Audit can't replace a lender's due diligence: NFRA Chairperson Nitin Gupta

New Delhi, Oct 27, 2026

Speaking at the Business Standard BFSI Insight Summit, Gupta said responsibility for the quality of financial reporting rests with multiple stakeholders

Audit cannot replace a lender’s due diligence, but the reliability of financial information available to lenders depends on the quality of auditors and audit processes, Nitin Gupta, chairperson of the National Financial Reporting Authority (NFRA), said on Tuesday at the Business Standard BFSI Insight Summit 2026in Mumbai.

“While audit cannot substitute for a lender’s due diligence, the reliability of the information available to the lender depends upon the quality of the audit and the high-quality financial reporting of the concerned institution,” Gupta said.

The discussion was moderated by Business Standard’s Gireesh Chandra Prasad.

Responsibility for financial reporting is shared

Gupta said responsibility for the quality of financial reporting rests with multiple stakeholders, including the management preparing the accounts, internal auditors, audit committees, external auditors and regulators.

“There are five lines of defence, from the preparer of accounts to the regulator. All five lines of defence are very relevant for high-quality financial reporting. It is a shared responsibility. We cannot put any particular line of defence as the sole party responsible for this,” he said.

He said the preparation of accounts was the first step in the process and that other stakeholders relied on the information provided by the management.

“The preparer of accounts has to be very careful that the accounts present the factual state of affairs. The entire process builds on that. Internal auditors and audit committees rely on the accounts prepared by the management,” Gupta said.

Statutory auditors, he said, were expected to provide reasonable assurance based on the accounts presented to them.

Fraud and financial reporting failures must first be addressed at the management level before the auditor's role comes into focus, he said.

“The management may also come across fraud, and it is the duty of both the management and the auditor to address it. No one can substitute for the other,” Gupta said.

Financial reporting key to Viksit Bharat 2047

Gupta said India’s long-term development ambitions would require substantial capital mobilisation, with the banking, financial services and insurance (BFSI) sector playing a key role.

He said Crisil estimates indicated that Indian companies would spend around ₹150 trillion on capital expenditure over the five years from 2027. Debt capital of around ₹130 trillion to ₹140 trillion would be required over the same period for capital expenditure, working capital and retail lending.

He said the capital required for Viksit Bharat 2047 would largely be channelled through the BFSI sector, with funding decisions depending on the financial information available to lenders and investors.

NFRA seeks to improve audit quality across firms

Gupta said NFRA is working to improve audit quality through inspections, enforcement actions, workshops, webinars and audit practice toolkits.

He said larger audit firms generally had better capabilities because of their networks, while smaller and mid-sized firms faced challenges in keeping pace with changes in auditing standards and practices.

“What we have observed is that the bigger audit firms have better quality because of their networks and their capacity to understand changes. Small and medium-sized audit firms are at a disadvantage,” he said.

NFRA was conducting workshops across India and providing practical resources to help smaller firms apply auditing and accounting standards, Gupta said.

“We have come out with audit practice tools that help bridge the gap between theory and practice, translating auditing and accounting standards into practical application,” he said.

He said inspections and enforcement actions served different purposes. Inspections assessed audit firms’ overall quality-control systems and practices, while enforcement actions examined specific cases in which auditors allegedly failed to identify issues that should have been detected.

Gupta said the objective of inspections was not merely to find faults but to improve audit quality. Under the inspection process, large firms were inspected annually, while mid-sized firms were inspected once every three years, alongside inspections of selected smaller firms.

Auditors must communicate deficiencies to boards

Gupta said effective communication between auditors and those charged with governance was necessary to improve audit quality.

He said NFRA had issued guidance on communication with those charged with governance, covering matters that auditors should bring to the attention of audit committees, boards or designated board subcommittees.

“The auditor should be able to communicate any material deficiencies in internal controls to those charged with governance. This could be the audit committee, a board-designated subcommittee or the board of directors itself,” he said.

Gupta said NFRA’s enforcement actions had identified weaknesses in communication between auditors and audit committees in some cases.

He also said audit inspection reports could help audit committees assess the work of their auditors and understand areas requiring improvement.

Under revised inspection guidelines issued in April, auditors are required to bring relevant inspection reports to the attention of audit committees, he said.

NFRA examines technology’s role in auditing

Gupta said NFRA had established an advisory committee to examine the use of technology in financial statement preparation and auditing, including the role of artificial intelligence.

The authority had also issued a paper setting out principles for the use of technology in statutory audits, he said.

“The audit opinion belongs to the identified auditor and not to any tool used in reaching it,” Gupta said.

He said NFRA intended to issue further guidance to help auditors understand their responsibilities as technology becomes more widely used in the profession.

Gupta said the broader objective was to strengthen confidence in financial reporting, which underpins lending, investment and long-term capital formation.

[The Business Standard]