Audit committees, independent directors should ask questions to auditors and CFOs: NFRA Chair
Oct 18, 2023
The audit committees and the independent directors should regularly communicate with auditors throughout the year and should not limit their role to reviewing the audit report only at the end of the audit, Ajay Bhushan Pandey tells ETCFO in an interview.
The Audit Committees and Independent Directors of the companies should ask questions to the auditors and the Chief Financial Officers who are the preparers of the financial statements to ensure a true and fair view of the accounts, stressed Ajay Bhushan Pandey, Chairperson, at India’s independent accounting watchdog, National Financial Reporting Authority (NFRA).
“Today we (regulators) are asking questions to auditors but these questions should actually have been asked by the members of the Audit Committee and Independent Directors to auditors and CFO ( preparers of the accounts) in the first place to ensure that the financial statements present a true and fair view,” Bhushan told ETCFO in an interview.
The NFRA Chairperson said that in the cases the regulator has dealt with so far it has found that auditors communicate only with manager-finance or general manager-finance or sometimes with CFOs and at the end, have one meeting with the Audit Committee or a 10-minute meeting with the Board or make a PPT presentation to them.
“This is the kind of interaction they are engaged with Those Charged With Governance (TCWG). However, this is not good enough for the effective two-way communication that is envisaged in the Standard on Auditing 260.
SA 260
SA 260 lays down the responsibility of the auditor to "communicate" with TCWG.
TCWG, in the SA 260, is defined as a person or organisation with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process and may include the likes of the Audit Committee and the Independent Directors. For some entities, TCWG may include management personnel, etc which includes the CFO.
“They (the audit committees and the independent directors of the companies) should regularly communicate with auditors throughout the year and should not limit their role to reviewing the audit report only at the end of the audit. These steps will empower the auditors and aid them in finding financial misstatements or frauds. The quality of the audit will therefore improve, and the improved trust and confidence will inspire all stakeholders,” Pandey concluded.
The NFRA
In recent cases of fraud, mismanagement, and corporate failure, auditors have come under the radar for failing to live up to the auditing standards expected of them.
NFRA was constituted as an independent audit regulator on October 1, 2023, to improve public trust in financial markets. It was created on similar lines to the Public Company Accounting Oversight Board (PCAOB) in the US and the Financial Reporting Council (FRC) in the UK. Previously, the education body for CAs, the Institute of Chartered Accountants of India doubled up as the accounting regulator.
[ET CFO]
