India needs a common and an aligned framework for regulating the audit profession, feels Vishal Divadkar, Head of Audit and Assurance at MSKA & Associates, an audit affiliate of BDO International in India.
“While regulation is welcome, unlike other countries where the jurisdiction for audit regulators is fairly well established and defined, in India, there doesn’t appear to be a common framework for disciplinary action against auditors, across key regulators. The country needs a common and aligned framework...,” Divadkar told ETCF in an exclusive interview.
Auditors are currently regulated by multiple regulators, with each having its own jurisdiction. National Financial Reporting Authority (NFRA) regulates auditors of large listed and unlisted firms.
Markets watchdog, Securities and Exchange Board of India (SEBI) regulates auditors of public listed entities. The Reserve Bank (RBI) regulates auditors of the financial services sector. The Ministry of Corporate Affairs (MCA) regulates auditors of small firms and businesses..
Divadkar noted the audit profession is under great scrutiny and has been a subject of much debate, especially in the backdrop of Rs 1-lakh crore fraud at IL&FS (October 2018), and about Rs 13,000 crore operational scam at the second largest state-run lender, Punjab National Bank (March 2018).
The veteran auditor highlighted the balance needs to be struck between driving better governance and fostering an environment that helps the audit profession grow. He stressed that the reforms to the regulatory landscape can directly influence the attractiveness of the profession.
He also said the level of audit concentration is much lesser in India when compared to certain western countries such as the UK.
NFRA’s mandatory audit exemption proposal
MSKA’s audit head backed NFRA’s recent proposal of doing away with the mandatory statutory audit for smaller firms but stressed the audit is a preventive check and the decision to carry it must be left upon the related stakeholders like corporates and the bankers themselves.
“A number of developed countries don’t have mandatory audits for small companies. In many small companies, the owners and managers are the same, and therefore there limited third-party users of financial statements. A majority of these micro small and medium companies are essentially family-owned enterprises formed as companies for the sake of limited liability, or to get bank loans, mining licences, and the like,” he said.
"Having said that, an audit is a good preventive check and where it is necessary to provide confidence to the stakeholders, it should be commissioned on a by-case basis, rather than mandated by a statute," the senior auditor further said.
On September 30, 2021, the NFRA had issued a consultation paper, proposing to exempt mandatory statutory audits for micro, small and medium companies or simply those firms whose networth is less than Rs 250 crores. The idea is to reduce the compliance burden of these firms; the watchdog studied the developed audit markets like Japan, UK, and Singapore etc while coming to such a proposal.
Future of Auditors
Divadkar also said that the increasing digitisation in today’s environment requires auditors to develop a deeper understanding of business so that they can embrace the disruption smoothly.
Auditors are also expected to keep abreast with developments that could impact the financial statements amid constant changes in regulations and dynamic business environment, he said.
“The advent of the pandemic posed peculiar challenges like remote auditing and further heightened the need for professional scepticism in the audit process.
This calls for ongoing and effective training programs for staff and Partners,” he said.
While auditors need to step up their game, he emphasised, other stakeholders such as regulators, legislators, standard-setting bodies, and the business community, too, need to make considerable efforts to improve audit quality.