The National Financial Reporting Authority on Friday came out with its inspection reports of BSR & Co, Deloitte Haskins & Sells, SRBC & Co and Price Waterhouse Chartered Accountants, which revealed certain audit lapses by each of the four audit firms.
Audit documentation falling short of the required standards in certain engagements was a common observation in almost all four reports apart from more specific observations. “Inspections are intended to identify areas and opportunities for improvement in the audit firm’s system of quality control,” the NFRA underlined, adding that inspection reports are also not intended to be either a rating or a marketing tool for audit firms. The reports, which were posted on the NFRA's website, have also been sent to the audit firms.
The NFRA, which is a regulator that oversees accounting standards and auditing profession in the country, had initiated the inspection of these audit firms in December 2022.
In the case of SRBC & Co, the NFRA report said the independent policies of the audit firm do not recognise 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 noted adding that the India-specific requirements in the Independence Policy of the audit firm do not comply with section 144 of the Companies Act, 2013.
For the year under review, the audit firm did not have a documented leadership structure and responsibilities, it further said.
In the case of Deloitte Haskins and Sells, the NFRA report observed that in one engagement, the audit firm provided non-audit services which amounted to “self review threat”. The report also observed that there is no Board as envisaged in the Networking Agreement.
In the case of Price Waterhouse Chartered Accountants, the NFRA noted, “The audit firm’s policy decision to voluntarily restrict provision of all non-audit services to the NFRA governed clients, its subsidiaries and its material overseas associates."
“The firm, as a policy and practice, identifies the Audit Committee of the audited entities as Those Charged with Governance (TCWG), which is not in compliance with Auditing Standard 260 (Revised),” the NFRA further observed.
Meanwhile, in the case of BSR & Co, the NFRA report found that it did not provide, during this inspection, details of KPMG Network entities, and non-audit services provided by those entities to audit clients of the Firm. “Consequently, the Inspection team was unable to evaluate whether the Firm is in full compliance with the independence related requirements of the Code of Ethics and Standard on Quality Control (SQC) 1,” it said, adding that the Inspection team observed the need for improvement in the firm's internal review of compliance with independence requirements by its personnel.
Absence of formal documentation, and inadequate explanations regarding the Firm’s governance and management structure indicate non-compliance with SQC 1's Leadership Responsibilities for Quality, the report further said.
“Section 132 of the Companies Act 2013 mandates the NFRA, inter alia, to monitor 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 it undertook the inspections under this mandate.
Selection of audit firms for the 2022 inspections was based upon the extent of public interest involved, as evidenced by the size of the firm, its composition and nature, the number of audit engagements completed in the year under review, complexity and diversity of preparer’s financial statements (henceforth, Companies) audited by the firm and other such risk indicators.
Globally, a number of regulators carry out inspections of large audit firms.
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