NFRA Chair says if CFOs and audit committees are careful, frauds can be prevented
Aug 18, 2023
Taking the radar towards the companies' internal management for good governance, the National Financial Reporting Authority (NFRA) on Friday puts the onus of preventing corporate fraud on the preparers of the financial accounts including Chief Financial Officers (CFOs), Audit Committee, and Company Directors, saying they could have avoided many of the scams had they remained alert.
"I think it is very necessary to have sound internal financial system controls. In the past two months, we passed many orders. In those orders, we described how exactly that corp failures (lapses ) have taken and what was the role of the auditor. And from there you can see if the preparer, the company, the audit committee, independent directors, and CFO if they were very careful, all those things could have been avoided", NFRA chairman Ajay Bhushan Pandey said at the 3rd edition of the ET CFO Turning Point 2023 here.
Pandey's assertiveness came after the regulator took the exceptional step of barring individual CAs as well as auditors for misgovernance.
Getting into overdrive after repeated incidences of corporate misgovernance, NFRA has so far barred 25 auditors in the last year along with fines which include auditors from Coffee Day India, ASRMP & Co, Sundaresha & Associates, and Bartronics among others.
Earlier the regulator had focussed on the auditors to report fraud in a company. But with the increasing number of frauds and bypassing of set processes, the regulator now has widened the responsibility to the internal people of a company.
In June, the NFRA released a circular addressing the responsibilities of statutory auditors in reporting fraud within a company. The circular stresses the mandatory reporting obligations placed on auditors by the Companies Act, 2013, and related rules and standards. It highlights the consequences for auditors who fail to report fraud and clarifies that resignation from an audit engagement does not absolve them of their reporting responsibilities.
Taking the CFOs in their strides, Pandey observed if tomorrow, there is a corporate scam, all the higher ratings that the companies have been given, as well as the bullishness would disappear.
"That is why the role of the CFO becomes important. An auditor is doing an audit later. CFOs are actually preparers of accounts, in that they have the responsibility and this responsibility is tough under the Companies Act, 2013, and Sebi's LODR (Listing Obligations and Disclosure Requirements) Regulations," he said.
The former finance secretary was categorical that accounting is not merely a calculation and a miss by the CFO can snowball into a major corporate failure
Nirav Modi and PNB Bank, IL&FS, PMC Bank, DHFL scams or frauds have already taken place in recent times.
[ET- CFO]
