NFRA to list out frequent lapses to alert auditors, managements
New Delhi, Aug 27, 2023
These deviations were noticed in specific cases during investigations and audit quality reviews done by NFRA in the last few years
The National Financial Reporting Authority (NFRA) will soon issue a circular outlining the frequently observed deviations in the preparation of financial statements and statutory audits to give guidance to managements and auditors on practices they should strictly avoid.
These deviations were noticed in specific cases during investigations and audit quality reviews done by NFRA in the last few years. Given the impact these deviations can have on corporate governance, NFRA wants the industry at large and the auditors to take note and consciously avoid them.
NFRA’s probe and audit quality review reports refer to various requirements account preparers and auditors have to follow under various statutes, ranging from the Companies Act and rules to accounting and auditing standards and guidelines on ethics, in addition to explaining how NFRA’s counterparts such as the Public Company Accounting Oversight Board (PCAOB) of the US look at certain violations.
Although these clarifications and regulatory perspective give a clear picture of NFRA’s expectations about adherence to the standards of financial statement preparation and audit, these are part of regulatory orders in individual cases. Once the practices to be avoided are flagged in a comprehensive circular, it is expected that auditors and managements may not take widely liberal interpretations of the regulatory requirements.
“The (proposed) circular will remind the stakeholders of the trends taking place and have been flagged in the regulatory orders, so that others can also take the right decisions," said a person on condition of anonymity.
NFRA, has in its disciplinary orders, taken a strong view of the practices of some company managements deciding not to recognize their interest liability just because the loan has become a non-performing asset. The regulator has also taken a serious view of auditors who are privy to frauds taking place in a company, quietly resigning from the audit assignment without reporting the fraud. In the case of audit of Infrastructure Leasing & Financial Services Ltd (IL&FS) and some of its group entities for FY18, NFRA had made far-reaching observations about auditor independence covering areas like non-audit services offered by the auditor to the audit client or group firms.
Experts believe the move to highlight NFRA’s findings in individual cases will enable the industry and auditor fraternity learn from others’ experience and improve their own. The proposed initiative is a welcome step that will combine the findings of NFRA’s disciplinary proceedings, enabling audit firms and auditors to understand and appreciate decisions in audit performance and take corrective measures, said Ashok Haldia, former secretary of accounting rule maker Institute of Chartered Accountants of India (ICAI).
“This will also help in taking legal and regulatory measures for bringing reforms in areas like auditor-client relationship, selection of auditors and audit remuneration, and fraud detection and reporting," explained Haldia.
The watchdog is seeking to raise the bar on the quality of financial statements and auditors’ performance given that credibility of financial reporting is central to the investment climate in an economy.
The regulator is keen that auditors exercise their professional scepticism and don’t always go by the interpretations taken by the management. It is also keen that auditors understand the overall business purpose and rationale of transactions and show professional care and skills when the circumstances warrant a deeper examination to rule out embezzlement.
Examples of these circumstances include extending large loans to entities without having the requisite repaying capacity, fund transfers to privately held entities of major shareholders and transactions of similar amounts across different entities suggesting round tripping of funds, NFRA chairperson Ajay Bhushan Pandey explained at a conference on 21 July.
An email sent to NFRA on Saturday remained unanswered till press time.