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Be harsh when you see serious fudging, NFRA tells auditors

New Delhi, Nov 24, 2023

Summary
The audit watchdog’s latest prescription is part of its drive to improve the quality of financial statements and statutory audits, as credibility of company accounts is vital for the investment climate in the country.

Statutory auditors cannot take the easy way out by issuing qualified reports where an adverse opinion is warranted, following a recent order from the national audit regulator. When a company’s accounts make mis-statements that are “pervasive and material", the auditor must issue an adverse opinion, the National Financial Reporting Authority (NFRA) said in a disciplinary order.

The audit watchdog’s latest prescription is part of its drive to improve the quality of financial statements and statutory audits, as credibility of company accounts is vital for the investment climate in the country.

In a disciplinary order dealing with the FY17 statutory audit of MAN Industries (India) Ltd, a listed company, NFRA said the audit engagement partner ‘qualified’ his opinion on the consolidated financial statements, saying it reflected ‘true and fair view’ except for the effect of non-consolidation of a subsidiary. The order is against the audit partner, and not the audit firm.

“This (qualification) was not correct as the impact of the grounds for qualification was both material and pervasive," NFRA said, adding the assets and liabilities of the subsidiary constituted about 19% and 29%, respectively, of that of the parent. “The audit engagement partner was required to give an adverse opinion where the effect is material and pervasive," the audit watchdog said. In its 2 November order, NFRA said it began investigating the MAN audit after capital market regulator Sebi made a reference to it.

An auditor’s adverse opinion is far more serious than a qualified opinion. A qualified opinion suggests the financial statements show a true and fair view of the company’s affairs, except for the factors highlighted. An adverse opinion, on the other hand, suggests the statements as a whole do not present a true and fair picture or, in essence, are misleading.

In the recent past, NFRA has made a series of orders and clarifications guiding auditors on how to handle some of the failings in financial statements, and asking them to stay alert, display professional scepticism, and question unsubstantiated assertions of company managements.

In June, the regulator clarified that quitting an audit assignment does not absolve a statutory auditor of the responsibility to report fraud noticed during the audit, and that absence of audit documentation and failure to submit audit files to the regulator is clear evidence that the audit is unreliable and invalid. Through other disciplinary orders, NFRA has also clarified that negotiations with banks and non-bank lenders for restructuring loans do not absolve a company from its liability to recognize interest cost in financial statements.

The disciplinary orders have also made auditors more proactive in flagging lapses in the audit reports and in some cases, resign from the audit engagement.

“With the NFRA coming into existence, auditors are more careful in adhering to the auditing standards and are adopting a cautious approach while accepting the audit, and while looking at significant matters having a bearing on the quality of financial statements that arise during the course of statutory audit," said Ashok Haldia, an expert in accounting and auditing.

[Mint]

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