Financial reporting authority to get statutory backing for focussed action on erring auditors

The Centre proposes to widen the scope of the National Financial Reporting Authority (NFRA), the newly set up audit profession regulator for large entities, for action against erring audit firms or its members, giving it specific debarment powers to deal with audit failures in large entities.

Amendments to the Companies Act 2013 moved through the Companies (Amendment) Bill 2019 – passed by Lok Sabha on Friday – seek to clarify and make the debarment power more descriptive and focussed on the activities that the regulator may want to get stopped. Prior to the proposed amendment, the NFRA had the power to debar the member or the firm from engaging in practice as a member of the CA Institute for a minimum of six months and up to 10 years.

Now the regulatory action can be targeted at activities that deserved to be stopped, and the NFRA will have the power to debar a member or a firm from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions of the company.

An erring member or the firm could also be debarred from undertaking valuation-related assignments for a minimum of six months and up to 10 years. The new regime would also mean that the regulatory axe could fall not only on statutory audit work but also on internal audit or valuation-related work, say experts.

It essentially gives a direction and description on how the NFRA could exercise its power of debarment, as opposed to just impacting membership.

The Centre’s latest move to clarify the NFRA’s debarment powers comes in the backdrop of the recent high-profile corporate collapses such as the IL&FS blowout, which has raised concerns over the role of some of the Big Four audit firms and the non-audit services they provided.

Experts’ take

Ashok Haldia, former secretary of the CA Institute, said the amendment is understandable as internal auditors and valuers also a play role in ensuring the quality of financial statements.

“Internal audit is a multi-disciplinary approach and valuation of different classes of assets require relevant specialist professionals. Therefore, broadening class of professionals under NFRA’s jurisdiction is a logical step,” he said.

Amarjit Chopra, past president of the Institute of Chartered Accountants of India (ICAI), told BusinessLine that he sees the proposed amendment as one that widens the NFRA’s scope of action.

Moin Ladha, partner, Khaitan & Co, said the NFRA, since its introduction, had the powers to order debarment from practice as a chartered accountant. This amendment seems to have made these more focussed and broadened them to extend to specific debarment from acting as an internal auditor/valuer for Indian companies, he said.

Ladha felt that auditors/firms will be able to continue with non-audit services provided by them, and also carry out valuation other than those required under the Companies Act 2013.

Expansive powers

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said the proposed amendment envisions conferment of expansive powers to the NFRA.

This reflects the clear intention of ensuring that the NFRA becomes the super watchdog of the assurance and performance of related attest functions, he said.

COMMENT NOW