Byju’s exposes gap in NFRA mandate

Deloitte Haskins & Sells Llp resigned as the auditor of Think and Learn Pvt. Ltd last week. (Mint)
Deloitte Haskins & Sells Llp resigned as the auditor of Think and Learn Pvt. Ltd last week. (Mint)

Summary

Regulator’s oversight extends to listed firms, banks, insurers

NEW DELHI : The resignation of Deloitte Haskins & Sells Llp as the auditor of Think and Learn Pvt. Ltd, which runs the online learning platform Byju’s, has exposed a gap in the regulatory framework for auditors, a person informed about the government’s regulatory response in the case said.

The oversight of audit regulator National Financial Reporting Authority (NFRA) extends only to statutory auditors of listed companies, banks, insurers, power utilities, and large unlisted public limited companies but excludes private limited companies, no matter how big they are, the person said on condition of anonymity.

Graphic: Mint
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Graphic: Mint

Therefore, NFRA faces a challenge in looking into the issue of auditor resignation in this case and concerns around the delay in financial reporting, the person said.

This concern around auditors of private limited companies remaining outside the ambit of NFRA’s oversight is significant in the context of the rapid growth of the startup ecosystem and the mushrooming of unicorns, many of which remain private limited entities but raise substantial capital and, in some cases, have a vast customer base.

This certainly makes a case for amending the NFRA Rules of 2018, which defines the public interest entities, the auditors of which come under the regulator’s ambit, according to the person.

Emails sent to the ministry of corporate affairs, NFRA, Think and Learn, and Deloitte on Monday seeking comments for the story remained unanswered at the time of publishing the story.

Mint reported on Tuesday that the corporate affairs ministry was examining the nature of enforcement action it needs to pursue in the wake of the resignation of Deloitte Haskins & Sells Llp last week as the auditor for Think and Learn. The options range from an inquiry in the form of seeking information, an inspection of books of account that is a more formal step meant to check compliance or a full-fledged investigation.

Independent regulators such as registrars of companies and NFRA and probe agencies such as the Serious Fraud Investigation Office are within the ministry’s regulatory ecosystem.

However, not everyone is keen on tightening the regulatory framework for auditors, and some experts suggested that the self-regulator of the accounting and audit profession Institute of Chartered Accountants of India (ICAI), can address any governance issue relating to entities outside NFRA’s mandate.

“Byju’s case may be an exception. Large investors in private limited companies, who sit on their boards, are astute and financially very well-informed, and they remain aware of the developments in the company. NFRA may focus its resources on companies where the public interest is involved," said Ved Jain, a former president of ICAI.

“Startups are expected to innovate, and greater regulatory burden is not in their interest. ICAI is entrusted with the task of addressing governance issues of entities which are outside the mandate of NFRA," said Vijay Kapur, a former director at ICAI.

NFRA has so far taken stringent action in the case of what it regards as wrongful audit engagement and compromise in the case of auditor independence and has flagged cases where the quality of financial statements needed improvement. Its orders seek to make auditors who sign financial statements more diligent about their task, as investors make decisions based on these documents.

On Monday, the regulator issued an order explaining that quitting an audit assignment does not absolve a statutory auditor of its responsibility to report fraud noticed during the audit. It is a misconception among auditors that resigning from audit engagement will absolve them from the consequences of not reporting fraud, NFRA said.

An expert on the regulatory framework for statutory audit said NFRA’s mandate also covers any company, person, or corporate body on a reference made to the authority by the central government in the public interest.

“The ministry of corporate affairs can make a reference to NFRA about cases which have witnessed delays in financial reporting and auditor resignation, and NFRA can look into such cases whether it is listed, unlisted public limited or private limited company. It is not that NFRA cannot look into private limited companies which have raised concerns around financial reporting and audit," said the person who spoke on condition of anonymity.

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