“This is a practice that is followed in other countries, including the US and the UK, and we are not trying to discipline or find faults with the firms. The idea is to understand the process followed by the firms… if the process is fine then the quality of audit will also be good. The purpose is to drive quality change across the firm so that shareholders have comfort in the audited accounts of companies,” a NFRA official said. This year, NFRA randomly picked up audits done by the identified firms and assessed them. The inspection will be an annual exercise with firms to be selected by rotation.
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The first set of inspection reports noted that Price Waterhouse Chartered Accountants (PWCA) had voluntarily restricted non-audited services to non-audited clients, its subsidiaries and its material overseas associates. There were some gaps related to its audit work and processes, which were noted in the inspection report.
In contrast, in case of SR Batliboi (SRBC), which is an affiliate of EY, the regulatory agency noted that the firm’s policies did not recognise the direct and indirect relationship between SRBC and its network members of the international network EY, which were violations of certain provisions of the Companies Act.
It pointed to several other gaps, including those related to audit documentation. Commenting on the report, SRBC said: “We are committed to delivering sustainable, consistent high quality audits and consider NFRA’s recommendations very constructive in supporting the objective of enhancing audit quality. With our firm’s strong focus on systems of quality control, governance, talent, tools and methodologies, we remain committed to upholding the confidence stakeholders place in us. We look forward to working with all professional bodies collaboratively to serve the public interest and maintain trust in the audit profession.”
The inspection report on BSR & Co, which is part of the KPMG network, said the firm did not provide details of the network entities and non-audit services provided to audit clients. It also pointed to inadequate control over creation, changes and review of audit papers, and also the absence of formal documentation and explanations regarding the firm’s governance and management structures.
In case of DHS (Deloitte Haskins & Sells), NFRA pointed to at least one case where the audit firm also provided non-audit services “which amounted to self-review threat”.