NFRA finds lapses in audit quality of Big 4 [Read Inspection Report]

The National Financial Reporting Authority (NFRA) issued inspection reports on BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants on Friday, revealing certain audit failures by each of the four audit firms.

Apart from more specific observations, audit documentation falling short of the required standards in certain engagements was a common observation in almost all four reports. “Inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control,” the NFRA stated, adding that inspection reports are not intended to be a ranking or a marketing tool for audit firms. The findings, which were posted on the NFRA’s website, were also provided to the audit firms.

The NFRA, the country’s body that supervises accounting standards and the auditing profession, has begun inspecting these audit companies in December 2022.

The NFRA investigation stated that in the instance of SRBC & Co, the audit firm’s independent policies do not recognize the direct and indirect relationship between SRBC and its network members of the international network Ernst & Young Global Limited (EY). “This has resulted in violations of Sections 144 and 141 of the Companies Act, 2013,” it said, adding that the audit firm’s India-specific standards under its Independence Policy do not conform with Section 144 of the Companies Act, 2013.

The audit firm did not have a documented leadership structure and duties for the financial year under examination, it added.

In the case of Deloitte Haskins and Sells, the NFRA report noted that the audit firm supplied non-audit services in one engagement, a “self review threat.” The investigation also noted that there is no Board of Directors, as specified in the Networking Agreement.

The NFRA stated in the case of Price Waterhouse Chartered Accountants, “the audit firm’s policy decision to voluntarily restrict the provision of all non-audit services to the NFRA governed clients, subsidiaries, and material foreign associates.”

“The firm, as a policy and practice, identifies the Audit Committee of the audited institutions as Those Charged with Governance (TCWG), which is not in compliance with Auditing Standard 260 (Revised),” the NFRA said.

Meanwhile, in the instance of BSR and Co, the NFRA report discovered that it did not submit details of KPMG Network entities and non-audit services provided by those entities to audit clients of the Firm during this inspection. “As a result, the Inspection team was unable to evaluate whether the Firm is in complete compliance with the independence-related demands of the Code of Ethics and Standard on Quality Control (SQC) 1,” it said, adding that the Examination team observed a need for improvement in the firm’s internal review of personnel compliance with independence requirements.

According to the report, the absence of formal documentation and inadequate explanations of the Firm’s governance and management structure suggest non-compliance with SQC 1’s Leadership Responsibilities for Quality.

“Section 132 of the Companies Act 2013 mandates the NFRA, inter alia, to observe compliance with Auditing Standards, to oversee the quality of service of the professions associated with ensuring compliance with such standards, and to suggest measures required for improvement in quality of their services,” it said, adding that the inspections were conducted in accordance with the terms of this order.

The size of the firm, its composition and nature, the number of audit engagements completed in the year under review, the complexity and diversity of preparer’s financial statements (henceforth, Companies) audited by the firm, and other such risk indicators were used to select audit firms for the 2022 inspections.

A number of regulators conduct audits of large audit companies around the world.

For Official Inspection Report Download PDF Given Below: