Big Five Audit Firms Adjust Policies Following NFRA Scrutiny

Big Five Audit Firms Adjust Policies Following NFRA Scrutiny

The Big Five audit firms in India are reportedly revising their policies to better align with regulatory standards after recent inspections by the National Financial Reporting Authority (NFRA). This move comes in response to concerns raised by the NFRA regarding potential conflicts of interest related to non-audit services provided by network firms.

According to a senior NFRA official, the regulator’s latest round of inspections revealed that some of the Big Five firms have made significant changes to their practices. “In the previous inspections, we identified several violations of the Companies Act 2013, specifically relating to the provision of non-audit services through network firms,” the official told FE. “In the current inspections, we have observed that many firms have addressed these issues by implementing new policies across their network.”

Under Section 144 of the Companies Act, statutory auditors are prohibited from offering nine specific types of non-audit services to their audit clients, including accounting, bookkeeping, internal audits, actuarial services, investment banking, and management consulting. The aim is to safeguard auditor independence and avoid conflicts of interest, ensuring auditors do not audit their own work or that of their network firms. Additionally, Paragraph 18 of the Standard on Quality Control (SQC) issued by the Institute of Chartered Accountants of India (ICAI) mandates that audit firms establish procedures to maintain independence.

The NFRA’s 2023 inspection highlighted several compliance issues. For example, SRBC & Co, an affiliate of EY, was found to be violating these regulations by providing audit services while other EY network entities offered non-audit services to the same client group. This raised concerns about adherence to Section 144 and Section 141 of the Companies Act.

Price Waterhouse Chartered Accountants also came under scrutiny. Despite updating its policy in February 2020 to restrict non-audit services to holding companies of NFRA-regulated entities, the NFRA found that the firm’s policy allowed exceptions for representing clients before authorities, potentially conflicting with Section 144.

Similarly, during the inspection of KPMG-affiliate BSR & Co, the NFRA noted that the firm failed to disclose details about non-audit services provided by KPMG Network entities to the firm’s audit clients. This lack of transparency hindered the NFRA's ability to assess compliance with independence requirements and highlighted a need for better internal review processes.

The NFRA’s findings emphasize the importance of stringent adherence to regulatory standards and the need for continuous improvement in internal compliance mechanisms among major audit firms. As these firms implement corrective measures, the NFRA's oversight aims to ensure greater transparency and maintain the integrity of the auditing profession in India.