NFRA urges auditors to strengthen identification, disclosure, and fraud prevention in related party transactions audits, ETCFO
The National Financial Reporting Authority (NFRA) has released its Auditor-Audit Committee Interaction Series 3, urging auditors to enhance their focus on the identification, disclosure, and fraud prevention associated with related party transactions (RPTs). The report emphasizes the growing importance of transparency and regulatory compliance in managing these transactions.
Increased Scrutiny Required for Related Party Transactions
NFRA’s latest interaction series calls for heightened scrutiny of RPTs, given their potential risks in corporate governance. The authority stresses that auditors must adopt a more detailed and thorough approach to ensure that related party transactions are identified correctly, disclosed comprehensively, and comply with the Companies Act, 2013, as well as Indian Accounting Standards like Ind AS 24 and auditing standards like SA 550.
Related party transactions have been a source of significant financial misreporting and fraud risks. It is crucial for auditors to remain vigilant and ensure complete transparency in the reporting of these transactionssaid NFRA
Audit Committees Urged to Take a Proactive Role in Approvals
The report highlights the role of audit committees in not only approving but also reviewing related party transactions to ensure they are conducted at arm’s length and in the best interest of the company. NFRA stresses that audit committees should ensure all material RPTs undergo thorough evaluation and meet legal and regulatory thresholds.
“Audit committees must be proactive in their oversight to ensure that related party transactions are aligned with shareholder interests and comply with the law,” NFRA emphasized. “Their approval should be a comprehensive process, especially for material transactions.”
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Management’s Responsibility for Accurate Identification and DisclosureNFRA also emphasizes that the responsibility for identifying related parties and disclosing related party transactions rests heavily with management. The report calls on management to ensure that their identification process is robust, including reviewing shareholder agreements and maintaining an up-to-date related party database.
Management must lead the charge in ensuring the accuracy and completeness of related party disclosures. This is crucial for maintaining the integrity of financial statementsNFRA stated.
Fraud Prevention: Auditors Must Be VigilantFraud risks in related party transactions are particularly concerning, especially when transactions deviate from standard business practices or involve terms that differ from the market norm. NFRA’s series underscores that auditors must approach RPTs with skepticism and scrutinize them carefully to detect potential fraudulent activities.
Transactions outside the normal course of business should raise red flags. Auditors need to be diligent and adopt a heightened level of scrutiny to prevent financial misreporting and fraudsaid NFRA.
Compliance with Ind AS 24 and SA 550 is Essential
NFRA also stresses the importance of compliance with Ind AS 24 (Related Party Disclosures) and SA 550 (Auditing Related Parties). These standards ensure that related party transactions are accurately disclosed and compliant with regulations, which helps prevent financial misstatements.
Ensuring compliance with Ind AS 24 and SA 550 is critical for the accuracy and transparency of related party transactionsNFRA noted.
Strengthening Governance and Transparency in Related Party TransactionsNFRA’s Auditor-Audit Committee Interaction Series 3 concludes with a call for stronger governance, transparency, and accountability in handling related party transactions. The authority urges auditors, audit committees, and management to work collaboratively to address the growing risks associated with RPTs and ensure compliance with legal standards.
“To ensure the integrity of financial reporting, strengthening the oversight of related party transactions is non-negotiable,” concluded NFRA.
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