The NFRA has requested feedback on the proposed new requirement of publishing an annual transparency report (ATR) by the statutory auditors of NFRA-regulated public interest entities (PIEs) from Financial Year 2022-23.
Responses should be addressed to nfra-comments@nfra.gov.in as soon as possible but no later than February 16, 2023 (as per news reports dt. 15/02/2023, the NFRA has extended the deadline up to February 24, 2023).
Statutory auditors play an important role in the PIEs’ financial reporting supply chain. The audit of PIE financial reports by an independent auditor improves the credibility and integrity of such PIEs’ general purpose financial reports. As a result, the importance of high-quality, comprehensive financial information that covers both financial and non-financial aspects of PIEs cannot be overemphasised.
PIEs are required to comply with a mandate from regulatory agencies that requires them to offer diverse stakeholders high-quality, comprehensive financial and non-financial information that is consistent with the nature, scale, and complexity of their operations. Significant changes have also been made to the roles and responsibilities of independent auditors employed by such entities. These changes have placed a greater emphasis on the need for the auditing profession to develop professional and operational capabilities that are commensurate with the changes. Audit professionals have been growing their skills and resources by, among other things, creating in-house multi-disciplinary professionals or professional units, offering services that aren’t related to auditing, using digital audit tools and techniques more, and separating management and governance structures.
It may be noted that the regulators and oversight authorities in many overseas jurisdictions compel audit firms that carry out audits of PIEs to generate and publish information on an annual basis in the form of transparency reports. As a direct result of this, the auditing firms operating in those jurisdictions have been publishing the Transparency Reports.
On the other hand, Indian companies have also grown to the point where they are significant contributors to the global economy. India has also become a world leader in financial reporting and auditing services for a large number of multinational corporations. As a consequence of this development, the expectations for sound and high-quality financial reporting codes and practises that are comparable to global benchmarks have increased.
Rule 8(2) of the NFRA Rule 2018 empowers the NFRA to require an auditor to report on its governance practises and internal processes designed to promote audit quality, protect its reputation, reduce risks, including the risk of auditor failure, and take any action on the report that is necessary. The Committee of Experts appointed by the MCA in response to a Supreme Court directive had also recommended that a similar requirement be imposed on every auditor and audit firm operating in India as part or member of an international network.
As a result, the NFRA has made the decision to mandate the publication of an annual transparency report. This report will include certain essential details regarding the auditor’s operational activities, management, governance, and ownership structures, as well as the policies and procedures required to conduct high-quality audits. Beginning with the auditors and audit firms performing audits of the top 1000 listed companies (determined by market capitalization) as of the financial year ending March 31, 2023, this requirement of an annual transparency report will be implemented in a gradual manner across the audit profession engaged in the audit of PIEs falling within the purview of NFRA.
NFRA has requested the views and comments of the stakeholders on the contents of the proposed requirement of an annual transparency report, as given in the annexure to this consultation paper, for consideration in framing the final requirement of an ATR by auditors of PIEs.
NFRA Consultation Paper dt. 16/01/2023: Comments invited on Proposed Requirement of Annual Transparency Report by PIE Auditors
The NFRA’s ATR requirements will benefit investors, audit committees, independent directors, and the public because they will be based on international best practises established by other major Independent Audit Regulators. It is similar to self-auditing and reporting on audit firms’ management and governance for greater transparency, credibility, and independence in order to avoid conflicts of interest. However, the NFRA’s plan to begin with the top 1000 companies is incomprehensible. Instead of relying on external resources, such as AMFI capitalisation, NFRA should set its own cut-offs.