Big Five take corrective steps after NFRA’s inspection
September 12, 2024
In the last round of inspections in 2023, NFRA had highlighted that firms were violating the norms, and the regulator had also asked the firms to beef up their policies around non-audit services.
The large audit firms in India are understood to have taken steps to streamlined their policies to avoid potential conflict with National Financial Reporting Authority (NFRA). The regulator is now conducting inspections of the Big Five audit firms.
“In last year’s inspections, we had pointed out instances of Big Five audit firms violating provisions of the Companies Act 2013 by providing non-audit services through their network firms. In the current round of inspections, we have found out that some firms have taken corrective steps. They have made these changes into a stated policy across network firms,” a senior NFRA source told FE.
The section 144 of the Companies Act prohibits statutory auditors to provide nine types of non-audit services, including accounting and book keeping, internal audit, actuarial services, investment banking services, management services, any other kind of services as may be prescribed, etc. This is because the practice of providing non-audit services to the audit clients poses threat to the independence of the auditors and also creates a self-review threat as the auditor is auditing the work that is being done by others in the network firm.
Similarly, the Para 18 of Standard on Quality Control (SQC), issued by the ICAI (The Institute of Chartered Accountants of India) asks audit firms to establish policies and procedures so that the firm and its personnel can maintain independence.
In the last round of inspections in 2023, NFRA had highlighted that firms were violating the norms, and the regulator had also asked the firms to beef up their policies around non-audit services. For instance, in the case of SRBC & Co, an affiliate of EY, the NFRA’s inspection team observed that SRBC was providing audit services to a client while some other EY network entity was providing non-audit services to the auditee group in violation of section 144 and section 141 of the Companies Act, 2013.
In the case of Price Waterhouse Chartered Accountants, even though the audit firm had amended its policy in February 2020 to voluntarily restrict the provision of all non-audit services to the holding companies of NFRA-governed entities; NFRA said that the firm’s independence policy has a clause that permitted non-audit service of representing before any authority which has potential conflict with section 144 of the Companies Act.
During the inspection of KPMG-affiliate firm BSR & Co, the NFRA report said that the firm did not provide 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 SQC 1. The Inspection team observed the need for improvement in the Firm’s internal review of compliance with independence requirements by its personnel.
[The Financial Express]
