The auditing landscape in India has seen significant improvement over the past three to four years, according to Ajay Bhushan Prasad Pandey, Chairperson of the National Financial Reporting Authority (NFRA). Emphasizing the importance of collaboration between auditors, board members, and audit committees, Pandey underlined that active engagement is essential for identifying red flags and preventing corporate failures.
Enhanced Oversight and Accountability
Since its establishment in October 2018 under the Companies Act, the NFRA has issued over 80 orders addressing lapses in high-profile cases, including Café Coffee Day and Dewan Housing Finance Corporation Limited (DHFL). Pandey acknowledged that many auditors are performing commendably but pointed to gaps in communication and accountability that persist in some instances.
"Overall, auditing of companies has improved," Pandey said, noting that a lack of sensitivity and alertness among certain auditors and board members has contributed to corporate failures. He stressed the need for heightened awareness of responsibilities under the Companies Act, 2013, and SEBI's Listing Obligations and Disclosure Requirements.
Bridging the Communication Gap
A critical issue identified by the NFRA is the lack of effective two-way communication between auditors and Those Charged With Governance (TCWG), including audit committee members. "Many red flags were missed due to failures in communication," Pandey noted, highlighting cases where audit committees failed to ask pertinent questions and auditors did not bring issues to their attention.
To address these gaps, Pandey underscored the necessity of sensitizing both auditors and board members to their responsibilities.
Capacity Building Initiatives
In a bid to strengthen the auditing ecosystem, the NFRA, in collaboration with the Indian Institute of Corporate Affairs (IICA), is launching capacity-building courses. A four-month program for audit committee members is already underway, with plans to introduce advanced courses for auditors handling large, listed companies.
"These courses aim to enhance understanding among audit committee members about what questions to ask auditors and how to fulfill their roles effectively," Pandey said.
Lessons from Corporate Failures
The NFRA's investigations into cases like DHFL, Café Coffee Day, Reliance Capital, and Reliance Home Finance reveal systemic failures where auditors repeatedly overlooked critical issues. "These are textbook cases of how lapses in auditing led to massive losses for banks and shareholders. Early red flags could have prevented such outcomes," Pandey stated.
Future Outlook
To foster a robust financial ecosystem, Pandey called for enhanced accountability, better training, and stronger communication between auditors and governance bodies. With ongoing reforms and capacity-building measures, the NFRA aims to minimize risks and bolster corporate governance in India.
This proactive approach signals a positive shift in the auditing landscape, ensuring greater transparency and safeguarding stakeholder interests.
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