very hard.
The National Financial Reporting Authority (NFRA) is going to enhance auditor independence. To be effective, the composition of the NFRA has to be of truly independent people, who are seen to be credible. Audit is not about number crunching, but about assuring the capital markets that the numbers that are disclosed can be relied on. Auditors have to perform a very important public interest role. Already there is a debate globally as to why not nationalise audits in the face of so many corporate frauds. Whoever sits on NFRA has a great public interest duty, as it is about people's life-saving. Investors want us to apply the highest standard, without that there is no future for the profession.
Is there clarity on how the NFRA would get funded?
Though the budget for NFRA will come from the Ministry of Corporate Affairs, but I think, the corporate sector should get involved in its funding. In the United States, the listed entities pay a small amount as part of listing fee to fund Public Company Accounting Oversight Board (PCAOB), which is NFRA-equivalent. It will help large Indian companies to attract better investors. With better regulation and governance of auditors, investors will get more comfortable. It will help India Inc when it comes to raising capital.
What is your view on not allowing foreign accountancy brands to sign audits in India?
This is something that impacts the old Indian (audit) firms more than the so-called Big Four. If you allow, it will transform the spirit of regulation within the profession. Then the 100-odd large Indian audit firms will have a better chance of competing against the Big Four.
Do you expect a churn within the audit industry given the mandatory rotation clause?
I expect a reduction in the number of audit firms that can audit public interest entities. The spend by Top 500 Indian firms on audit is likely to more than double over the next three to five years.
Will the new Act lead to improvement in corporate governance practices at the board level?
Corporate governance is not about rule making. We have some of the best corporate governance laws in the world even if one goes by our old companies Act, 1956 or Sebi's listing agreement. Having new laws will not achieve anything new. But the question is do we have the capacity to monitor and implement these laws, levy appropriate penalties for deviations, if any. In most times the penalties are either disproportionately too large, or too small.
The new Companies Act makes a good start with the role of independent directors and the audit committees. But it is also about creating an environment (in the board room) where independent directors can play their duties to their full extent. It is also about monitoring whether independent directors and the audit committees are working in the right spirit. Lastly, it is also about personal morality and personal ethics.
The legislation to have a women director on the board is a good move. For almost all companies the customer base is both men and women. Within a company, anywhere from 25 per cent to 50 per cent of work force is women. There is a capacity issue when it comes to having women on the board. Now, once there is legislation, capacity will follow. But I just hope corporate India does not look towards home to appoint that woman director.
How will mandatory auditor rotation and setting up of a regulatory body in NFRA impact the audit industry?
We support mandatory firm rotation, but the universe of companies that it should apply to, should be looked at. My view is, we should try out each and every thing that has the potential to enhance auditor independence - whether it is mandatory firm rotation or joint audits or anything else. But we need to try them out in a small subset of companies, learn from the experience and then enhance the coverage. Monitoring the whole universe of companies can be very hard.
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One disconnect I have with the Act is the retrospective element to mandatory rotation of auditors, while for independent directors the rotation is prospective in nature. Different standard of "independence" for auditors and independent directors don't make sense to me. Both are pillars of corporate governance, along with the audit committees and the regulators.
The National Financial Reporting Authority (NFRA) is going to enhance auditor independence. To be effective, the composition of the NFRA has to be of truly independent people, who are seen to be credible. Audit is not about number crunching, but about assuring the capital markets that the numbers that are disclosed can be relied on. Auditors have to perform a very important public interest role. Already there is a debate globally as to why not nationalise audits in the face of so many corporate frauds. Whoever sits on NFRA has a great public interest duty, as it is about people's life-saving. Investors want us to apply the highest standard, without that there is no future for the profession.
Is there clarity on how the NFRA would get funded?
Though the budget for NFRA will come from the Ministry of Corporate Affairs, but I think, the corporate sector should get involved in its funding. In the United States, the listed entities pay a small amount as part of listing fee to fund Public Company Accounting Oversight Board (PCAOB), which is NFRA-equivalent. It will help large Indian companies to attract better investors. With better regulation and governance of auditors, investors will get more comfortable. It will help India Inc when it comes to raising capital.
What is your view on not allowing foreign accountancy brands to sign audits in India?
This is something that impacts the old Indian (audit) firms more than the so-called Big Four. If you allow, it will transform the spirit of regulation within the profession. Then the 100-odd large Indian audit firms will have a better chance of competing against the Big Four.
Do you expect a churn within the audit industry given the mandatory rotation clause?
I expect a reduction in the number of audit firms that can audit public interest entities. The spend by Top 500 Indian firms on audit is likely to more than double over the next three to five years.
Will the new Act lead to improvement in corporate governance practices at the board level?
Corporate governance is not about rule making. We have some of the best corporate governance laws in the world even if one goes by our old companies Act, 1956 or Sebi's listing agreement. Having new laws will not achieve anything new. But the question is do we have the capacity to monitor and implement these laws, levy appropriate penalties for deviations, if any. In most times the penalties are either disproportionately too large, or too small.
The new Companies Act makes a good start with the role of independent directors and the audit committees. But it is also about creating an environment (in the board room) where independent directors can play their duties to their full extent. It is also about monitoring whether independent directors and the audit committees are working in the right spirit. Lastly, it is also about personal morality and personal ethics.
The legislation to have a women director on the board is a good move. For almost all companies the customer base is both men and women. Within a company, anywhere from 25 per cent to 50 per cent of work force is women. There is a capacity issue when it comes to having women on the board. Now, once there is legislation, capacity will follow. But I just hope corporate India does not look towards home to appoint that woman director.