Publication of Annual Transparency Reports (ATR) byauditors/audit firms

Background

• Indian companies have become significant constituents of the global economy and India has evolved as global centre of excellence in the delivery of financial reporting and audit services to a large number of multi-national corporations raising expectations for sound and high-quality codes and practices comparable to global benchmarks.
• Regulators have been prescribing obligations for Public Interest Entities (PIEs) to provide high-quality comprehensive financial and non-financial information commensurate with the nature, size and complexity of their operations to the various stakeholders. The role and responsibilities of the independent auditors of such entities have also evolved significantly with focus on the need to build commensurate professional and operating capabilities within the auditing profession.
• In this backdrop, Regulators and Oversight Authorities in some overseas jurisdictions require audit firms carrying out audit of PIEs to prepare and publish information in the form of Transparency Reports on annual basis.

Provisions Involved

Rule 8(2) of the NFRA Rule 2018 empowers the NFRA to require an auditor to report on its governance practices and internal processes designed to promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor and may take such action on the report as may be necessary.

Proposed Additional Disclosure

• In accordance with Rule 8(2) of the NFRA Rule 2018, NFRA considers it appropriate to prescribe publication of Annual Transparency Report containing certain critical information about the auditor’s operational activities, management, governance and ownership structures, policies and procedures necessary to deliver high-quality audits etc.
• This requirement of an annual transparency report will be implemented in a gradual manner across the audit profession engaged in the audit of PIEs falling within the purview of NFRA.
• NFRA also decided to seek public comments/suggestions on the contents of the ATR.

Objective of the Annual Transparency Report

The objective of the annual transparency report is to ensure better governance of auditors. The NFRA aims to increase transparency in the functioning of auditors of large listed firms by making it obligatory for them to file annual transparency reports. The NFRA aims to ensure that the public has a better understanding of the auditors’ role and their working alliances, including any collaborations and membership of international networks. The information contained in the ATR will be useful to the investors, audit committees, independent directors and public at large.

Details to be Included in the Annual Transparency Report

The ATR is expected to provide a detailed description of the statutory auditors, information about collaborations, working alliances and membership of any international network, details about revenue, as well as information on audit and non-audit services provided by them. Audit firms would also be required to include information about their internal governance systems. After submitting the ATR to the NFRA, audit firms would then be required to publish the report on their websites.

Kritika Jain, Audit Associate, SW