This article outlines the guidelines and requirements for effective communication between Statutory Auditors and Those Charged with Governance (TCWG), including Audit Committees. These instructions are based on the National Financial Reporting Authority (NFRA) Circular No. NF-25013/3/2025–NFRA, dated January 7, 2026, which aims to address identified gaps in corporate transparency and audit quality.
1. Key Roles and Statutory Obligations
The Companies Act, 2013 (CA 2013) places specific duties on various corporate bodies to ensure the integrity of financial reporting:
- Board of Directors (BOD): Responsible for approving financial statements and providing a Directors’ Responsibility Statement covering accounting standards, internal financial controls, and going concern assessments.
- Independent Directors (IDs): Must satisfy themselves regarding the integrity of financial information and ensure that risk management systems are robust and defensible.
- Audit Committees (ACs): Tasked with monitoring auditor independence and performance, evaluating internal controls, and discussing the audit’s scope and findings with auditors.
- Statutory Auditors: Legally obligated under Section 143 to comply with Auditing Standards (SAs) and report whether financial statements provide a “true and fair view”.
2. Identifying “Those Charged with Governance” (TCWG)
According to SA 260 (Revised), TCWG are those responsible for overseeing the strategic direction and accountability of a company.
- Determination: Auditors must identify the appropriate persons as TCWG at the start of the audit.
- The Board as TCWG: Generally, the Board of Directors qualifies as TCWG. While auditors may communicate with a sub-group (like the Audit Committee), they must evaluate if further communication with the full Board is necessary.
- Two-Way Flow: Once identified, there must be regular, documented, two-way communication throughout the audit process.
3. Common Communication Failures Identified by NFRA
Investigations by the NFRA have highlighted several recurring non-compliances by auditors:
- Incorrect Identification: Failing to identify TCWG correctly, often mistaking management executives for those charged with governance.
- Inadequate Documentation: Relying on audit engagement letters as a substitute for specific communication or failing to record oral discussions.
- Failure to Report Risks: Neglecting to communicate critical matters like going concern issues, valuation deficiencies, or unusual transactions outside the normal course of business.
- Missing Red Flags: Not informing TCWG about non-compliance with laws, deficiencies in related party transaction policies, or serious weaknesses in internal controls.
4. Recommended Communication Framework
The NFRA recommends that Boards prepare a formal framework to facilitate effective interaction with auditors. This framework should include:
- Nodal Persons: Identifying specific members from both the Board (including Independent Directors) and the Audit Engagement Team to act as primary contacts.
- Shared Expectations: TCWG should proactively inform auditors about strategic decisions, suspected fraud, or concerns regarding management’s integrity.
- Escalation Policy: Defining how significant matters will be escalated from nodal officers to the full Board or sub-groups.
- Acknowledgement: All significant communications must be in writing and formally acknowledged by both parties.
5. Standards for Effective Interaction
For communication to be considered effective, it must meet high standards of clarity and timing:
- Form of Communication: All communication must be in writing. If oral discussions occur, they must be documented with the date, time, and participants, forming part of the Audit Work Papers.
- Meeting Frequency: Auditors and TCWG should meet (in person or virtually) at least twice a year: once before the audit begins and once well before the financial statements are approved.
- Proactive Requests: If auditors face difficulties, such as restricted access to evidence or suspected fraud, they must request a meeting with TCWG in writing.
6. Essential Agenda Items for Discussion
The following matters must invariably be part of the interaction between auditors and TCWG:
- Audit Strategy: Discussion on materiality levels, assessment of the Risk of Material Misstatement (ROMM), and areas requiring expert involvement.
- Significant Findings: Difficulties encountered during the audit, such as unavailability of information or disagreements with management on accounting estimates.
- Internal Control Weaknesses: Clear reporting of material weaknesses in internal financial controls.
- Ethics and Independence: Confirmation of the auditor’s independence, including disclosures regarding business relationships or non-audit services provided.
Conclusion
Effective communication is not merely a procedural requirement but a foundational element of corporate governance. By following these guidelines, companies and auditors can enhance audit quality, protect the public interest, and maintain investor confidence.