A well-funded NFRA is key to its effectiveness

When Enron happened in 2002, the US Government reacted by establishing the Public Company Accounting Oversight Board ( PCAOB), a body that had powers to check the work done by audit firms and regulate them.

When Punjab National Bank (aka Nirav Modi) happened in 2018, the government reacted by establishing the National Financial Reporting Authority ( NFRA) with objectives similar to that of the PCAOB. It has been a relatively quiet three years for NFRA as most of their time has gone into doing a post mortem of the work done by the auditors of IL&FS.

In addition, they have also got all the auditors of listed firms registered with them. NFRA then formed a Technical Advisory Committee (TAC) to suggest improvements to NFRA’s working. The Committee has given its recommendations to which NFRA has responded in a Consultation Paper which has been put out in the public domain to seek the views. The Consultation Paper makes frequent references to the PCAOB thus making it clear that they intent to do in India what the PCAOB has done in the US.

Thanks to PCAOB’s 16-year head-start, NFRA has a lot of ground to cover. At the outset, the Institute of Chartered Accountants of India ( ICAI) and NFRA have to sit across the table and ensure that neither step into the others’ territory since a few skirmishes have occurred in the past. The ICAI has issued 46 Auditing Standards which will hopefully be blessed by NFRA soon.

The ICAI has maintained that it can only take disciplinary action against its members and not accounting firms — both of which NFRA can usurp for listed entities.

The ICAI’s disciplinary actions have invariably been “too little and too late”. One of the suggestions given by the TAC is to build regulatory capacity by attracting the best talent from the industry. This would be possible only if NFRA is funded well. It does not seem to be well-funded now since its website could do with a major revamp in both design and content — this is one of the suggestions in the Consultation Paper. The PCAOB is funded by an accounting support fee paid by the companies that come under its purview. Will listed Indian entities agree to pay a fee to ensure that the work done by the auditors’ is being watched and regulated by a third party?

The recommendations

A few other recommendations of the TAC merit attention. The Committee has recommended that NFRA formulate a policy for inspection and make it public. As on date, NFRA is operating in a hush-hush manner which makes everyone look at the other suspiciously. There is also a recommendation to formulate a policy for settlement of disciplinary matters. In response, NFRA did not suggest anything since NFRA rules 2018 provide for direction by the Authority to an auditor to make improvements and for monitoring improvements made by the auditor. NFRA intends to reach out to stakeholders by forming different committees and study groups — this is a welcome move provided the committees are not over-burdened with too many consultants.

If it needs to be successful, NFRA has to shrug off its image of being just another office. The only way it could get going would be to have a plan for obtaining funding over the long term and using the money for the right purposes such as recruiting talented staff, conducting outreach and other programmes. If not, NFRA would end up being described by a oft-repeated phrase from the TV serial Family Man-2 — “Minimum guy”.

The writer is a chartered accountant

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