contractual cash flows. another example is how the impairment framework prescribed under ind as 109 is implemented. while the framework is forward looking and assessment of any significant increase in credit risk ( sicr ) for movement of assets from stage 1 to stage 2 is required to factor in more forward - looking criteria than just days - pastdue ( dpd ), it has been observed that some nbfcs primarily rely on the 30 dpd criteria. dpd being a lagging indicator, is not always in sync with using the forward - looking approach of ecl. in case of asset reconstruction companies ( arcs ), it was observed that no provision was created for management fees and expenses which remained unrecoverable for more than 180 days. such observations necessitated reserve bank to issue guidelines from a prudential perspective so that such unrealised management fees are deducted from regulatory capital while calculating capital adequacy ratios. the instances highlighted above bring forth our concern of regulated entities using the flexibility offered in the principle based framework in a way that is not free from bias. we are of the view that such issues require greater levels of skepticism from the auditors. as independent assesors, auditors should critically evaluate and challenge management's judgement and assumptions to ensure that the same are aligned with the underlying principles of the accounting standards and prudential norms. a recent order by the national financial reporting authority ( nfra ) in case of an audit report of a non - banking financial company highlighted that the auditor did not perform the audit procedures to ensure the reasonability of ecl provisions. this is also a stark reminder of potential shortcomings in the auditing process. 3 / 5 bis - central bankers'speeches disclosure frameworks the discussion regarding principle - based frameworks brings me to the second part of my remarks which is focused on disclosure frameworks. it is said that with great power comes great responsibility. let me rephrase this to " with greater flexibility in accounting and prudential norms comes greater responsibility in disclosures. " disclosures are the cornerstone of transparency. clear disclosures bridge the gap between what management knows and what external users can infer from financial statements. but the moot question is, how much disclosure is'good enough'to ensure a clear understanding without overwhelming users with information overload. striking a balance between comprehensive disclosure and conciseness is a tight rope walk. when disclosures are clearand comprehensive, they foster trust in the market. again, let

for important elements of prudential regulations set by the reserve bank. the capital and leverage ratios, liquidity position, the computation of impairment and provisions, etc. rely on the accurate and transparent financial statements prepared by regulated entities. the financial statements can only be accurate when the accounting standards are correctly interpreted and consistently applied. the auditors are guardians who are expected to ensure the sanctity of this process. they are also 1 / 5 bis - central bankers'speeches the bridge between the management and stakeholders. they ensure that management's judgement is sound and that the entity adheres to spirit of the accounting standards. the interest of the regulator is not limited to fair and transparent representation of affairs in the entities regulated by it. banks and financial institutions are also users of financial statements and to a large extent their well - being in linked to the entities which they lend to or invest in. therefore, we are equally concerned with sound audit practices that result in high quality corporate reporting. we also monitor developments in the area of national and international accounting and auditing standard setting closely. with these objectives in mind, we continue to work closely with the institute of chartered accountants in india ( icai ) on accounting issues in the banking sector. in october 2001, the rbi had set up a working group under the chairmanship of shri n d gupta, the then president of the icai, to identify gaps in compliance with accounting standards. based on the recommendations of the group, guidelines were issued to banks in march 2003 to ensure compliance with accounting standards. we had also worked closely with the industry and icai on the road map to moving towards adoption of ind as and had set up a working group to deal with ind as implementation issues in banks. role of auditors in a principle - based regulatory environment the reserve bank, for some time now, has been supplementing rule - based regulations with principle - based regulations to give res a degree of flexibility in their business decision making. this process has evolved with indian financial sector achieving greater maturity. the principle - based regulations also embed an aspect of accounting that would reflect a move away from the prescriptive, rule based criteria to record transactions. let me cite two recent examples. the first guideline pertains to classification and valuation of the investment portfolio in banks. the revised norms, effective from april 1, 2024, largely align the guidelines on classification, valuation and operations of investment portfolio of banks with the global financial reporting framework. these norms require banks to