AUDIT COMMITTEES FAILING TO CHALLENGE MANAGEMENT ON ASSET IMPAIRMENT, NFRA WARNS
The National Financial Reporting Authority (NFRA) has warned that some audit committees are failing in their duty to critically challenge management’s assumptions on asset impairment.
Key issues raised by NFRA.
Weak oversight: The report noted weak engagement between statutory auditors and audit committees, resulting in insufficient oversight of impairment assessments.
Insufficient challenge: Audit committees are not adequately challenging management’s estimates and the methodology used to calculate future cash flows and discount rates. This can lead to the misstatement of a company’s financial performance.
Reliance on management: There is an over-reliance on management’s judgment, rather than the audit committee performing an independent, critical review.
Risk of misstatement: Poorly assessed impairment of non-financial assets—including property, equipment, and intangible assets—can lead to financial misstatements and harm investor interests.
Inadequate disclosures: The NFRA also highlighted the importance of ensuring that impairment losses are properly recognized and that disclosures are complete
This was published in NFRA’s Auditor-Audit Committee Interaction Series 4, which focuses on the audit of accounting estimates and judgments related to the impairment of non-financial assets.
NFRA report flags weak auditor-committee communication on accounting estimates and goodwill testing, highlighting gaps in impairment assessment, fair value and value-in-use calculations, and disclosure practices.
Are audit committees effectively scrutinising management assumptions? Are cash flow projections and discount rates being properly challenged?
Are impairment recognition and disclosures sufficiently transparent to protect investors? Here is what India’s audit watchdog said:
The National Financial Reporting Authority (NFRA) has flagged gaps in communication between statutory auditors and audit committees, calling for stronger oversight of accounting estimates and judgments, especially related to the impairment of non-financial assets.
The warning comes in Auditor-Audit Committee Interaction Series 4, which highlights areas where auditors must ensure compliance with Ind AS 36 (Impairment of Assets) and SA 540 (Auditing Accounting Estimates, Including Fair Value Accounting Estimates).
Boards and audit committees under scrutiny
NFRA noted that boards, under Section 134(5) of the Companies Act 2013, must confirm that accounting policies are applied consistently and that judgments and estimates are reasonable. SEBI’s listing regulations further mandate that audit committees review major accounting entries involving management estimates.
Impairment losses and reversals in profit or loss or other comprehensive income
Discount rates used in present and prior periods
Main classes of assets affected and reasons for unallocated goodwill
NFRA also emphasized that key audit matters (KAMs) should cover all areas of significant management judgment, ensuring investors are aware of risks in asset valuation.
“The series aims to strengthen audit quality, enhance board oversight, and protect public interest,”* the report said.
Team: CreditMoneyFinance.com