India’s audit penalties are among the world’s lowest. That could change.
New Delhi, Sep 3, 2024
Summary
As India’s audit regulator revamps its frameworks to align more closely with international standards, it may consider increasing its penalties as well, which currently are a fraction of global fines for audit violations.
When India’s audit regulator imposed a fine of ₹10 crore on Coffee Day Enterprises Ltd’s auditor last month, it was among its highest so far—a fraction of global penalties.
As India’s National Financial Reporting Authority enters its seventh year, the extent of penalties for audit failures could shoot up particularly in instances of repeated non-compliance, said a person with knowledge of NFRA’s penalty regime.
“Penalties ordered by NFRA have been on the lower side in comparison to that of its global peers because it is early years for the independent regulator in India, and it is expected that compliance will improve and a situation doesn’t arise where NFRA also has to consider penalty at par with the level seen globally," this person said, declining to be identified.
The regulator’s penalty on Coffee Day Enterprises’s auditor, BSR & Associates LLP, was for lapses from 2018-19.
NFRA, which was established in October 2018 under the Companies Act, is attempting a cultural shift in how statutory auditors, audit committees in companies, and the managements of companies approach their functions. It is holding inspections on audit firms to detect deficiencies and issue public reports for the benefit of the audit industry.
The authority is also exploring ways to overhaul India’s audit regulations aligning with international standards. Although the audit and accounting industry welcomes tighter oversight, some experts have cautioned that the regulatory framework needs to factor in domestic realities.
NFRA’s fines pale in comparison with hefty penalties imposed by watchdogs such as the US’s Public Company Accounting Standards Board (PCAOB) and the UK’s Financial Reporting Council (FRC).
In April, PCAOB slapped a record penalty of $25 million, or about ₹210 crore, on KPMG Netherlands towards settling a case relating to the audit firm’s internal training program and monitoring of its quality control system.
Earlier in October, FRC imposed a penalty of £21 million, or about ₹230 crore, on KPMG LLP and KPMG Audit PLC for violations related to the audits of Carillion Plc, a UK construction firm that went into liquidation, as per information available from the British audit regulator.
NFRA, BSR & Associates, KPMG, PwC, Deloitte and EY did not reply to emails sent on Monday.
A more lenient approach?
“Indian businesses are often compared with their global peers in terms of market capitalisation, scale, and market presence… So how can one expect penalties for audit failures in businesses to remain at a significantly lower scale than the global level?," said the person quoted earlier.
Penalties are levied depending on the nature of audit violations and principles of proportionality, and to serve as a deterrence against future misconduct.
Audit professionals, however, are expecting a lenient approach from the audit watchdog.
“We should keep in mind the big differences in per capita income and earning potential in India and in the developed markets when examining the penalties to be imposed," said a senior auditor, who spoke on condition of anonymity. “The audit regulator should handhold, do more inspections of audit firms, give them time for remediation of the deficiencies, and only after that consider penalties."
Mint reported on 1 September that NFRA plans to hold the lead auditors of business conglomerates accountable for audit lapses in the group’s subsidiaries, as part of its revamped framework that’s likely to align more closely with international standards.
Meanwhile, global audit authorities are tightening the screws even on the Big Four accounting firms.
Last year, PCAOB imposed a total penalty of $7 million, or about ₹58 crore, against two registered public accounting firms within the PwC global network—Shanghai-based PricewaterhouseCoopers Zhong Tian, LLP, and Hong Kong-based PricewaterhouseCoopers—for quality control violations.
[Mint]
