India’s audit watch dog, the National Financial Reporting Authority (NFRA), is promoting enhanced collaboration between audit committees and auditors to strengthen corporate governance.

In guidance released on its website, NFRA stressed the importance of audit committees, usually chaired by independent directors, engaging more thoroughly with statutory auditors.

Such interactions aim to cultivate a better understanding of anticipated tax savings, profitability, and liabilities.

The guidance is relevant to all firms under NFRA’s jurisdiction, which includes both listed and large unlisted companies, as well as insurance, banking, and electricity utility sectors.

It believes that closer collaboration will prevent auditors from approving financial statements in a perfunctory manner.

NFRA seeks to ensure heightened accountability concerning management judgements in financial reports.

By instituting checks and balances, the initiative aims to empower professionals overseeing governance to detect early signs of financial distress or fraud.

Audit committees, functioning independently of management, are encouraged to pose critical inquiries to statutory auditors.

This approach will facilitate a comprehensive examination of management assumptions and enhance the overall scrutiny of financial documents.

The NFRA pointed out that considerable judgement is necessary when evaluating the likelihood of realising deferred tax assets (DTA) or future tax savings.

Audit committees should be apprised of the methods employed to assess the recoverability of DTAs and the potential effects of changes in business operations or economic conditions.

As part of its advocacy initiatives, NFRA is urging statutory auditors to rigorously question the assumptions presented in financial statements.

This effort aims to bolster the credibility of financial reports, thereby increasing the appeal of India’s corporate sector to potential investors.

Moreover, the boards of directors of companies are required to declare in their annual reports that they have adopted accounting policies and judgements that accurately reflect the company’s financial position.

This stipulation highlights the significance of transparency and accountability in corporate governance.

In January2025, NFRA launched a series titled ‘Auditor-Audit Committee Interactions’ to improve audit quality and to promote awareness of accounting and auditing standards.