NFRA Highlights Auditor Non-Compliance with Communication Standards, ETCFO
The National Financial Reporting Authority (NFRA) has flagged systemic non-compliance by statutory auditors with mandatory communication requirements under Standard on Auditing (SA) 260 (Revised) and Standard on Auditing (SA) 265, citing repeated failures in engagement with boards of directors and audit committees, weaknesses in internal control reporting, and inadequate escalation of significant audit risks.
In a detailed circular issued to all listed companies, specified large unlisted entities and their statutory auditors, NFRA said ineffective communication between auditors and those charged with governance (TCWG) is undermining the audit oversight framework prescribed under the Companies Act, 2013.
“These measures are instrumental in enhancing audit quality and, in turn, protecting public interest,” NFRA said, warning that non-compliance is not merely procedural but impacts the governance framework of public interest entities.
Auditors misidentifying TCWG, bypassing boards
Audit committees treated as sole governance authority
NFRA said its investigations into professional misconduct revealed that auditors frequently failed to correctly determine those charged with governance, a core requirement under SA 260 (Revised). The regulator clarified that TCWG refers to persons or bodies responsible for overseeing the strategic direction of the company and its accountability obligations, which under Indian law is primarily the Board of Directors.
“Auditors were found to have not adequately evaluated the entity’s governance structure,” the circular said, noting that audit committees alone, and in some cases even management executives and executive directors, were incorrectly identified as TCWG. NFRA emphasised that treating discussions with management as communication with TCWG is not permissible under the Standards on Auditing.
Under the Companies Act, 2013, the Board of Directors is responsible for overall governance. Where a sub-group such as the audit committee is treated as TCWG, auditors are required to assess whether communication with the full board is also necessary and to document that assessment.
Audit planning, materiality and key risks not communicated
Going concern, valuation and unusual transactions excluded from board discussions
NFRA flagged that auditors failed to communicate significant audit matters to TCWG, including the planned scope and timing of the audit, the determination and application of materiality, key audit matters and significant risks, going concern assessments, valuation deficiencies and significant accounting estimates, and unusual transactions outside the normal course of business.
The regulator said auditors improperly relied on audit engagement letters as evidence of compliance instead of maintaining ongoing, structured and two-way communication throughout the audit, as mandated under SA 260 (Revised). In several cases, communication was limited to a presentation shortly before approval of the financial statements, without adequate documentation of deliberations or actions arising from audit committee or board discussions.
“Communication with TCWG was incomplete and inadequately documented,” NFRA said.
Internal control deficiencies not reported under SA 265
Significant weaknesses withheld from boards
NFRA identified repeated breaches of SA 265, which requires auditors to communicate significant deficiencies in internal control to TCWG and management in writing and in a timely manner. The regulator cited instances where auditors failed to report serious deficiencies, including the absence of internal controls, weak credit policies and the failure of risk management committees to meet over multiple financial years.
“Significant deficiencies in internal control need to be communicated in writing and in a timely manner,” NFRA reiterated, adding that such deficiencies must be evaluated individually and in combination and their potential effects clearly explained.
Promoter-linked and circuitous transactions not escalated
Audit committees kept unaware of high-risk dealings
The regulator said auditors failed to communicate significant unusual transactions to TCWG, including supplier and land advances, borrowing and lending arrangements, and circuitous dealings with promoter or group-controlled entities outside the normal course of business. NFRA said such non-communication deprived boards and audit committees of visibility into high-risk transactions and was contrary to the requirements of the Standards on Auditing.
Regulatory non-compliance and license risks not flagged
NFRA also flagged cases where auditors did not communicate non-compliance with laws and regulations, including prudential and sectoral regulatory requirements that could affect an entity’s license to operate. The circular emphasised that the audit of financial statements does not dilute the statutory responsibilities of boards of directors, independent directors or audit committees in ensuring regulatory compliance and effective oversight.
Independent directors’ statutory role weakened
Schedule IV duties undermined by audit communication gaps
NFRA linked ineffective auditor communication to failures in independent directors fulfilling duties under Schedule IV of the Companies Act, 2013. Independent directors are required to satisfy themselves about the integrity of financial information and the robustness of internal financial controls and risk management systems.
NFRA said that without timely and complete communication from auditors, independent directors are unable to ensure that concerns are adequately deliberated and, where unresolved, recorded in board minutes.
Written, two-way communication made mandatory
Bullet-point presentations and email silence rejected
Reiterating mandatory requirements, NFRA said all significant communication between auditors and TCWG must be written, specific and two-way. “Presentations in bullet form alone, or communication by emails with a caveat of ‘no comments from the other party is construed as acceptance’, is unacceptable,” the regulator said.
NFRA added that such communication must clearly record the views of both auditors and TCWG, be formally acknowledged, form part of the audit working papers and be reflected in the minutes of board or audit committee meetings.
Minimum two formal auditor–TCWG meetings recommended
NFRA recommended that auditors and TCWG meet at least twice during the financial year, once before the commencement of the audit and again well in advance of the approval of financial statements.
The regulator said that in situations involving suspected fraud, difficulties in obtaining sufficient audit evidence, significant internal control weaknesses or disagreements with management on key accounting matters, auditors must seek meetings with TCWG in writing, and TCWG must formally respond.
Audit failures termed governance failures
In a strong closing observation, NFRA said ineffective auditor–governance communication weakens financial reporting oversight and poses risks to investor confidence. “These communication requirements are designed to strengthen governance over the financial reporting process,” NFRA said, adding that failures may ultimately erode investors’ confidence.
Company secretaries have been directed to place the circular before the board of directors and the audit committee, reinforcing NFRA’s intent to fix accountability across auditors, management and governance bodies.
