Audit gaps at Big 4 affiliates
New Delhi: 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 such as 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 audit firms such as Price Waterhouse Chartered Accountants and Price Waterhouse & Co Chartered Accountants; MSKA & Associates; SRBC & Co; and BSR Affiliates Network. 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 raised concerns that key controls over other expenses and related payments were not supported by adequate documentation.
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, adding, the firm needs to strengthen its root cause analysis through more comprehensive coverage.
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.
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 recognise that the inspection framework plays a vital role in strengthening audit quality. The Firm has noted the feedback shared by NFRA in the inspection report and would continue to invest in its audit quality agenda and upholding public trust," said a spokesperson with BSR Affiliates.
"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 audit firms such as Price Waterhouse Chartered Accountants and Price Waterhouse & Co Chartered Accountants; MSKA & Associates; SRBC & Co; and BSR Affiliates Network. 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 raised concerns that key controls over other expenses and related payments were not supported by adequate documentation.
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, adding, the firm needs to strengthen its root cause analysis through more comprehensive coverage.
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.
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 recognise that the inspection framework plays a vital role in strengthening audit quality. The Firm has noted the feedback shared by NFRA in the inspection report and would continue to invest in its audit quality agenda and upholding public trust," said a spokesperson with BSR Affiliates.
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