Auditors told to scrutinize biz loans for fund diversion

NFRA has found fund diversion from firms to subsidiaries and associates by way of loans

- Gireesh Chandra Prasad

The National Financial Reporting Authority (NFRA) has told auditors to thoroughly scrutinize business loans given by companies to private entities linked to their controlling shareholders to catch attempts to divert company funds.

The regulator's warning has gone out to both auditors and the audit committees of businesses led by independent directors. These may be cases of professional incompetence or auditors lowering their guards and failing to question management's approach and assertions, experts said.

Experts said the NFRA's latest note on recognizing credit losses by companies will prompt auditors and audit committees to scrutinize whether companies are creating a smokescreen around how they deal with loans given to related parties and how losses on that count are shown on their books.

Audit committees are specialized committees of the board of directors in a company, tasked with overseeing financial reporting and the audit process.