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 lapses by each of the four audit firms.
Apart from more specific observations, audit documentation falling short of 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 rating or marketing tool for audit firms. The audit firms were also sent the reports, which were posted on the NFRA’s website.
The NFRA, the country’s regulator that oversees accounting standards and the auditing profession, had begun inspecting these audit firms in December 2022.
The NFRA report stated that in the case 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 requirements in its Independence Policy do not comply with Section 144 of the Companies Act, 2013.
The audit firm did not have a documented leadership structure and responsibilities for the fiscal year under review.
Meanwhile, in the case of BSR & Co, the NFRA report discovered that it did not provide 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 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 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 about the Firm’s governance and management structure indicate non-compliance with SQC 1’s Leadership Responsibilities for Quality.
“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 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.