NFRA finds lapses in audit quality of network entities of Big 4
Context:
- The National Financial Reporting Authority (NFRA) has found certain lapses in the course of detailed audit quality inspections network entities of the Big 4 companies.
- During detailed audit quality inspections the regulatory body found several violations, including those of Sections 144 and 141 of the Companies Act, 2013.
- The watchdog carried out audit quality inspections of the firms – Deloitte, Haskins & Sells LLP, BSR & Co LLP, SRBC & Co LLP and Price Waterhouse Chartered Accountants LLP.
- PwC, Deloitte, EY and KPMG are the four major global entities in the auditing space and hence they are also known as ‘Big 4’.
- The inspections of the audit firms were started in December 2022 and covered various aspects which includes:
- review of firm-wide quality controls
- evaluating their adherence to Standards on Quality Control (SQC-1) and
- selected audit documentation of the annual statutory audit of financial statements for the year ended March 31, 2021.
Violations reported:
- In the case of Deloitte, Haskins & Sells LLP, the NFRA has found out six deficiencies which includes that the audit firm did not reassess and re-categorise audit risk in one engagement which was required.
- NFRA has also made six observations with respect to BSR, including that missing of formal documentation, and inadequate explanations regarding the firm’s governance and lack of proper management structure which indicates non-compliance with SQC 1’s Leadership Responsibilities for Quality.
About NFRA:
- National Financial Reporting Authority(NFRA) is an independent regulator which was set up to oversee the auditing profession and the Indian Auditing and Accounting Standards under the Companies Act 2013.
- NFRA was constituted in 2018 by the Government of India under Sub Section (1) of section 132 of the Companies Act, 2013.
- It will try to improve the transparency and reliability of financial statements and information presented by listed companies and also large unlisted companies in India.
Various functions of NFRA:
- As perSub Section (2) of Section 132 of the Companies Act, 2013, the functions and duties of the NFRA are to:
- To Recommend the accounting and auditing policies and standards needed to be adopted by the companies for approval by the Central Government;
- To Monitor and to enforce compliance with accounting standards and auditing standards;
- To Oversee the quality of service of the professions associated with ensuring compliance with such standards and also to suggest the measures required for improvement in the quality of service;
- To perform any such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.
Various powers and duties:
- NFRA is responsible for recommending accounting and auditing policies and standards in the country, undertaking investigations, and imposing sanctions against defaulting auditors and audit firms in the form of monetary penalties and debarment from practice for up to 10 years under Section 132 of the Companies Act 2013,
- According to the NFRA Rules, 2018. the powers of the NFRA were extended also to include the governing of auditors of companies listed in any stock exchange, in India or outside of India and also unlisted public companies above certain thresholds, and other companies which are specified in Rule 3 (1) therein.
- Rules 7 and 8 allow the NFRA for the monitoring of accounting and auditing professionals of the companies referred to in Rule 3 (1).
- Companies under Rule 3 (2) and 3 (3) are also required to disclose information of their auditors as and when needed to the NFRA through form NFRA-1.