In the corporate world the financial
position of the company is the key component that will certainly decide the
destiny (development or destruction) of such company. Audit reporting assumes
great importance in substantiating the financial statements of a company and
make known the existing state of financial affairs of the company to
stakeholders and general public.

There is mammoth responsibility on
shoulders of the auditors to conduct the audit process in transparent method by
coming up with spotless audit reports without hiding any fraudulent conduct of
the company in disguise.

Satyam case (and the resultant PwC
disqualification) has highlighted the rot in the audit system. Contrary to the
underlying objectives, credibility of auditing system is in jeopardy as
currently, more than 1,500 cases are pending against audit firms/auditors at
different stages for abuse of accounting and auditing standards (Standards) by
firms/auditors as per the official reports.

As a result, the government is in
progression of instituting a National Financial Regulatory Authority (NFRA) to
evaluate audit firm’s compliance with established Standards including oversight
of audit professionals.

Despite of the existence of the
self-regulatory mechanism within Institute of Chartered Accountants of India
(ICAI) the government is of the opinion that there is instant requisite to
inaugurate NFRA due to upsurge in integer of cases for desecration of
Standards.

The underlying intent to establish
NFRA is that it will provide recommendations to the government in relation to
formulation of accounting/auditing policies and standards for monitoring firms
compliance with these polices and to evaluate the quality of
auditing/accounting services rendered by the professionals.  

The process of independent regulator
to monitor the firm’s acquiescence with Standards and excellence of services
rendered by auditing/accounting professionals is in practice in more than 50
countries at international front.

Contrary to the government ideology,
ICAI is of the opinion that existing framework is adequate to monitor the
compliance of Standards by the firms.

Despite of the opposition from ICAI,
in the light of increase in non-compliance cases against the
firms/professionals incorporation of NFRA is the need of the hour and will
certainly help in reduction of non-compliance cases and make the
firms/professionals more responsible and accountable for their acts –
ultimately attain the objective of zero tolerance policy for non-compliance of
the accounting and auditing polices and more transparency in auditing system.

Research and inputs by Paruchuri
Baswanth Mohan

 

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].