Dr. Pandey stresses on importance of involving experienced individuals in auditor's committee to ensure high-quality audits

National Financial Reporting Authority (NFRA) Chairperson Dr. Ajay Bhushan Prasad Pandey, participated in the inaugural session of 3^rd International Conference: Financial Reporting and Control: Recent Development and Challenges organised by ASSOCHAM, here today.

Dr. Pandey spoke about the role of Financial Reporting and Auditors in enhancing the investor’s confidence in the Corporate Sector.

In his address, Dr. Pandey emphasised the significance of private sector and audit of Financial Reports in the Nation’s economic growth and development, in the backdrop of phenomenal success achieved by our country due to a number of path breaking reforms initiated by Indian policy makers during last 8-9 few years i.e., such as Digital Reforms like Aadhar, UPI, GST and Tax Reforms.

Dr. Pandey elaborated on the work of NFRA in ensuring audit quality in recent months. He drew attention to critical message coming out of a number of disciplinary orders issued by NFRA. In particular, he mentioned how NFRA considers the view taken by its peer group like PCAOB, FRC that have decades of experience as Independent Regulators.

Dr. Pandey highlighted the role of its disciplinary orders as tools to improve audit quality and not just punitive actions. He drew attention to following four critical areas of findings arising from these Dos.

1. Auditors have to evaluate the business rationale, or lack thereof, of company transactions, business objective or purpose. In this regard, he mentioned the auditors responsibility enshrined in a few standards on auditing i.e. understanding the entity’s operations/strategy to identify risk of misstatements, fraud identification and related parties/transactions.
2. Auditors responsibilities in the area of frauds in/by the company as outlined in the standards and laws. There is a ‘mind-set’ gap among the auditors rather than ‘expectation gap’ of the investors. Auditors need to follow the prescriptions in standards and law, which may or may not result in prevent/detection of frauds. He advised auditors not to cherry-pick based on debate principles versus rule based regime etc. In order to address misunderstanding among auditors, NFRA has issued circular clarifying frauds are required to be reported even if the auditor is not the first to find the fraud; Fraud is not to be reported only when previous auditor has already filed ADT-4.
3. Lack of audit work documentation & timely archival of audit files: Present era standards have heavy emphasis on documentation of the audit work. Current underlying principle is that audit work papers should speak themselves regardless of whether the auditor is present or not. Audit work documentation, if performed in true spirit, leads to ‘thinking audit’ rather than ‘ticking audit’.  
4. Excessive or inappropriate reliance on management’s experts or auditors  expert: There is unduly excessive reliance on the reports or opinions of either management’s or auditor’s expert or legal opinions. Appropriate audit checks prescribed under SAs are not followed in true spirit in evaluating reports on impairment loss, fair values etc.

Dr. Pandey concluded that audit is essential part of Corporate Governance to building trust in private sector and needs to be strengthened along with those of Audit Committee and Independent Directors. Auditors also need to be remunerated suitably for performing this critical role.

Audit quality: clarify auditor duties and fraud reporting to strengthen financial reporting and governance. The document stresses strengthening audit quality through clarified auditor duties, improved audit documentation and archival, proper application of fraud-related standards including mandatory reporting of detected frauds, reduced inappropriate reliance on experts, and enhanced governance via experienced audit committees and suitably remunerated auditors.