Mint Explainer: How does NFRA seek to uphold auditor independence?

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Audit regulator National Financial Reporting Authority (NFRA) is making sustained efforts to ensure that auditors who sign off on financial statements of companies and banks are independent. Mint takes a look at steps taken by the regulator. To draw investments, the reliability of financial statements and governance in Indian firms is essential, especially as policy makers actively promote India's prospects to global investors, aiming for developed country status within the next 25 years.

Auditor independence has emerged as a significant concern. Past corporate failures have revealed vulnerabilities in certain audit firms' practices and potential undue influence from management. Family-run businesses dominate India's corporate landscape, with many family members of majority shareholders also serving as top executives.

While audit committees featuring independent directors exist, the fact that audit fees come directly from the company sometimes hampers perceived auditor independence. Financial discrepancies within companies often arise either from shareholders channeling company funds to closely-associated entities for personal benefit or individual fraud. The NFRA is tasked with enforcing adherence to accounting and auditing standards and supervising the quality of service of professionals responsible for such compliance.

The agency also advises the government on accounting and auditing policies for adoption by corporations. Its oversight encompasses statutory auditors of listed entities, banks, insurers, power utilities, sizable unlisted public companies, and any other organizations referred by the government. NFRA speaks through its orders.