Why Weakening NFRA Risks Eroding Trust in Audit Oversight

PCAOB Dissolution Debate: Will Merging with SEC Disrupt Audit Oversight or Drive Deregulation?

By Sesh Kumar Pulipaka

New Delhi, April 28, 2025: Any attempt to weaken NFRA or merge it with SEBI, citing efficiency, must prioritize public trust in audit independence. Enron and Satyam cases highlight that trust is vital for financial stability.

The proposed dissolution of the PCAOB and its merger with the SEC, driven by Republican lawmakers, sparks debate over audit oversight, deregulation, and global implications, including for India’s NFRA.

The recent proposal by some Republican lawmakers in the United States (US) to eliminate the Public Company Accounting Oversight Board (PCAOB) and merge its functions with the Securities and Exchange Commission (SEC) has ignited significant debate over the future of audit regulation in America.

Originally established in response to the Enron scandal to restore public trust in corporate audits, the PCAOB has been a cornerstone of independent audit oversight.

The move, positioned as part of a broader Trump-era deregulatory agenda, has triggered alarm across the audit community. It raises questions not only about the implications for audit quality in the US but also about the possible impact on regulatory structures in countries like India, where the National Financial Reporting Authority (NFRA) performs a similar role.

The Justification Behind the Proposal

At the heart of the Republican proposal lies a long-standing ideological commitment to reducing the footprint of regulatory bodies, perceived by conservatives as stifling business growth and innovation.

The PCAOB, according to proponents of the merger, has become overbearing under its current leadership, particularly since Erica Williams assumed the chair.

Her tenure has been marked by aggressive enforcement, imposition of tougher standards, and record fines against errant audit firms. The argument being forwarded is that the SEC — already a comprehensive market regulator — can absorb the PCAOB’s inspection and enforcement functions without needing a separate agency funded by levies on listed companies and broker-dealers.

For lawmakers pushing this agenda, the proposal promises administrative efficiency, reduced regulatory overlap, and financial savings, ostensibly by eliminating redundancies.

However, the more nuanced undercurrent is political. The PCAOB was conceived as an independent body to ensure that auditors do not cozy up to corporations, as had happened in the era of Arthur Andersen and Enron.

Its structure, outside direct government payroll and with a distinct funding stream, was a deliberate design to keep audit oversight insulated from both industry capture and political manipulation.

Folding it into the SEC threatens to undo this independence, not just structurally but also functionally. While the SEC is a powerful institution, its priorities are broad, ranging from investor protection to capital formation, and audit oversight risks becoming diluted in this larger mandate.

The Risks of the Proposed Merger

The proposed integration of the PCAOB into the SEC risks creating both operational and philosophical problems. Firstly, the audit oversight architecture in the US is delicately balanced between regulation and autonomy.

The PCAOB’s distinct legal identity and its inspection routines are not just bureaucratic exercises but are instruments to instil public confidence in capital markets.

If inspections, enforcement actions, and standard-setting get folded into a vast agency with multiple responsibilities, audit-specific concerns may get buried under the weight of competing priorities.

Secondly, the transition is likely to bring about significant administrative and human capital disruptions. PCAOB employees, who are generally paid above government pay scales, may resist transfers, potentially leading to a talent drain.

This would seriously impair the institutional memory and technical capabilities built up over two decades of audit enforcement.

Moreover, while proponents claim that functions can simply be shifted, oversight is not merely about tasks; it is also about culture, rigour, and independence of judgment — all of which take years to establish.

Thirdly, the move would likely face legal and procedural challenges. The PCAOB was set up through the Sarbanes-Oxley Act, which was bipartisan legislation passed in the wake of one of the worst corporate scandals in history.

Any attempt to reverse such a law will need to survive court scrutiny, bipartisan Congressional support, and, possibly, electoral backlash.

Audit firms themselves, even if they chafe under strict inspection regimes, are wary of the reputational risk that any watering down of oversight may pose to public confidence in their work.

Broader Implications for India: A NFRA-SEBI Parallel

The proposal bears striking resemblance to ongoing debates in India regarding the functioning of the National Financial Reporting Authority (NFRA), the audit regulator established in the wake of massive corporate frauds such as IL&FS and Satyam.

NFRA, like the PCAOB, was created to provide an independent check on auditors of large companies and public interest entities.

The experience of PCAOB and SEC was considered by Government before establishing NFRA in 2018. Prior to its formation, the Institute of Chartered Accountants of India (ICAI) had exclusive regulatory control over audits — a model akin to the pre-Enron self-regulation in the US.

But as with PCAOB, there have been occasional calls in India — especially from within professional bodies and segments of government — for streamlining or merging regulatory powers between NFRA and SEBI or at least clarifying their overlapping jurisdictions.

NFRA is separately grappling with questions on fair play and natural justice, emphasising separation of its investigative functions and powers to penalise errant audit firms with the matter engaging the higher judiciary in India.

However, any move in India to merge SEBI and NFRA would need to reckon with the same dangers that are currently being debated in the US.

SEBI, much like the SEC, has a broad mandate that includes securities market development, investor protection, insider trading surveillance, and takeover regulation. Audit oversight may not get the focus it deserves.

More importantly, the independence and objectivity of NFRA, which has already been questioned in certain cases, would be further compromised if its powers are diluted or subsumed under an agency structurally more exposed to political economy considerations.

In fact, India’s recent experiences with large-scale audit failures, such as in IL&FS, DHFL, and Punjab and Maharashtra Cooperative Bank, point precisely to the dangers of diluted audit scrutiny.

NFRA has only recently started building enforcement capability and credibility. A premature folding of its powers or resources into another regulatory structure would amount to a return to a fragmented and conflicted system of audit self-regulation, undermining hard-won gains in public oversight.

While the drive for deregulation may be rooted in ideological conviction, any move to disband the PCAOB and absorb its responsibilities into the SEC represents a high-stakes gamble.

The PCAOB was not just another bureaucratic appendage — it was a structural response to a systemic failure that caused real damage to investor confidence and the credibility of American capitalism.

Diluting or dismantling it in the name of administrative efficiency may save a few million dollars and earn short-term political capital but risks much larger damage to the trust embedded in financial disclosures and capital market integrity.

The potential ripple effects for India are real. Any move to weaken NFRA or collapse its functions into SEBI —citing efficiency or coherence — must be evaluated not just on structural or budgetary grounds, but on the more fundamental test of whether such a change would strengthen or weaken public faith in the independence of audit oversight.

If the lessons of Enron and Satyam taught the world anything, it is that public trust in audit integrity is not a luxury — it is a foundational pillar of the financial system. And such trust, once eroded, takes decades to rebuild.

(This is an opinion piece; views expressed solely belong to the author)

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