Auditors’ auditor

| Updated on September 28, 2021

The government must ensure that the NFRA remains independent and autonomus   -  Getty Images/iStockphoto

NFRA is a systemically important regulator. It needs an independent professional as its head

The National Financial Reporting Authority (NFRA) will be headless from October 1 if the government, in the next two days, does not announce, either a successor or another term, to the incumbent Chairman Rangachari Sridharan. A former bureaucrat, Sridharan took over as the first Chairman of NFRA after it came into being in late-2018 in the wake of the IL&FS financial scandal. In the short period that he has been at the helm, Sridharan has managed to give a distinct identity to NFRA and has set its course as a serious, no-nonsense regulator of the audit profession in this country. The three Audit Quality Reports (AQR) that NFRA has produced since 2018 on IL&FS Financial Services (I-Fin), IL&FS Transportation Networks and Jaiprakash Associates, caused quite a flutter as they called out the sub-standard audit practices followed by well-known audit firms such as Deloitte Haskins & Sells and Rajendra K Goel & Co. This was the first time in this country that audit practices were put under the scanner with such serious intent and analysed in such great depth.

That the NFRA managed to achieve what it has in the last three years despite being hamstrung on many fronts is creditable indeed. It has been functioning with a skeletal staff — apart from the Chairman there is just one whole-time director on the board, and three part-time directors who are nominees of The Institute of Chartered Accountants of India (ICAI). It is strange indeed that the NFRA board should have representation from the constituency that it seeks to regulate. This is something unique to it. It is akin to the Securities and Exchange Board of India having stock brokers on its board or the Reserve Bank of India appointing practising bankers as Deputy Governors. There is a clear conflict of interest. The ICAI was viscerally opposed to the NFRA even before it was notified; it is now even more so, after the path-breaking AQRs that it produced shining the spotlight on ICAI’s ineffective regulation.

The NFRA is systemically as important a regulator as the SEBI, IRDA or IBBI and it is the government’s responsibility to ensure its independence and autonomy — functional, financial and administrative. The government should streamline regulations under Section 132 of the Companies Act to increase the effectiveness of NFRA. The ICAI’s efforts to capture the regulatory body through appointments of its office-bearers as part-time directors, and worse, possibly as the next Chairman, should be rebuffed. It should be remembered that the NFRA was born due to the failure of self-regulation of the audit profession by the ICAI. The NFRA is at the crucial take-off stage now and it needs an independent head who is not an ex or present office-bearer of ICAI. With greater participation of retail investors in the stock market and increasing shareholder activism, we need a strong, autonomous regulator who can keep auditors in check and help develop the auditing profession.

Published on September 28, 2021

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