Audit Committees of corporate Boards cannot avoid culpability by blaming auditors: NFRA Chief

The Chairman of the National Financial Reporting Authority (NFRA), Ajay Bhushan Prasad Pandey, emphasised that a company’s Audit Committee, primarily composed of Independent Directors, cannot shirk its responsibility for ensuring accurate financial statements, even if auditors fail in their duty. He stressed the necessity of regular and substantial communication between the Audit Committee and auditors regarding the company’s financial status.

According to Section 177 of the Companies Act, listed companies are required to establish Audit Committees comprising at least three Directors, with a majority being independent. These committees typically oversee a company’s statutory audit compliance.

Pandey highlighted that the interaction between the Audit Committee and auditors should not be a mere formality. Some instances have shown brief meetings between these parties just before the approval of financial results, which undermines effective two-way communication.

This stance coincides with NFRA’s plan to engage directly with large listed companies by June-end to raise awareness about accounting standards and prevent corporate fraud. The outreach may involve engagement with Audit Committees, Independent Directors, Chief Financial Officers, and others on the company’s Board.

Efforts to detect stress in listed companies or prevent corporate fraud through accurate and transparent auditing benefit both retail and other investors. Pandey suggested that Audit Committees could learn from disciplinary actions against auditors for professional misconduct in recent years, such as those related to frauds at IL&FS and DHFL.

He also emphasised the importance of auditors questioning the company’s management to ensure the accuracy and fairness of financial statements, particularly regarding related-party transactions and internal financial controls. Asking these questions, even if answers aren’t always obtained, ensures documentation of due diligence.


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