The National Financial Reporting Authority (NFRA) has identified lapses in the auditing-related activity of network entities of the Big Four. In the course of detailed audit quality inspections, the watchdog found several violations including those of Sections 144 and 141 of the Companies Act, 2013.
Inspections were carried out of Deloitte, Haskins & Sells LLP, BSR & Co LLP, SRBC & Co LLP and Price Waterhouse Chartered Accountants LLP. BSR & Co LLP and SRBC & Co LLP are the network firms of KPMG and EY, respectively.
Among others, it said the audit firm did not provide, during this inspection, details of KPMG network entities, and non-audit services provided by those entities to audit clients of the firm.
“Consequently, the inspection team was unable to evaluate whether the firm is in full compliance with the independence-related requirements of the Code of Ethics and SQC 1. The inspection team observed the need for improvement in the firm’s internal review of compliance with independence requirements by its personnel,” the report on BSR said.
With respect to SRBC, the watchdog said the audit firm’s policies and procedures for ensuring the integrity of audit documentation are not fully in accordance with certain requirements of SQC 1. One of the observations is that the independent policies of the audit firm do not recognise the direct and indirect relationship between SRBC and its network members of the international network Ernst & Young Global Limited (EY).
“This has resulted in violations of Sections 144 and 141 of the Companies Act, 2013. The India-specific requirements in the Independence Policy of the Audit Firm do not comply with section 144 of the Companies Act, 2013,” NFRA said.
In the case of Price Waterhouse Chartered Accountants LLP, the regulator said the audit firm as part of its internal quality monitoring policy and process, performs inspection of a sample of individual audit engagement files and the Inspection teams select certain audit areas for review. “However, there is no document explaining the rationale or criteria for selection of these specific audit areas for review by the inspection team,” NFRA noted among its observations. PwC, Deloitte, EY and KPMG are the four major global entities in the auditing space and they are also known as ‘Big 4’.
The inspections of the audit firms were initiated in December 2022, and covered various aspects, including review of firm-wide quality controls evaluate 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, according to four separate reports released by NFRA on Friday.
