Auditors must display professional scepticism'

National Financial Reporting Authority (NFRA) has detected an absence of "professional scepticism" by auditors in several cases during its inspections, chairperson Ajay Bhushan Pandey tells Priyansh Verma.

He said some auditors or their associate firms are found to be involved in providing non-audit services either to the same client or related companies leading to conflict of interest. The roles of the Institute of Chartered Accountants of India and NFRA are clearly defined, and both are two-wheels of the same regulatory system, Pandey said. Edited excerpts:

What are the major issues plaguing auditors? Where are the lapses?

In the larger context of corporate governance, in the last few years we've seen several issues that need to be addressed - both by companies' directors and auditors. First of all, auditors should challenge the management assertion and give their objective opinion on the state of affairs. These assertions in financial reporting involve estimation and judgments by management in many areas. These could be affected by "management bias", which could be unintentional or intentional, to achieve a desired management result.

Standard on auditing requires evaluation of these management judgments without bias.

However, this principle is not applied by auditors in its true spirit due to lack of independence. This is because auditors or their associate firms are involved in providing non-audit services either to the same client or associate companies or both. This leads to several conflicts such as self-review threat, financial threat or self-interest threat. All of these are listed in the code of ethics.