NFRA explores AI for better audit firm inspections

• The NFRA (National Financial Reporting Authority) plans to complete 10 inspections of major audit firms in the current fiscal year (ending March) using AI. 
• As per NFRA, AI will ensure scanning thousands of records identifying critical red flags that might otherwise go unnoticed by human auditors.
• The overall process is at an experimentation stage, with a view to verify how effective they are before they can be effectively used on a permanent basis.
• The purpose is not just to penalize firms. Instead, the NFRA wants to Improve Audit Quality and Identify Systematic Issues which multiple firms are having, so that they can be effectively rectified.  
• While the main focus is on the large firms, the NFRA is also starting to reach out to small and medium-sized (SMP) audit firms. They have noticed that many smaller firms are failing to file required annual returns. It is launching workshops and meetings to educate these firms on compliance and global standards.

Our view: 

Technology is a welcome addition to the repertoire of a regulator. Sebi uses algorithms and so does RBI in a big way. While it is laudable that NFRA is using the latest technology to improve the functioning of auditors , it is surprising that this would need to be highlighted. What would have been of more use is if they could have given information about where they wish to source the technological prowess considering the deep linkages, the audit industry has with the developers of these tools. There are other errors like false positives which may need to be guarded against. These are some of the pitfalls the NFRA should be careful about. Quite certainly better functioning of auditors is essential with ultimately a beneficial impact on the ultimate stakeholders. 

It needs to be mentioned that NFRA has recently been in the news, as it sought more Functional and Financial autonomy, and more penal powers to take penal action against auditors and audit firms for non-compliance.  Our News Summary dated Dec 11, 2025, covers this information in detail - suggesting the pro-active measures being taken by the government to delegate more authority to the NFRA is welcome.   

___________________

Link - https://www.livemint.com/news/nfra-testing-waters-on-ai-use-to-complete-10-audit-firm-inspections-this-fiscal-says-chief-nitin-gupta-11769411400178.html