NFRA Circular 2026- lessons to auditor on communication
Published: Apr 22, 2026
By Ramanujam Srinnvasan
Introduction:
IN January 2026, NFRA issued a circular specifying the role of each of the participants who are involved in the company's management viz. the Board, the audit Committee & the auditor. The circular clarified how they should communicate in writing to each other instead of holding physical meetings only and how all these should be documented clearly. NFRA also has stated that the contents of the circular are based on SA 260 (revised) and SA 265. Though none would object to a regulator governing auditors specifying these things elaborately about the role to be played by others who are governed by other regulator-SEBI-what is lost sight of is the consequence of a breach that arises especially by the other parties (apart From the auditor), if they fail to reciprocate with equal fervour. Assuming that this were to happen as intended, the issue before the auditor is to how to communicate this in his audit report, which in the view of the author, the NFRA has failed to indicate. Since this is left to the imagination of the auditors, an attempt is made here to communicate the effect, if any, of non-compliance of this circular (due non response by the TCWG & others) in the auditors' report-which is the only space for the auditor to showcase his communication skills!
Some extracts from NFRA circular :
"Subject: Effective Communication Between Statutory Auditors and Those Charged with Governance, Including Audit Committees…
In the course of discharging of NFRA's statutory functions, it has been noticed that there is a need to strengthen the communications between Statutory Auditors (Auditors), Those Charged with Governance (TCWG), including Audit Committees (ACs), in line with the requirements of the Companies Act, 2013 (CA 2013), the Standards on Auditing (SAs) prescribed under CA 2013, and other relevant Rules and Regulations.
Provisions of CA 2013 and other Relevant Rules: The CA 2013 has placed certain important obligations on the Board of Directors (BOD or the 'Board'), Independent Directors (IDs), Audit Committees and Statutory Auditors of Companies in respect of Accounts and Audit of Companies.
Common non-compliances with SA 260 (Revised) and SA 265 observed during NFRA's investigations into professional misconduct by some Auditors.
4.1 The common non-compliances by some Auditors as noticed by NFRA are listed below:
a) Auditors were found to have not adequately evaluated the entity's governance structure, and contrary to the requirements of SA 260 (Revised), they incorrectly identified only the Audit Committee and, at times, even Management Executives and Executive Directors as TCWG.
b) The communication process with TCWG was incomplete and was inadequately documented. It often failed to clearly record the purpose and objective of such communication by improper reliance on the audit engagement letter as being sufficient compliance with TCWG communication requirements. Auditors failed to communicate significant matters, including the planned scope and timing of the audit, materiality, key audit matters and significant risks (such as going concern issues, valuation deficiencies and unusual transactions outside the normal course of business).
c) Auditors failed to establish and document the form, timing and two-way nature of communication with TCWG. They also did not document expected communications from TCWG about significant strategic decisions, suspected or identified fraud, and views regarding the integrity and competence of senior management.
d) In several instances, communications to the Audit Committee (which the Auditors treated as TCWG) were limited to a presentation shortly before approval of the financial statements, without adequate supporting documentation of discussions of significant matters or of actions arising from Audit Committee deliberations.
e) Often, meetings and discussions with management were erroneously construed as communication with TCWG.
f) Significant unusual transactions, including supplier and land advances, borrowing and lending transactions, and circuitous dealings with promoter or group-controlled entities outside the normal course of business, were not communicated to TCWG or the Audit Committee, which is contrary to the requirements of the Standards.
g) Instances of non-compliance with laws and regulations, including prudential and regulatory requirements that could affect the entity's license to operate, were not communicated.
h) Often, there was no communication of deficiencies in the entity's related party transaction policy and issues in related party transactions, such as significant increases, questions as to whether they were in the ordinary course of business, or whether they were at arm's length.
i) Despite the requirement of the Law and the Standards on both the Audit Committee and the Auditor, regarding internal controls, in one case, the Auditors failed to communicate identified weaknesses or the absence of internal controls to TCWG, including serious deficiencies in credit policies and the failure of the Risk Management Committee to meet over multiple years.
5. In view of the above, and other information from various monitoring activities, and in light of the instances of ineffective communication between the Auditors and TCWG, the following provisions of the SAs prescribed under the CA 2013, other requirements of the CA 2013 and relevant Rules thereof are reiterated for the attention of Statutory Auditors and Management/TCWG/ACs of the Companies that fall within the purview of NFRA.
(only para headings are reproduced from the Circular excepting in 5.6 which prescribes the agenda to be observed)
5.1 Role and Responsibility to establish an Effective Two-way Communication:
5.2 Appropriate determination and documentation of TCWG under Indian Legal and Regulatory Framework:
5.3 Establishing a robust two-way communication process:
5.4 Appropriate form of communication by Auditors with TCWG/ACs and its documentation:
5.5 Timely communication with TCWG/ACs:
5.6 Agenda and matters to be communicated with TCWG:
(a) Audit Strategy and Audit Planning including quantification of Materiality and its effect on nature and extent of audit work; Auditors assessment of risk of material misstatement (ROMM), Internal Control Environment in particular to prevent frauds and non-compliance with critical laws and regulations; areas of significant accounting policy judgment and management estimations; areas requiring involvement of experts, either by the Management or the Auditors; accounting or other areas of concerns requiring special attention by the Auditors.
(b) Status of audit work and significant findings during the audit period:
While the SAs, and provisions of CA 2013 and Rules thereof have a comprehensive and detailed list of matters to be discussed with and communicated between the Auditors and TCWG, the following matters shall invariably form part of the agenda matters for interactions between Auditors and TCWG.
- Significant difficulties during the audit, like unavailability of expected information etc.
- Significant transactions or events where the Management encountered difficulties in identifying the appropriate accounting policies or standards, and the Auditor's view on the appropriateness of the policies applied by the Management.
Comments on the extracts :
Positive aspects of the circular :
i. The circular preaches basic hygiene to be adopted by all companies
ii. Already this procedure is followed in in large companies and no startling new procedure is now introduced by the circular
iii. Normally secretarial department audio / video records all proceedings of the meetings and then later carefully prepares the minutes and hence it is not very difficult to observe the contents of the circular
iv. Normally audit committee members act in a transparent manner with the auditors and seek their views on all aspects of the financial transactions which have come to their attention and any disquieting features noticed by them
v. Through this circular NFRA wants a higher level of interaction of auditors with the Board members and hence this is in order
vi. There is nothing wrong in NFRA coming out with their views which indirectly provide adequate support to other directors in their duties to the companies
Some negative aspects :
(i) Strengthening of secretarial department is the foremost task for small companies who apart from staffing this department need to have secretarial consultants to see that they do not breach any of the guidelines issued by any of the regulators
(ii) Since compliance becomes a top priority, the cost of compliance will be burdensome for small companies which have gone for IPOs
(iii) Teaching(!) how to communicate resembles suggested type answer books prepared by professional bodies to help the students pass their exams
(iv) A self-serving document protecting the professionals like auditors / company secretaries from proceedings at a later date, provided they have followed the contents of this circular
(v) Circular is prescriptive-though auditors will follow meticulously as they are scared of the reach of NFRA in levying huge fines on them, others may not be willing to consider the importance of following the procedure meticulously; for them running the business is more important than compliance issues
Possible scenario in future !
Since NFRA prescribes two-way communication, what happens when communication breaks down between the TWCG and the auditor-like the married couple now moving towards divorce?
Maybe the auditor complies but the Company does not-resulting in the auditor leaving the audit assignment midway (auditors are bound by NFRA circulars). They can now additionally say "we disclaim the accounts, as the TWCG did not strictly follow the NFRA circular dated 7th January 2026".
If they do so, one can foresee a challenge to NFRA circular with regard to their jurisdiction covering the role of TWCG in their circular.
In that event, soon a new case law will emerge clarifying the jurisdiction.
Conclusion :
Humorous quote from Mr Malegam's (former president ICAI) lecture about chartered accountants role-where he quoted from a speech by a foreign regulator:
"the profession believes because they can count the wealth, it can create the wealth and indeed it has managed to create the impression of wealth creation when reality may be wealth dissipation; this is what Is known as creative accounting…
But despite all this, I would not be without accountants and I adore their pompous self-importance, their capacity for humbug which would be the envy of a bishop, their refusal to communicate in simple English and their ability to take everybody……..to cleaners without incriminating themselves…….….."
Thus, going by this quote of the past, no one will object to NFRA's effort to teach communication skills to auditors!
