The National Financial Reporting Authority (NFRA), the country’s sole independent audit regulator, on Friday asserted that it should not be seen as a “villain” by the auditing fraternity and that its disciplinary orders against erring auditors were aimed at improving audit quality and financial reporting in the country.
“I want to assure audit fraternity that we are not here to be kind of a villain, but we are here to assist you and improve the system. Our goal is to improve the quality of audit, quality of financial reporting and help create an atmosphere of trust and confidence,” Ajay Bhushan Pandey, Chairman, NFRA, said at Assocham organised international conference on ‘Financial reporting & control’ in the capital.
He said that audit should not be a ticking (tick the box) audit but be a thinking audit and audit documentation should be such that it should aid “thinking audit”.
Pandey said that NFRA’s orders should not be just seen as punitive orders and pointed out these orders will travel to various forums like NCLAT, High Court and SC in the coming days and further clarity will emerge on the legal position.
“This is how practice will settle and ultimately lead to improvement in quality of audit. If quality of audit improves, the accountability and responsibility of board of directors, responsibility of independent directors also will get increased.
“Ultimately, there will be more trust on the financial figures reported. Retail investors, foreign investors will have more confidence in our reporting system and working of companies”, he said.
While hailing the recent trend of companies to set up Business Advisory Council to improve governance, Pandey said that companies would also do well to focus on strengthening their audit committees and empower statutory auditors to tackle any adverse situations of director or auditor resignations or whistleblower complaints.
“It is a good trend to appoint advisory councils to improve governance. I must welcome it. I am not saying advisory board for governance should not be there — they can always add to the value, but why don’t you strengthen audit committees and independent directors. Management should be also encouraging the auditors and be empowering them,” Pandey said.
Auditors can be empowered by capacity building and paying them fair remuneration for the work undertaken by them, he added.
FOLLOW LAID DOWN PROCESS
Pandey concurred with viewpoint of auditing fraternity that auditors are not required to be “bloodhounds” in discharge of their professional responsibilities. He however pointed out that auditors are required to follow the stipulations specified in the various Standards of auditing.
“Auditors say they are not bloodhounds and we are not supposed to find frauds. Of course you are not supposed to find frauds, but you are supposed to follow the stipulations in standards of audit”, Pandey said.
RULES vs PRINCIPLES
NFRA Chairman urged the auditing fraternity to refrain from using the Rules vs Principles argument to their convenience and advantage.
“I find this principle based vs rule based argument little amusing. Suppose you don’t follow the rule you say it is principle based. Supposing if you find it useful to follow just the rule , you say I have just followed it and not gone into the spirit of the rule. Principle is the spirit of the rule.
Whatever is convenient you select. But the law is clear, if you see the standards of audit, the word used is “shall”. Our point is you follow the rule and while following the rule you follow the principle and spirit of law. This is the correct way and you cannot selectively read certain sections.Actually it has to be applied together and it is not this versus that. It is both (rule as well as principle)”, Pandey said.
BUSINESS RATIONALE
Pandey said auditors are failing in their responsibilities if they don’t question managements on the business rationale behind the related party transactions (RPT) undertaken by companies.
“Auditing standards obligates auditors to evaluate business rationale. Business rationale need to be ascertained especially in RPT. Because auditors did not ask business rationale and apply professional scepticism in RPT, it has led to companies and investors losing tens of thousands of crores.”, he noted.
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.