NFRA report flags audit lapses at firms linked to PwC, EY, KPMG, BDO

The National Financial Reporting Authority (NFRA) on Monday released four inspection reports on major audit firms affiliated with PwC, BDO, EY and KPMG, flagging deficiencies in areas, including audit independence, internal governance and scrutiny of related-party transactions.

“These inspections are a tool to provide audit firms with actionable regulatory feedback much earlier in the financial reporting cycle to help them enhance their quality control systems,” the audit regulator said in a statement.

“Overall inspections assist in the goals of strengthening overall financial market integrity and investor and creditor protection,” it added.


The regulator also acknowledged improvements made by the firms in response to concerns highlighted in earlier inspection reports.

The latest reports cover four audit firms—Price Waterhouse Chartered Accountants LLP and Price Waterhouse & Co Chartered Accountants LLP; SRBC & Co; MSKA & Associates; and BSR Affiliates Network.

These annual inspections assess the processes and standards adopted by the firms, including their governance framework, effectiveness of internal controls over audit quality, and systems for identifying and assessing audit risks.

Any deficiencies identified in these processes are flagged to the firms for remedial action. The NFRA will release reports on more firms in the coming days.

PwC entities

For PwC affiliates, the regulator pointed to issues relating to the independence of six partners and human resources policies governing recruitment.

It also examined certain individual audit engagement files involving audited companies. It flagged irregularities in audit procedures related to investments held for sale and impairment assessments of investments, inadequate arm’s length evaluation of loans to subsidiaries, non-compliance with required related-party disclosures, and modifications made after signing the audit report.

The regulator also flagged that key controls over other expenses and related payments were not supported by adequate documentation.

A PwC spokesperson didn’t respond to a request for comments on the regulator’s observations.

MSKA & Associates

The BDO affiliate needs to “strengthen network-wide controls over the provision of non-audit services and ensure mandatory re-sign-off by the engagement partner” for any modifications after the issuance of the audit report, NFRA said.

The regulator also asked the firm to formally constitute a whistleblower committee, as mandated by policy, to oversee and investigate complaints.

“Strengthening of audit evaluation procedures relating to revenue and receivables, as well as assessing their impact on financial reporting, is required,” it said.

In addition, the firm needs to strengthen its root cause analysis through more comprehensive coverage.

MSKA & Associates said it looks forward to “constructively engaging in evaluating and implementing further improvements to our policies and practices”.

“We undertook significant remedial actions following our findings from last year, and remain committed to enhancing audit quality, ensuring highest levels of integrity and competence in our audit engagements,” said Vishal Divadkar, managing partner & head of audit and assurance at MSKA & Associates, told ET.

SRBC & Co

For the EY affiliate, NFRA said “there is a need to have an appropriate monitoring mechanism to ensure that the firm’s policies and procedures on firm-wide independence are operating effectively and compiled with in practice”.

As for the firm’s individual audit engagements, appropriate procedure was not performed to evaluate the arm’s length price of the related party transaction in respect of shares and investments in a selected engagement, the regulator said.

"We are committed to performing high-quality audits and we consider the insights from the NFRA’s inspection process important to maintaining those high standards,” said an SRBC spokesperson.

“We remain focused on continuously improving our audit quality processes and policies in line with regulatory expectations," the spokesperson added.

BSR Affiliates Network

The regulator said the KPMG affiliate was “found to be generally compliant with independence requirements and previous years’ inspection findings” in terms of firm-wide quality aspects.

However, it said the firm’s policies on acceptance of non-audit services for immediate past audit clients, as well as its root cause analysis policies, require strengthening.

"We recognize that the inspection framework plays a vital role in strengthening audit quality. The firm has noted the feedback shared by the NFRA in the inspection report and would continue to invest in its audit quality agenda and upholding public trust," said a BSR Affiliates spokesperson.