NFRA Seeks to Promote Innovation in India’s Auditing Industry

The National Financial Reporting Authority (NFRA), the newest regulator in India, intends to provide a framework identical to an innovation lab to promote technological advancement in the auditing industry.

Rao Inderjit Singh, India’s Minister of State (MoS) for Corporate Affairs, stated comparable objectives in his statement at the first international conference held by the NFRA in New Delhi, indicating that the country is moving toward reforming its auditing procedures.

Over the past decade, an effective auditing process in India has had a major impact on accurate financial reporting, which has enhanced capital inflows and spurred economic growth, job creation, and improvements in corporate governance. Accounting professionals and industry executives consider India’s adoption of global best practices in accounting and auditing to be a strategic priority rather than just a compliance issue.

According to MoS Corporate Affairs Inderjit Singh, utilizing global best practices in auditing and accounting builds a strong foundation for India’s progress into becoming a developed nation by 2047. He notes that the stage is set for India to grow at rates that surpass 7-8 percent over the next several decades through purposeful investments in infrastructure and human resources combined with a commitment to sustainable and equitable development.

India awaits technological revolution in auditing processes

On March 6, 2024, Ajay Bhushan Pandey, NFRA Chairman, announced that the agency will create an Innovation Lab, or Sandbox, to support cutting-edge auditing techniques. The initial announcement was made at the first-ever International Conference on Transparent Financial Reporting and Audit Quality: Foundations of Corporate Governance, organized by the NFRA, between March 5-6, 2024, in New Delhi. The announcement underscores NFRA’s goal of improving audit quality and openness by working together with the Ministry of Corporate Affairs (MCA), the Securities and Exchange Board of India (SEBI), and allied authorities.

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The proposed Innovation Lab seeks to establish a supportive environment for auditors. This method, a structure akin to a sandbox, guarantees that any novel techniques can be tested for effectiveness and compliance prior to a broader introduction, while also fostering creativity.

The conference also focused on the possibilities of evaluating corporations based on governance and ranking auditors based on qualitative variables in order to establish a more dynamic and transparent audit environment.

Along with promoting innovation in the audit business, NFRA has also made progress on other initiatives like firm-wide audit quality inspections and interaction with audit panels, independent directors, and boards of listed firms. It is important to note that the Companies Act of 2013 envisaged the NFRA as a single, independent entity for the creation and implementation of accounting and auditing standards as well as the supervision of auditors’ work.

Meanwhile, the NFRA seeks to strengthen this area in collaboration with the Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA).

Pandey envisions collaborating with the MCA in developing frameworks that would facilitate the growth of homegrown audit firms, aligning with India’s vision to have domestic audit firms at par with the global Big 4, PricewaterhouseCoopers (PwC), Deloitte, Ernst & Young (EY), and KPMG.

‘AI in ICAI’: New sunrise period for CA professionals

In February 2024, the Institute of Chartered Accountants of India (ICAI) announced the launch of the “Drishti” initiative. Standing for Digitalization (D), Research (R), Integrity (I), Skills (S), Handholding (H), Transparency (T), and Independence (I), the said initiative is likely to lead ICAI into a new era of advancements in auditing, accounts, and financial management.

The world’s largest accounting body has established a committee, namely “AI in ICAI.” The committee is tasked with exploring the potential of artificial intelligence (AI) in enhancing the professional development of students, members, and employees. As part of initiatives benefiting students nationwide, the institute is providing digitized and recorded tools to facilitate learning.

The AI in ICAI framework is also expected to lay the groundwork for recommending standards and guidelines for green finance and audits to the government. Emphasizing the focus on digitalization and the integration of AI, the ICAI is aiming to prepare its CA professionals to be technologically adept.

It has also been reported that the institute is looking forward to expanding its global presence, providing a platform for Indian CAs abroad, and attracting foreign investment to India. A newly constituted committee, the Committee for Aggregation of CA Firms, is set to bring together smaller firms, enhancing their global competence by pooling resources.

The importance of company audits

An audit involves the thorough examination and scrutiny of various financial records by an auditor, coupled with a physical verification of inventory. This process aims to ensure that all organizational departments adhere to the established system for recording transactions, ultimately verifying the accuracy of the financial statements presented by the organization.

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This evaluation can be conducted either internally by departmental employees or heads, or externally by an independent auditor or an external firm. For publicly listed companies, it is mandatory to undergo an independent audit by a certified auditor before releasing quarterly results.

In India, chartered accountants affiliated with the ICAI are authorized to perform independent audits.  Similarly, businesses are required to comply with different types of audits governed by various laws. The most common audits include statutory audits, internal audits, cost audits under the Companies Act, 2013, and tax audits under Section 44AB of the Income-Tax Act, 1961. Additionally, since the implementation of the Goods and Services Tax (GST) law in 2017, businesses and entrepreneurs in India must conduct GST audits annually.

Outlook

The ICAI has observed that executive leadership may not find value in audit reports presented quarterly, half-yearly, or annually, and that chartered accountants must prepare themselves to deal with technological advancements. The ICAI believes that in the near future, audit reports will be legally required to be provided at far lower intervals due to online and real-time accounting.

With the announcement of NFRA creating its own audit industry sandbox, the action shows a wider understanding of the necessity of striking a balance between risk management, consumer protection, and innovation. As a way to promote innovation while ensuring strict oversight, the successful implementation of such a system might serve as a model for regulatory authorities worldwide.

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