NFRA to seek views from Big 5 audit cos on second draft inspection report

The NFRA report highlights serious violations of Section 144 of the Companies Act, which bans firms from offering certain non-audit services to their audit clients

The National Financial Reporting Authority (NFRA) will soon seek comments from Big Five audit companies and share its second draft inspection report assessing whether they have incorporated the suggestions it made in the last financial year, according to people in the know.

Sources said the NFRA has found that the firms have taken steps to improve audit quality, but it has pointed out a larger scope for improvement.

The authority is also in the process of finalising the reports of three other audit firms that are facing their first inspections this year. The reports would be shared with the firms for their comments as well, the sources said.  

All final reports, which will include comments from the audit firms, are expected by the end of November.

“The report has been shared with some of the firms that were audited last year and, in the coming days, the draft report will be sent to all others for their comments. We are in the process of finalising the draft,” a source said. 

On December 22, the NFRA released the inspection reports for audit firms BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants, followed by Walker Chandiok & Co. 

While highlighting several gaps across audit firms related to documentation and violation of Standards on Auditing, the NFRA stated in a report that the areas of weaknesses should be treated as areas of potential improvement and not as a negative assessment of the work of the audit firm unless specifically indicated otherwise.

One of the more serious issues raised by the NFRA in its report is about violation of section 144 of the Companies Act, which prohibits firms from providing certain non-audit services to audit clients. 

The Big Four firms had welcomed the suggestions of the regulator to enhance trust in audit quality, supporting efficient capital markets. 

The NFRA, the audit watchdog set up by the government in 2018, is planning to increase the number of audit firms it inspects annually to around 30. It will cover financial statements of four companies per audit firm in keeping with international standards. 

This year, the NFRA is conducting inspections of eight firms, of which the Big five firms are facing a second round of inspection. 

Going forward, the firms are expected to be selected based on various parameters including the extent and significance of the public interest involved, for instance, the number of firms being audited by the firm. 

Meanwhile, the NFRA is pushing for adoption of the revised International Standard on Auditing 600 for audits of listed companies and Public Interest 

Entities, except Public Sector Enterprises, Public Sector Insurance Entities and Public Sector Banks and their branches. The Authority has invited public comments for the same. 

Keeping an eye

> NFRA to assess whether audit firms have incorporated suggestions made in last financial year

> Audit watchdog found that firms have taken steps to improve audit quality, but points out larger scope for improvement

> Reports to be shared with firms for their comments

> Final reports, with comments from audit firms, expected by November-end