Auditors should follow the due process rather than just rely on expert opinions, NFRA Chairperson Ajay Bhushan Prasad Pandey said on Friday and emphasised that auditing should not be just a “ticking” exercise. Amid instances of auditing lapses at companies and the regulator taking action against erring auditors, Pandey also said that audit documents should evidence that due process has been done.
“I would like to assure the audit fraternity that we are not here to be kind of a villian, we are here to assist you and improve the system,” he said while speaking at an industry event here.
While asserting that trust in the financial reporting system is very important, the chief of the National Financial Reporting Authority (NFRA) said, “audit should not be just ticking audit… It should be thinking audit”.
The watchdog has around 7,000 companies, including unlisted ones, under its purview.
According to him, it has been noticed that there is very excessive reliance by auditors on the opinions of management experts or legal opinions.
“Relying on expert opinions… and not doing the analysis required, it is not correct. You may come with the same conclusion that the expert has come… but at least your audit documentation should evidence that you have done the procedures under the SAs (Standards on Accounting). This is very very important,” he said.
Auditors have to follow the due process, he said while speaking at a conference on ‘Financial Reporting & Control: Recent Developments and Challenges’ organised by industry body Assocham.
“It is expected that if you follow the process, you may find the probability of (finding) fraud becomes higher. Nobody can guarantee that you can always find a fraud but if you have followed the process, then there are good chances…,” Pandey said.
The NFRA chief referred to the views in certain quarters that auditors are not expected to find frauds at companies.
“Look, it is immaterial whether you are expected to find fraud or not. What is material is that you are required to follow the process. If you have followed the process and in that process, you have found fraud then it is fine, if you are not able to find fraud, then that also is fine…
“What is important is whether you have followed all the process or not… Therefore, it is not an expectation gap. It is an understanding gap or a mindset gap,” he said.
Last month, the regulator said a statutory auditor should exercise his or her professional scepticism while evaluating fraud at a company and should not be influenced by the legal opinion provided by the management.
“Resignation does not absolve the auditor of his responsibility to report suspected fraud or fraud as mandated by the law,” the watchdog had said in a circular to the auditors of entities regulated by it.
On Friday, Pandey also said that when companies are facing problems, they should also look at strengthening their audit committees and empowering independent directors while mentioning about the trend of companies setting up advisory boards for governance.
Meanwhile, the watchdog has made recommendations with respect to Ind AS 117 to the government. Indian Accounting Standards (Ind AS) 117 pertains to the insurance sector.
“It (Ind AS 117) will be notified by the government in due course,” Pandey said.
To a query, he said the regulator also gets references from the corporate affairs ministry about companies which are not under its domain.
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