NFRA flags deficiencies in BSR & Co's audit of related party transactions

The National Financial Reporting Authority (NFRA) has highlighted significant shortcomings in the audit practices of BSR & Co LLP, a KPMG sub-licensee, particularly in related party transactions.

The audit regulator's inspection was conducted in August 2024, which reviewed three BSR audit engagements from the FY ending March 2022 and March 2023.

In a 13-page inspection report, NFRA found lapses related to auditing standards and compliance with the Companies Act 2013. Among the critical observations were deficiencies in verifying related party transactions.

The inspection report also revealed a complex series of transactions initiated by an unnamed company, involving its promoter entity.

 

NFRA noted that the company raised Rs 550 crore through non-convertible debentures (NCDs) and invested Rs 650 crore in compulsorily convertible preference shares (CCPS) of the promoter entity. This transaction was reportedly used to facilitate debt repayment by the promoter entity.

NFRA also flagged the lack of a documented business rationale for the investment, suggesting the funds were effectively diverted for personal use by the promoter.

Further, the inspection highlighted that the arrangement likely violated Section 185 of the Companies Act, which prohibits companies from extending loans directly or indirectly to directors or their relatives, the regulator said.

In its assessment, NFRA also observed that the company's financial statements ambiguously disclosed the transactions, failing to highlight their substance.

It also criticised the audit team's documentation for not addressing these compliance issues adequately.

The rules, which mandate auditors to inquire whether personal expenses have been charged to the revenue account, were overlooked.

Responding to the findings, BSR & Co, submitted that its audit procedures included verifying documents and communicating with those charged with governance.

However, the audit firm acknowledged the need for improvements in documenting audit conclusions.

"We have taken note of the further feedback provided in the 2024 report and will continue to constructively engage with NFRA in evaluating and implementing any further improvements required to our policies and practices," BSR & Co said.

It argued that the CCPS subscription was approved as per the Companies Act, disclosed in financial statements, and did not constitute a loan under Section 185.

Further, NFRA also reviewed BSR's system-wide audit quality controls. It acknowledged remedial measures implemented by the firm, such as enhancing independence policies and revising the sign-off mechanism for audit documentation.

However, the audit regulator indicated that further refinements were required for sustained compliance.

BSR & Co, a part of the KPMG International network, audited 304 entities under NFRA's purview during the reviewed period. The firm expressed its commitment to address NFRA's concerns and emphasised its focus on audit quality.

In December last year, NFRA found certain lapses in the auditing-related activities of the network entities of the Big 4 during detailed audit quality inspections.

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.