NFRA introduces annual transparency reports for audit firms

India’s audit watchdog, the National Financial Reporting Authority (NFRA), on Monday published draft requirements regarding the preparation and publication of the Annual Transparency Report (ATR) by auditors or audit firms.

The move is aimed at enhancing transparency about the management and governance of audit firms and their internal policy framework to ensure high-quality audits and prevent conflict of interest by maintaining independence, the government said in a release. The conflict of interest arises when an auditor takes relatively higher-paid non-audit work from the same audit client, raising doubts about his independence to carry out the audit objectively.

The ATR requirements are on the lines of the contemporary international best practices implemented by certain prominent independent audit regulators in other jurisdictions, the release said. Rule 8(2) of the NFRA Rules 2018 empowers the NFRA to require an auditor to report on its governance practices and internal processes designed to promote audit quality.

The information contained in the ATR will be useful to investors, audit committees, independent directors, and the public at large, the release said.

The ATR requirements are proposed to be implemented in a gradual manner for public interest entities (PIEs) starting with statutory auditors of the top 1,000 listed companies (by market capitalization) with effect from the financial year ending on March 31, 2023. Audit firms need to publish the report within three months from the end of each financial year.

NFRA has also decided to seek public comments or suggestions on the contents of the ATR by February 16, 2023. NFRA was constituted in October 2018 as an independent audit regulator on similar lines to the Public Company Accounting Oversight Board (PCAOB) in the US and Financial Reporting Council (FRC) in the UK to improve corporate financial reporting.

"The introduction of Annual Transparency Reporting is yet another bold and assertive move by the NFRA which shall indeed go a long way in establishing auditor accountability and quality assurance. The end users will be able to take more informed decisions with handy information on governance, structures, policies and methodologies of audit practitioners," said Vikram Pratap Singh, Partner- Audit & Assurance , Nangia & Co LLP.

"Even though this reporting shall be limited to auditors’ of the top 1000 listed companies are part of a phased implementation, it is expected to become an assurance service norm in the near future," the expert further said.