National Financial Reporting Authority (NFRA) Unveils Audit Quality Inspection Findings on Deloitte, PwC, EY and KPMG Network Entities
The National Financial Reporting Authority (NFRA) has disclosed a series of deficiencies in the auditing-related activities of the network entities belonging to the esteemed 'Big 4' - Deloitte, Haskins & Sells LLP, BSR & Co LLP, SRBC & Co LLP, and Price Waterhouse Chartered Accountants LLP. NFRA's detailed audit quality inspections, initiated in December of the previous year, have uncovered several areas of concern, shedding light on lapses in compliance and quality control standards.
Inspection Overview
The audit quality inspections, as outlined in four separate reports released by NFRA, covered a spectrum of aspects. This encompassed a thorough review of firm-wide quality controls, evaluating adherence to Standards on Quality Control (SQC-1), and scrutinizing selected audit documentation for the annual statutory audit of financial statements for the year ended March 31, 2021.
Deloitte, Haskins & Sells LLP
NFRA's scrutiny of Deloitte, Haskins & Sells LLP revealed six deficiencies. Notably, the audit firm failed to reassess and recategorize audit risk in one engagement, contrary to regulatory requirements and its own policy manual. This raises concerns about the effectiveness of internal risk management processes within the organization.
BSR & Co LLP (KPMG Network)
For BSR & Co LLP, a KPMG network entity, NFRA identified six observations, including the absence of formal documentation and inadequate explanations regarding the firm's governance and management structure. The lack of details provided on KPMG network entities and non-audit services to audit clients hindered the assessment of compliance with independence-related requirements.
SRBC & Co LLP (EY Network)
In the case of SRBC & Co LLP, an EY network entity, NFRA highlighted concerns over policies and procedures related to the integrity of audit documentation. The regulator pointed out that the independent policies of SRBC did not fully recognize the relationships between SRBC and its network members, leading to potential violations of the Companies Act, 2013.
Price Waterhouse Chartered Accountants LLP
NFRA's observations on Price Waterhouse Chartered Accountants LLP focused on the absence of documented rationale or criteria for the selection of specific audit areas during the internal quality monitoring process. This lack of transparency raises questions about the methodology employed by the firm in ensuring the quality of its audit engagements.
Implications for Compliance and Independence
The NFRA reports underscore the need for enhanced compliance measures and improvements in internal review processes across the audited firms. Non-compliance with independence-related requirements, violations of regulatory acts, and deficiencies in documentation and governance structures are areas that demand immediate attention from the audit industry.
As the regulatory spotlight intensifies, the Big 4 firms face increasing pressure to address these lapses and fortify their audit practices to uphold the highest standards of quality, transparency, and regulatory compliance. The outcome of NFRA's findings will likely prompt a reevaluation of audit processes and internal controls within the audited entities, signaling a critical phase for the audit industry.
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