Auditing of companies has improved in last 3-4 years: NFRA Chairperson

Auditing of companies have improved in the last three to four years, NFRA chief Ajay Bhushan Prasad Pandey has said and highlighted the need for board as well as audit committee members to engage with auditors which will help in raising red flags and prevent possible corporate failures.

The National Financial Reporting Authority, constituted in October 2018 under the companies law, has passed more than 80 orders, including in Cafe Coffee Day, DHFL and a few other large cases, for lapses that led to corporate failures.

At the helm of the watchdog for more than two years, Pandey told PTI in an interview that many of the auditors were doing and are doing a good job.

"Overall, auditing of companies has improved over the last 3-4 years," the NFRA Chairperson said.

However, he noted that there is a certain section among the auditors and among the board members who were not that sensitive and alert due to which there have been many corporate failures. "People should be aware that these are the pitfalls and they have responsibilities".

Securities and Exchange Board of India (Listing Obligations and Disclosure Regulations) as well as various provisions under the Companies Act, 2013 have cast some responsibilities on auditors and companies board members.

Also, auditing standards require auditors to have a two-way communication with the members of the TCWG (Those Charged With Governance).

It is necessary for the board members and audit committee to engage with the auditors and then take a call.

In many of the cases that the NFRA has dealt with, Pandey said it was noticed that audit committees did not engage with auditors and did not ask the right questions to the auditors.

"Also, the auditors did not present many of the issues. It was a failure of communication between the two. That is why many of the red flags could not be raised," he said.

To ensure that such instances do not get repeated, the NFRA chief emphasised that both sides -- auditors and TCWG -- have to be sensitised about their responsibilities and mandate.

In the overall ecosystem, Pandey stressed on the need to improve the capabilities of the auditors.

The regulator along with the Indian Institute of Corporate Affairs (IICA) is planning to launch some courses for upgradation of knowledge of auditors who will be auditing large listed companies.

Already, a four-month course has been started for audit committee members. "There should be a two-way communication between auditors and TCWG. The audit committee members are part of the TCWG and therefore they also have to understand their responsibilities like what questions should be asked to the auditors," Pandey said.

The NFRA has issued more than 80 orders against auditors for their failure to raise red flags and other lapses that had also led to corporate failures.

"Look at DHFL, Cafe Coffee Day, Reliance Capital, Reliance Home Finance, these are like textbook cases of corporate failure on how the auditors year after year failed to raise the red flag. If they had raised the red flag earlier, the huge amount of losses suffered by banks and shareholders could have been avoided," Pandey said.