NFRA Highlights issues with Audit Quality of Three Audit Firms

The National Financial Reporting Authority (NFRA), which is a regulatory body responsible for supervising the quality of audits in India, has identified some flaws in the audit quality of three audit firms. NFRA has found some issues with the audit done by three audit firms, SRBC & Co LLP, Deloitte Haskins & Sells LLP, and Walker Chandiok & Co LLP, in its three different inspection reports. The three separate inspection reports were made public by the regulator in March.

SRBC & Co LLP

The regulator conducted an audit quality inspection of SRBC & Co LLP in 2024. The inspection focused on three areas, which include Internal financial control over financial reporting on revenue, related party transactions and impairment of non-financial assets.

NFRA urged SRBC & Co LLP to set up a strong system to handle any potential risk to their independence as auditors. The NFRA is concerned that some services aren’t clearly defined as “non-audit” services, which could lead to problems with independence.

It further added that the audit firm should reassess its policy of not including non-audit services to the holding companies of NFRA-regulated audit clients that are involved in private equity. This is to make sure they fully follow the laws and standards.

SRBC & Co LLP is part of two networks: the Ernst & Young Global network and SR Batliboi & Affiliates. The EY network has given ‘Financial Reporting and Accounting Advisory Services’ to its audit clients in 7 cases during 2022–23 and in 4 cases during 2023–24. This shows that the firm may be breaching rules and regulations. NFRA recommended that the audit firm should review its policy to avoid indirect business connections through EY Network entities. It should also set up a strong process to make sure it fully follows Section 141(3)(e) of the Companies Act.

NFRA stated that the firm should review its policy and replace the term ‘financial reporting oversight role’ with ‘Key Managerial Person’ to comply with Section 141(3)(f) of the Companies Act. Additionally, this section should apply to all partners and their relatives in the EY network.

Based on the related party transaction, NFRA stated that among all the three selected engagements, it was observed that one or more than one audit practice conducted by the firm was not sufficient. These included not checking how the loans given to subsidiaries were used and not assessing if the management’s claim of arm’s length pricing for transactions with related parties was fair. Arm’s length pricing refers to the concept that transactions between parties should be conducted as if they were between two independent parties, meaning the prices should be fair and valid.

Deloitte Haskins & Sells LLP

NFRA started the audit quality inspection of Deloitte Haskins & Sells LLP in March 2024. It focused on three aspects: internal financial control over financial reporting on revenue, related party transactions and impairment of non-financial assets because of their inherent higher risk of material misstatement. NFRA found that the entity was not performing enough audit processes for verifying the transactions of related parties based on arm’s length as per SA 620. It was further inspected that there was insufficient evaluation of the competence, capability, objectivity, and work of the auditor’s expert, which is also required under SA 620.

NFRA also stated that the firm has followed an updated networking agreement in which the audit executives hold the ultimate responsibility for quality control and risk management within the firm.

It added that the audit firm has also improved its process to ensure the independence of its personnel. Instead of preparing a separate EQCR docket, the firm has started including the EQCR work directly in the audit file itself.

Walker Chandiok & Co LLP (WCCL)

NFRA started the audit quality inspection of Walker Chandiok & Co. LLP (WCCL) in August 2024. It focused on three areas: related party transactions, impairment of non-financial assets and ICFR revenue due to their inherent higher risk of material misstatement.

The regulator found that WCCL had not addressed issues related to auditor’s independence, audit documentation, and EQCR, which were pointed out in earlier inspections.

Additionally, in the three engagement files reviewed in the current inspection, shortcomings were found in the verification of related party transactions, impairment of non-financial assets, and ICFR (Internal Control over Financial Reporting) revenue.

NFRA also noted that, according to its 2022 inspection report, WCCL was part of the international network Grant Thornton International Ltd. (GTIL). However, WCCL communicated to NFRA that it is not a member of the GTIL network.