National Financial Reporting Authority (NFRA), the youngest regulator in India, plans to work towards a Sandbox (Innovation Lab) like structure for encouraging innovations in the audit space, its Chairperson Ajay Bhushan Pandey has said.

This five-year-old regulator will look to work with SEBI, other regulators and the Ministry of Corporate Affairs (MCA) on this front, Pandey said at the NFRA-organised international conference in the capital. This two-day conference concluded on Wednesday.

The international conference saw a suggestion from participants on the need for NFRA to set up an Innovation Lab.

“The idea of auditors being ranked on qualitative parameters (though has inherent complexities) and auditors themselves ranking companies on governance matters came up and can be explored”, Pandey said, highlighting this suggestion as one of the key takeaways from the international conference. 

Broadly, a regulatory sandbox is a framework that allows live, time-bound testing of innovations under a regulator’s oversight. This is a contained space where incumbents and challengers experiment with designs lying on the edge of or outside the current regulatory framework. 

The other NFRA-conducted international conference takeaways include a suggestion to explore the topic of issuing a readable and succinct summary of audit results with explanations of what the auditors observed and what his areas of concern are. 

This is required as the length and complexity of audited financial statements are too complicated for investors to understand meaningfully.

Meanwhile, Pandey also indicated that NFRA may explore with its key stakeholders some form of specialisation of auditor skill sets. Auditor capacity and training in this ever-changing and increasingly complex world were discussed at the international conference.

Honest reporting

The core issue at the international conference was that investors expect auditors to report honestly. This is something that should be a given, but is not so at times, Pandey noted. “That this is not so, is indeed a matter of concern for us collectively”, Pandey added.

Already, regulators like RBI, IRDAI, and SEBI are encouraging the concept of regulatory Sandboxes for the financial services and insurance segments.

The idea of sandboxing comes from the information technology sector, where new products are tested while the database is isolated from critical system resources and the product is necessarily not live. The regulatory sandboxes, however, test products that are already live.

The concept of regulatory sandboxes aims to strike a delicate balance between encouraging innovation and protecting consumers and the financial system from potential risks.

The RBI officially introduced the Regulatory Sandbox Framework in August 2019. This framework put in place a formal mechanism for fintech firms to collaborate with regulators in testing their innovations under controlled conditions.

In April 2016, the RBI released its first “Draft Enabling Framework for Regulatory Sandbox,” laying the groundwork for a structured approach to experimentation in fintech. The draft outlined the objectives, eligibility criteria, and operational guidelines for participating in the sandbox. It aimed to provide a conducive environment for testing innovative products, services, and business models within a well-defined regulatory framework.