Regulator tells auditors to scrutinize loans that are used to divert company funds

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Subscribe to enjoy similar stories. New Delhi: 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 a case 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.

NFRA’s past investigations including of certain non-bank lenders had identified fund diversion from companies through subsidiaries and associates by way of loans given to them, the regulator had said last October while listing its findings from multiple probes for the benefit of auditors and companies. In a note released by NFRA earlier this month, the watchdog spelt out the questions auditors should expect from audit committees on how credit loss is accounted for and audited. NFRA had last October cited scandal hit Dewan Housing and Finance Ltd.