The National Financial Reporting Authority (NFRA), the country’s sole independent audit regulator, has started inspections of five audit firms. NFRA Chairman Ajay Bhushan Pandey said the inspections will take three weeks to complete and a draft report is expected before financial year end.

In November, NFRA had stated in its guidelines that inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control. Inspections will consist of firm-wide review of audit quality (SQC 1) and individual file reviews on test-check basis to evaluate the level of compliance with applicable auditing standards and quality control policy and processes. 

Delivering the keynote address today at the Conference on “Financial Reporting & Governance Framework – Building Trust” organised by the Confederation of Indian Industry,  Pandey said there is a need to revisit the existing short-term and vague ‘Going Concern’ accounting concept and replace it with long-term viability or Resilience Statements by the Management and Board.

Preventing corporate frauds

Pandey said the need of the hour for the finance community and directors is to take measures to prevent frauds and failure of internal financial controls as not all the corporate frauds were committed by sophisticated designs but by age-old methods of fictitious sales and loans and advances, over invoicing of purchases, related party transactions and due to failure of basic internal controls.

In relation to building trust and meeting stakeholders expectations, Pandey mooted the idea of crowdsourcing of risk related and matters of emphasis for auditor consideration. He also suggested consideration of UK Brydon report’s recommendation of publication of Directors Risk Report before the audit scope is decided by The Audit Committee which can evaluate stakeholders inputs on that Risk Report.

Ajay Bahl, Chairman, CII Task Force on Judicial Reforms, said, “Achieving excellence in financial reporting and corporate governance should be a major goal for any investor-friendly economy like India and requires a robust ecosystem of checks and balances where independent directors, statutory and internal auditors and other stakeholders have a very important role. “