NFRA guidance to nip financial fraud
New Delhi, Jun 17,2025
The idea is to ensure greater accountability of management judgements.
India’s audit watchdog has called for greater coordination between audit committees and auditors of companies 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 audit committees led by independent directors must have deeper interactions with companies’ statutory auditors for better understanding of future tax savings, profitability and liabilities.
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.
Entities under NFRA’s oversight include listed and large unlisted companies, insurance and banking companies and electricity utilities.
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.
Nemish Kapadia, partner at chartered accountancy firm Sudit K Parekh & Co LLP said 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.
“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.”
He said 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.
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