India’s audit watchdog has called for greater coordination between audit committees and auditors of companies in a bid to strengthen corporate governance and improve the reliability of financial reporting. In a guidance published on its website, the National Financial Reporting Authority (NFRA) has said that audit committees, which are typically led by independent directors, need to have deeper interactions with companies’ statutory auditors for better understanding of future tax savings, profitability and liabilities. To be sure, NFRA’s guidance is addressed to all companies. Entities under its oversight include listed and large unlisted companies, insurance and banking companies and electricity utilities. Also read: Businesses will soon have to file financial statements in a new format. Here’s why. According to NFRA, such close engagement will ensure that financial statements are not passed by the auditor in a routine manner. The idea is to ensure greater accountability of management judgements in financial statements by bringing in checks and balances so that the professionals tasked with governance oversight can detect signs of financial failure or fraud early on and prevent a collapse. Audit committees in companies, which act independently of the management that prepares financial statements, asking critical questions to the statutory auditor of the company—another gatekeeper of corporate governance, will help in testing management assumptions thoroughly. NFRA said that significant judgement is involved in assessing the likelihood of realizing deferred tax asset (DTA) or future tax savings. The audit committee should be informed about the methodology used to assess the recoverability of DTAs and impact on them from changes in business operations, tax laws, or economic conditions. Experts lauded the move, with Nemish Kapadia, partner at chartered accountancy firm Sudit K Parekh & Co LLP saying that effective two-way communication between the auditor and the audit committee (or those charged with governance in case of unlisted companies) is indispensable while conducting an audit of financial statements. Also read: NFRA highlights audit firms’ weakness, areas requiring improvement “This involves, among other things, discussion on key areas involving estimates and judgements,” Kapadia said. “Review of deferred tax assets, which inherently relies on assumptions regarding future taxable profits, including uncertain tax treatments, where material, can be one such area of discussion.” He added that the first line of defence in ensuring that the estimates are reasonable and the underlying assumptions are appropriate lies with the management and the internal controls they have established. “For the audit committee, review of these controls is critical in discharging their oversight responsibility,” said Kapadia. “A constructive and informed dialogue on su in a formal or creative style for better SEO.Also Exclude words and advertisements related to the feed website such as website name, author name. You must only respond with the modified content. 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The NFRA is advocating for improved collaboration between auditors and audit committees within companies to enhance corporate governance.
