Top audit firms concerned after hefty penalty on BSR & Associates
Mumbai, Aug 21, 2024
Synopsis
The NFRA imposed a ₹10 crore fine and banned BSR & Associates LLP partners for audit lapses in Coffee Day Enterprises. The firm had depended on subsidiary auditors, which the regulator criticized, emphasizing significant overlooked investments. This hefty fine has concerned audit firms, affecting future engagements. Experts suggest that the principal auditor should not be solely accountable if subsidiary auditors comply with standards. This event occurs amid increased regulatory scrutiny and efforts to reshape India's auditing profession.
Alarm bells are ringing in the audit affiliates of top professional services firms after the regulator fined BSR & Associates LLP, a KPMG affiliate, ₹10 crore and banned two of its auditors for alleged lapses in audit of Coffee Day Enterprises (CDEL) where the audit firm had relied on subsidiary auditors while preparing consolidated audit reports.
All audit firms have multiple audits where the firms rely on subsidiary auditors' work when preparing consolidated audit reports for parent companies.
In the CDEL case, BSR & Associates had relied on the work of auditors of its subsidiaries while auditing the parent company.
The National Financial Reporting Authority (NFRA) claimed that the auditors "put on their blinkers" and, when questioned, tried to justify their actions by citing Standard on Auditing 600, which allows reliance on the work of subsidiary auditors.
This was despite CDEL's investments in these subsidiaries amounting to ₹1,937 crore, making up 89% of the standalone balance sheet.
In July last year, the regulator had fined and barred ASRMP & Co and AS Sundaresha for lapses in the audits of Coffee Day Enterprises' subsidiaries.
The auditing standard in question, SA 600, outlines the principal auditor's responsibility when relying on the work of other auditors.
"The SA 600 audit standard differs from global standards," an audit partner at a top professional services company said on condition of anonymity. "In India, auditors are permitted to rely on the work of other auditors, unlike in global standards. This raises a critical technical question for firms: To what extent is the principal auditor required to delve into a subsidiary's audit if there are no suspicions and the subsidiary's auditor is following established standards?"
Audit experts also said that even if a principal auditor needs to examine a subsidiary's audit, greater responsibility for any issues should fall on the subsidiary's auditor who is closest to the transaction rather than the principal auditor.
Additionally, in cases where firms lack sufficient coverage, auditors who do have access to the business's books will perform procedures to ensure they are comfortable before signing off on the accounts.
Top Audit Firms Concerned After Hefty Penalty on BSR
What has stunned the top firms is the hefty penalty of ₹10 crore.
"Proportionality is always debatable. But we feel that ₹10 crore is disproportionate to what the firm was charging for the audit. Audit is already a low-margin business, and the penalty plus legal fees could easily equal the fees from 8-10 audits," another Big Four audit partner said.
An immediate impact could be that the firms that are getting out of audits, where they did not have sufficient coverage of 75-80% for consolidated financial statements, will become stricter while signing new audits.
The regulator has lately been consistently questioning auditors of companies involved in scams or frauds.
The development comes at a time when the Institute of Chartered Accountants of India (ICAI) disciplinary committee has been issuing orders against Big Four firms and the government is actively working to change regulations to facilitate the merger of local Indian audit firms.
Leaders of the top firms are taken aback by this order, as the NFRA, under its new chairman Ajay Bhushan Pandey, has maintained a comparatively more collaborative approach towards them, even amidst rigorous quality inspections, unlike other regulators who have typically been adversarial.
"It looks like the regulator is trying to send a message to the profession with hefty fines and strict penalties for partners," an audit partner said.
"All these developments are occurring at a time when the appeal of the auditing profession is diminishing due to high risks, while other service lines offer better opportunities," the person added.
[The Economic Times]
