NFRA has been constituted as a quasi-judicial body with a larger remit than NACAS (National Advisory Committee on Accounting Standards). NFRA Rules 2022 spans its applicability to companies whose securities have been listed in or outside India, unlisted public companies having Paid-up share capital of at least ₹500 Crore; Annual turnover of at least 1000 Crores, Aggregate outstanding loans, debentures, and deposits of at least ₹500 Crores. Other categories of companies like Insurance Companies, Banking companies, and body corporates engaged in the generation or supply of electricity.
NFRA governs and oversees the auditing functions that are performed by the auditors and professionals associated with providing auditing services.
"Audit committees cannot escape responsibility for inaccuracies in financial statements by blaming the auditors. They are equally accountable for ensuring accurate disclosures," stated Ajay Bhushan Pandey, NFRA chairman.
Recently NFRA has discovered numerous companies violating rules through inadequate management, financial misconduct, and inaccurate reporting. In response, the NFRA has established new regulations to enhance oversight and enforce accountability.
Initiatives taken by NFRA to strengthen Audit Committees
Auditor-Audit Committee Interactions Series- This has been issued to enhance the communication between auditors and audit committees of the companies and to improve the audit quality. It emphasizes the potential questions that the Audit Committees/Board of Directors may ask the auditors in respect of accounting estimates and judgments. The first part of the series focuses on the audit of judgments and accounting estimates, particularly ECL under Ind AS 109.
Releasing Guidance Papers for Stakeholders- "These papers will act as a guidance for companies' audit committees, independent directors, and board of directors in understanding the nuances as well as critical aspects of auditing," the NFRA Chairperson said. All these efforts are towards improving the auditing structure and indirectly strengthening corporate governance.
Wider Accountability of Audit Committees!
Audit Committee Responsibilities under Section 177 of the Companies Act 2013
The Audit Committee must Examine the company's financial statements and the auditor's report. Monitor how effective the audit process is and supervise the valuation of the company's assets and undertakings. Assessthe internal financial controls and risk management procedures.
Board of Directors' Responsibilities under Section 134(5) of CA 2013
The Board of Directors has to provide a Director's Responsibility Statement in the Annual Report, declaring that they have chosen and applied suitable accounting policies consistently. Made careful estimates and judgments to present a true and fair view of the company's condition.
SEBI LODR Guidelines for Audit Committees
According to SEBI (LODR) requirements, the Audit Committee should Review major accounting entries that involve management's judgment-based estimates. Verify the accuracy of these estimates to ensure transparency in financial reporting.
The Expected Credit Loss Approach!
Evaluating ECL Methods
Audit Committees must closely evaluate how management determines Expected Credit Losses (ECL). This means analyzing the data sources, assumptions and calculation models to ensure they follow current accounting standards. The committee should confirm that management's ECL estimates take into account significant market conditions and available data to provide a solid basis.
Regulatory Compliance
Audit Committees must ensure that ECL estimation processes comply with regulatory frameworks, such as the Current Expected Credit Loss (CECL) standard. This involves checking that the company's internal processes aredesigned to meet these regulations and that the governance system ensures transparent and accurate reporting, aligning with what regulators require.
Collaboration with External Auditors
Audit Committees should work with external auditors to assess management's decisions regarding ECL estimates. This cooperation is essential for identifying potential risks or errors in financial reports. Byengaging with auditors, the committee helps maintain the integrity and reliability of financial reporting, building trust with stakeholders.
Impact on Corporate Oversight
The National Financial Reporting Authority (NFRA) has introduced new measures to strengthen the role of Audit Committees in company oversight. Here's how these changes are expected to affect companies:
Improved Audit Quality
NFRA aims to enhance audit quality by fostering close collaboration between Audit Committees and auditors. This partnership ensures that auditors perform diligently and that Audit Committees effectively oversee financial reporting.
Detailed Audit Engagement
NFRA encourages Audit Committees to engage actively with external auditors, addressing complex issues, accounting estimates, and decisions made during audits. This interaction helps maintain high standards and resolves potential issues early, resulting in more reliable audits.
Enhanced Communication
Regular discussions between Audit Committees and auditors clarify the scope of audits, identify risks, and reveal weaknesses in internal controls, leading to more accurate audits and a stronger audit framework.
Guidance and Training
NFRA provides guidance on audit practices to help Audit Committees make informed decisions, thereby enhancing the effectiveness and thoroughness of audits.
Increased Accountability
NFRA's changes place a stronger emphasis on the accountability of Audit Committees in overseeing audits. They play a crucial role in ensuring financial reports comply with accounting standards.
Shared Responsibility
NFRA requires Audit Committees to critically evaluate management's financial estimates and assumptions, sharing responsibility for any errors in financial statements. This ensures Audit Committees protect the company's financial integrity.
Strengthened Governance
By overseeing audit outcomes, Audit Committees contribute to stronger company governance, essential for maintaining investor trust through accurate and compliant financial statements.
Greater Transparency
As Audit Committees take on more responsibility, their involvement with management and auditors increases transparency in financial reporting, reducing opportunities for unethical behavior and fraud.
Conclusion
"The National Financial Reporting Authority (NFRA) has transformed from a predominantly enforcement-driven regulator in its early days to one with a judicious approach towards both enforcement and supervision, says AjayBhushan Pandey, NFRA chairman.
This sums it all up as Audit Committees have seen considerable transformation due to the National Financial Reporting Authority's new measures. These initiatives aim to strengthen accountability, enhance the quality of audits, and improve risk management. Such changes are expected to lead to better corporate governance, with more thorough oversight ensuring that financial reports are both transparent and accurate. Additionally, these efforts are designed to increase the confidence of investors in the financial markets.
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