NFRA wants to continue to Inspect Top Auditors with Fresh Start

The regulator’s determination to ensure audit quality remains strong. While the National Financial Reporting Authority (NFRA) examined the top five firms’ auditors last year, it has chosen to broaden the scope of its yearly assessment this year.

The Big Five, along with three more audit firms, namely MSKA and Associates (associated with BDO) and Lodha and Co., would be subjected to a fresh inspection soon, according to a senior official, who added that the regulator plans to broaden the list and pick up more firms in FY25.

“The top eight auditing companies will be scrutinized first, and thorough reports on each will be released by December of this year. A few more firms will be picked up later for inspection,” a source explained. The reports from the first round of inspections will be available by December.

The annual inspection of audit companies, which began in 2023, is intended to guarantee that statutory auditors adhere to the audit standards announced by the central government. Auditors are expected to take corrective action if shortcomings are discovered.

According to an official source, the regulator has also selected approximately 60 listed companies that are clients of these large auditing firms in order to assess their compliance with auditing standards. Once the inspection begins, the regulator will communicate directly with the businesses’ audit committees, independent directors, chief financial officers, and other management officials.

In the previous round of inspection, the NFRA voiced concerns about the auditors’ independence and non-audit work. NFRA discovered that significant auditors were providing non-audit services to their customers, resulting in a conflict of interest with auditees and gaps in the auditing process.

For example, the NFRA’s inspection team discovered that SRBC and Co. LLP (an EY affiliate) was providing audit services to a customer while another EY network business was providing non-audit services to the auditee group, in breach of sections 144 and 141 of the Companies Act 2013.

The watchdog also highlighted improper contact between the auditors and the company’s directors, as well as a lack of documentation for their findings.

“It is difficult for the auditor alone to assure the accuracy of financial statements. Even while the statutory auditor has a broader obligation and accountability to all stakeholders, the roles of audit committees, internal auditors, and others must not be overlooked. It is a wise decision for the NFRA to interact with all stakeholders in the financial reporting value chain,” said Ashok Haldia, former ICAI secretary.

The Big 5 firms include BSR and Co (associated with KPMG), Deloitte Haskins and Sells (DHS), SRBC and Co, Price Waterhouse Chartered Accountants, and Walker Chandiok and Co (connected with Grant Thornton). There are over 1 lakh audit businesses in the country, with 75% working as proprietary firms. According to primeinfobase.com, the Big 6 audit firms handled 637 assignments (out of 1,961 companies), accounting for 32.48% of all NSE-listed companies as of March 2024.