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Regulator releases reporting standards for audit firms

Auditors of 1,000 large listed companies in India will have to file transparency reports with the National Financial Reporting Authority (NFRA) in specified format, from the current financial year, a move that will improve the credibility of auditors and boost investor confidence in them.

The move would impact large auditing firms, especially the Big Four more.

The NFRA, the regulator of the auditing profession and accounting standards, has published draft requirements for preparation and publication of Annual Transparency Report (ATR) by auditors and audit firms. The idea is to make the audited entities and their shareholders aware of the management, ownership structure and governance of audit firms and their internal policy frameworks.

The ATRs are also expected to and prevent conflict of interest that auditors might encounter as their associate firms provide other services to the firms they audit.

The ATR requirements are proposed to be implemented in a gradual manner for public interest entities (PIEs) starting with statutory auditors of top 1,000 listed companies (by market capitalisation) with effect from the financial year ending on 31 March 2023.

“In accordance with Rule 8(2) of the NFRA Rule 2018, NFRA intends prescribing publication of Annual Transparency Report containing certain critical information about the auditor’s operational activities, management, governance and ownership structures and policies & procedures necessary to deliver high-quality audits,” NFRA said on Monday, adding that it will be useful to investors, audit committees, independent directors and public at large.

According to the draft, the ATR would contain a detailed description of the statutory auditors and also include details about the network, if the statutory auditor is a member of any network in India or overseas, as well as details about any working alliances, collaborations, licensing arrangements and knowledge and resource sharing arrangements in India or abroad.

The auditors would also be expected to provide information about their total revenue as well as that of their network firms, including information on audit and non-audit services rendered to entities within the NFRA purview or their holding company or subsidiary companies.

Further, the ATR would contain details and descriptions about the statutory auditors on various issues including overall internal quality control system, description of audit methodology and remuneration of partners and senior staff.

The ATR would need clearance from the officials authorised to approve the financial statements of the statutory auditors and will then be filed with the NFRA. An audit firm will have to publish the ATR within three months from the end of each financial year and first submit it to the NFRA and then publish it on its website.

NFRA has sought comments from stakeholders by February 16.

Sumit Maheshwari, partner, Ashok Maheshwary & Associates, noted that of late NFRA has been taking many steps to improve the audit quality for listed companies. “However, one has to see how ATRs will translate into improvements in the quality of the audits. This will surely bring more transparency for all the stakeholders,” he said.

Ameet Patel, partner, Manohar Chowdhry & Associates, said while the new requirement is welcome from a governance perspective, it will require finetuning and it is a welcome move that comments have been invited.

“Most Indian firms will or should not have any problems in giving information on issues like governance, ownership and legal structures because, in most cases, all lists will have common names. Generally, Indian firms will not have any foreigner taking decisions. But asking for financial data about network members is complicated as it would be impossible for any member firm of a network to find this out. Even assuming that this information is shared by network firms with each other, the time given for providing this to NFRA is too short,” he said.

The audit regulator noted that the proposed ATR requirements are on the lines of the contemporary international best practices implemented by certain prominent independent audit regulators in other jurisdictions. “Indian companies have become significant constituents of the global economy and India has evolved as a global centre of excellence in the delivery of financial reporting and audit services to a large number of multi-national corporations raising expectations for sound and high-quality codes and practices comparable to global benchmarks,” it said.

Previously, a committee of experts appointed by the ministry of corporate affairs in 2018 following a Supreme Court direction, had also recommended inclusion of a similar requirement for every auditor and audit firm operating in India as a part or member of an international network.

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