NFRA for effective communication between auditors and firm management

Regulators, including the National Financial Reporting Authority (NFRA), are stepping up focus on bolstering an "effective two-way communication" process between auditors and those charged with governance of a company in a bid to ensure IL&FS-like scandals don't recur, people close to the development said. The idea is to ensure early detection of corporate fraud or stress and enable the company or authorities concerned to take swift remedial measures, they told ET. It could also limit the influence of company management on the independence of auditors, they added.

The regulators like NFRA and Sebi may tighten vigil around the need for the "effective two-way communication process" soon, they said. At present, auditors in many cases are found to give a last-minute report/presentation to the audit committee of a company, consisting mainly of independent directors, just before the board is about to approve its financial statement, one of the persons said. "So, the auditor's report isn't scrutinised properly by the audit committee. Also, there is no effective two-way communication process, as required," he added.

"Unless the auditors remain engaged with those charged with the governance of a company throughout the year and sensitise them regularly as to what is really happening in the company, the audit committee won't be able to ask the management to do the right thing, and frauds will continue to take place," the person said, adding this has to change.

Moreover, if the auditors keep flagging issues regularly, the audit committee, the board or the management of a company can't ignore these issues for long even if they want to, he added.

According to Section 177 of the Companies Act, the board of all listed companies, among others, must set up audit committees. Such a committee will have at least three directors, with independent ones forming a majority. In the Act, the need for strict enforcement of auditing standards have been built into the responsibilities of not just auditors but also the audit committee and the directors of a company.

Moreover, the Standard on Auditing (SA) 260 states that "effective two-way communication is important in assisting the auditor and those charged with governance in understanding matters related to the audit in context, and in developing a constructive working relationship".

"This relationship is developed while maintaining the auditor's independence and objectivity," it added. NFRA has been highlighting auditors' responsibilities in its orders and calling for better adoption of these standards. "While rules and standards already exist, their adoption, in the right spirit, holds the key to their success in reducing the number of corporate frauds in the country. Regulators are seized of the matter," said one of the persons quoted above.