Audit panels of companies can’t escape blame by citing auditors’ failure: NFRA chief
May 31, 2024
Synopsis
NFRA chairman Ajay Bhushan Pandey emphasized the audit committee's responsibility in ensuring accurate financial statements, even if auditors fail in their duty. He highlighted the need for meaningful communication between audit committees and auditors, stating that it should not be a mere formality. Pandey's remarks come as the NFRA plans to engage with large listed companies to promote accounting standards and curb corporate frauds. This regulatory outreach is part of efforts to protect retail stock investors, a focus highlighted by Finance Minister Nirmala Sitharaman.
Focus Now on Supervision to Boost Audit Ecosystem, says NFRA Chief
A company’s audit committee, comprising mostly independent directors, can’t avoid its responsibility towards ensuring accurate financial statements of the firm merely because the auditors have failed in their duty, National Financial Reporting Authority (NFRA) chairman Ajay Bhushan Prasad Pandey said Friday.
The chief of the audit regulator underscored the need for regular and meaningful “two-way communications” between a company’s audit committee and auditors on its financial positions.
Under Section 177 of the Companies Act, the boards of listed companies, among others, are mandated to set up audit committees. Such a committee must have at least three directors, with the majority being independent ones. It typically oversees the statutory audit compliances of a company.
Speaking at an Assocham event here, Pandey stressed that the engagement between the panel and the auditors can’t be reduced to a mere formality.
In some cases, the regulator has found out that the meetings between the audit panels and the auditors have been very brief, and that, too, just before the approval of the companies’ financial results. This goes against the principle of an effective "two-way communication", he indicated.
His statements come at a time when the NFRA is planning to directly engage a few large listed companies for the first time by June-end to “sensitise” them about accounting standards and help curb corporate frauds, ET has reported.
The regulatory outreach could involve the NFRA’s engagement with audit panels, independent directors, chief financial officers and others on the boards of these companies.
The latest NFRA move also comes amid a heightened focus on the part of the authorities on protecting retail stock investors. Earlier this month, finance minister Nirmala Sitharaman exhorted market intermediaries to help preserve the trust of Indian households that have made a “generational shift” in deploying a larger part of their savings in the stock markets.
Any efforts toward early detection of stress in listed companies or curbing corporate frauds—which can be done through accurate and transparent auditing of the company’s financials—will serve the interest of both retail and other investors.
The audit committees of companies, Pandey said, can also draw lessons from the disciplinary orders passed by the regulator against errant auditors.
In recent years, the regulator has passed scores of orders against auditors for professional misconduct, including for the frauds at IL&FS and DHFL.
As for auditors, they must ask questions to a company's management to ensure that the financial statements are true and fair, Pandey said.
"What has been done to ensure that financial statements are true and fair? When you (auditors) approve related party transactions, what were the questions you asked? Those things become very important,” Pandey said.
"What are the internal financial controls? You have to ask questions (to the management) on all these things. In some cases, you may not get answers but at least if you have asked the questions, it would be documented," he added.
[The Economic Times]
