Ahead of next month’s Supreme Court hearing regarding the appeal by the National Financial Reporting Authority (NFRA) that challenges the Delhi High Court’s ruling, which annulled 11 show-cause notices issued by the audit regulator, leading audit firms have expressed concerns over the NFRA’s operations.
Insiders from the Big Five have informed Financial Express that the NFRA’s current practices violate the Companies Act of 2013. An auditor from a Big Four firm, speaking on the condition of anonymity, stated, “Regulatory bodies like NFRA need to strike a delicate balance, ensuring that while they hold auditors accountable for any shortcomings, their decisions must also appear impartial and compliant with legal standards.”
Auditors point out that Section 132 of the Companies Act and the NFRA Rules of 2018 imply a division of authority in the execution of investigations and disciplinary actions. However, sources claim that the NFRA’s executive body is managing both roles, lacking the neutrality necessary for an objective evaluation. This concern was also echoed by the Delhi High Court in its recent ruling.
Vishesh C. Chandiok, CEO of Grant Thornton Bharat, noted that regulators, like audit firms, are likewise subject to legal analysis. “India must progress to a point where stakeholders can genuinely challenge the actions of regulators or government agencies through the judiciary in a manner that is fair, transparent, and responsive, without any apprehension,” he remarked.
On the other hand, NFRA maintains that the law does not mandate a “strict division of powers or separation of functions regarding investigation, inquiry, and disciplinary procedures.”
Audit firms contend that the stringent regulatory supervision, combined with the NFRA’s perceived lack of impartiality, complicates their ability to attract and retain top talent, as many chartered accountants are increasingly gravitating towards less “risky” career paths outside of auditing.
“The NFRA must ensure its own practices aren’t fostering an environment that dissuades talented individuals from joining the profession,” the aforementioned auditor asserted.
“A capable regulator can enhance the profession’s appeal, as it demonstrates that there is genuine concern for the quality of work performed,” Chandiok added.
