Home >News >India >CFOs may also be hauled up for financial reporting lapses

Auditors won’t be alone in facing the National Financial Reporting Authority’s (NFRA) ire for lapses in reporting.

The audit watchdog is expanding its ambit to include the chief financial officers (CFO) and directors who prepare not only financial statements but also other statutory documents such as annual reports. The idea is to step up corporate governance and transparency.

NFRA has sought comments on the proposal by 10 July. The move signifies a major shift in the approach to financial reporting oversight as the attention would now fall equally on those who prepare the financial statements—the management, and not just on the statutory auditor who certifies it as a true and fair account of the affairs of the company.

NFRA said the proposed financial reporting quality review of chosen firms will focus on how well the management and CFO have prepared the reports and may comprise any advisory for improvement. Lapses will, of course, be reported to other regulators for action where needed.

Audit firms welcomed the proposal, given that so far auditors were the first to come in the regulatory firing line when a company faced financial collapse or fraud.

“This is a good step as the primary obligation of preparing the financial statement is on the management," said a senior executive with an audit firm.

Audit firms’ appreciation of the NFRA move comes against the backdrop of a professional challenge they face—regulators expect statutory auditors to unearth corporate failure or fraud, although auditors believe it is beyond the scope of their work. Auditors of companies that faced financial collapse or fraud have in the past faced stringent regulatory action, which auditors claim is disproportionate to the alleged lapses. Debarring a firm from auditing work can be financially devastating as clients will not immediately return once the ban is over.

NFRA seeks to address this, too. It is working on a plan to offer an option for settlement in certain disciplinary cases without going into the determination of professional misconduct. The idea is to avoid lengthy litigation and cost in cases where this option is feasible. “The objective of settlement is to seek the cooperation of the audit firm in the investigation and in improving performance standards while reducing litigation," said another senior executive at an audit firm seeking anonymity. NFRA’s move is balanced, consultative and practical, said the executive.

The accounting watchdog is shifting gears in its engagement with professionals and other stakeholders. The proposals for financial reporting quality review and settlement of disciplinary cases stem from suggestions made by a technical advisory panel set up by the regulator. “We welcome and are encouraged by the regulator’s decision to issue a consultation paper on the recommendations of the technical advisory committee. Enhanced stakeholder engagement with the regulator will help the profession and others in the financial reporting ecosystem to further improve and enhance mutual trust, respect and confidence," said V. Balaji, partner, Deloitte.

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