NFRA second inspection of Big five firms shows signs of improvement

National Financial Reporting Authority’s (NFRA’s) second inspection of the audit arms of the Big-5 firms is expected to be completed by October-end and initial findings suggest that most have taken measures suggested especially related to separation of audit and non-audit services.
 

“There is now greater awareness among firms of issues related to independence. We have started seeing some improvements. They are fixing the issues which were pointed out,” NFRA Chairperson Ajay Bhushan Pandey told Business Standard.
 

Pandey said that many of the firms have self-declared and brought in a policy to the effect that neither they nor their network associates would provide non-audit services to their audit clients or their associates.
 

 

“Yet we have to go another mile to ensure that other firms too comply with independence requirements in letter and spirit,” Pandey added. The NFRA on December 22, 2023 released the inspection reports for audit firms BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants. This was followed by a report on Walker Chandiok & Co. While BSR is part of the KPMG network, SRBC is part of the EY network and DHSL is of Deloitte network. Walker Chandiok & Co’s affiliation could not be established. While pointing to the several gaps across audit firms related to documentation and violation of standards on auditing, the NFRA stated in a report that 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. “We are sure that along with us, other firms also welcome the rigour of annual inspections to enhance trust in audit quality, supporting efficient capital markets…We continue to strengthen our documentation, and checks and balances to ensure high quality audits,” a spokesperson for Walker Chandiok & Co. said.
 

Another of the Big-5 firms said that these inspections serve as constructive exercises to enhance audit quality and that they commend NFRA’s initiative.
 

“Over the years, firms like ours have significantly invested in technology, people and infrastructure to elevate audit quality and the regulator is acknowledging that,” a partner in a large audit firm said. BSR & Affiliates network entities and KPMG India entities have made a voluntary decision to not provide any non-assurance services to audit clients of BSR regulated by NFRA, its head of audit Sudhir Soni said. “We have taken this step in response to NFRA observations and to address perceptions of conflict of interest. We believe this will help build trust and confidence in audit,” Soni said. He said that NFRA’s inspection process has helped the firm understand the authority’s regulatory perspective to identify qualitative improvements to its systems and processes.

Keeping a tab
 

Firms under second round of inspection:

BSR & Co

Deloitte Haskins & Sells

SRBC & Co

Price Waterhouse Chartered Accountants

Walker Chandiok & Co

First inspection report came out in December 2023

Second inspection likely to be completed by October