NFRA Chairperson Says Audit Committees Need to Ensure Independence of Auditors

Audit committees at companies should ensure the independence of auditors, NFRA Chairperson Nitin Gupta said on Thursday, as he stressed the importance of good corporate governance practices.

He also listed out various fundamental principles for sound financial reporting, including the key role of external auditors.

The National Financial Reporting Authority (NFRA) has been taking steps to boost sound financial reporting practices and is also taking action against auditing lapses.

Gupta underlined the importance of effective communication between a company's management, audit committee, independent directors and auditors. The audit committees must ensure the independence of the auditors, he added.

According to him, there should be comprehensive and effective internal control at companies, and unless the internal controls are strong, "what we see outside may not be the truthful depiction" of the financials.

There have been instances of auditing lapses at various companies.

Speaking at the conference on 'Agile Governance: Fostering Transparency & Building Trust' organised by industry body Ficci in the national capital, he also said there is a need for a revolutionary change in the audit approach by the Indian auditors and they should embrace a risk-based approach and technology use, among other aspects.

Touching upon various aspects in relation to corporate governance, Gupta wondered whether the contents of annual reports can be made more transparent and comprehensive rather than just reproducing the audit committee's terms of reference.

Another area that the NFRA chairperson mentioned was about related party transactions, saying auditors have the challenge of identifying who is a related party and also to what extent disclosures are made by the management.

While noting that India is becoming a nation of investors rather than a nation of savers, he said high-quality financial reporting and corporate governance are key areas to fostering transparency and building trust.

Before starting his address, Gupta mentioned that he was going to express his personal views and not necessarily the views of NFRA.

NFRA was constituted in October 2018 under the companies law.