Planning to audit more firms, increase capacity: NFRA chairperson

The National Financial Regulatory Authority (NFRA), an audit watchdog set up by the government in 2018, is planning to increase the number of audit firms it inspects annually to around 30, its chairperson Ajay Bhushan Pandey told Business Standard.

NFRA will also cover financial statements of four companies per audit firm in keeping with international standards, the chairperson said.

The watchdog, which has the authority to probe CA firms and CAs, would inspect eight firms in this financial year and increase it to 12 in the next year.

And to meet this challenge, NFRA is planning to more than double its capacity in the next four-five years, Pandey said. Presently the financial regulator has around 60 people from the sanctioned strength of 70. It plans to increase its manpower to 150-200 in the next few years, while maintaining a lean structure. 

Of the eight shortlisted firms for inspection this year, NFRA is re-inspecting the Big five to assess if the suggestions it made in the last financial year have been incorporated. In each audit firm, the regulator would pick up books of five companies for inspection.

“We want to check if audit firms have got adequate checks and balances in place and if their systems are working properly. That would ensure that the audit quality is good,” Pandey said. 

Next year, NFRA will shortlist 12 firms for inspection and in the next 4-5 years it plans to inspect 20-30 firms every year.

The firms are expected to be selected based on various parameters including the extent and significance of the public interest involved, for instance, the number of companies being audited by the firm. 

Pandey said that NFRA will use data analytics, early warning signs in the financial statements as well as independent sources, news items in deciding which companies’ financial statements it wants to inspect.

NFRA’s mandate is limited to listed companies. 

NFRA would also meet with the audit committee of the companies as part of the inspection process. After the process is concluded, the Authority would share positive and negative feedback with the audit committee members as well so that next year onwards they can make improvements. 

“This is the international practice which we want to follow in India as well,” Pandey added. 

For audit firms, NFRA would first like to establish that their auditors are independent and do not have any conflict of interest with the companies whose books are being inspected.

This would also include if there is any self-review threat. 

NFRA team would also look at whether due processes are being followed by the audit firms through practices such as an internal review which includes an engagement quality control review (EQCR). 

The firms being inspected this year include BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants and Walker Chandiok & Co among the big five. 

The other firms under NFRA’s radar include MSKA and Associates and Lodha & Co. 

Constituted in October 2018 under section 132 of the Companies Act, 2013, NFRA’s functions include laying down of accounting and auditing policies and standards for adoption by companies and their auditors. 

It also oversees the quality of service of the professions associated with ensuring compliance with such standards, and suggests measures required for improvement in quality of service.

HARD LOOK

 Firms inspected this year  
 

>BSR & Co

>Deloitte Haskins & Sells

>SRBC & Co

>Price Waterhouse Chartered Accountants

>Walker Chandiok & Co
 

 Firms on radar 
 

>MSKA and Associates

> Lodha & Co