The National Financial Reporting Authority ( NFRA ) is gearing up to scrutinize auditors, including the prominent Big Four, with a focus on their provision of “non-audit services” to clients they concurrently audit. This proactive move may stir controversy, as it challenges the established norms set by the Institute of Chartered Accountants of India ( ICAI ).
While auditors adhere to the ICAI’s ethical code, the restriction on non-audit services lacks clear definition. Despite Section 144 of the Companies Act 2013 limiting certain services, auditors still have a range of services available to offer clients.
NFRA aims to oversee services beyond those specified in Section 144, potentially expanding the prohibition to other prescribed services. Audit firms, particularly the Big Four, often refrain from providing non-audit services to listed entities to safeguard their reputation, but they are less cautious with unlisted firms.
This regulatory step is seen by some industry experts as potentially burdensome and diverging from internationally accepted practices. Non-audit services are typically lucrative for audit firms compared to the auditing process itself.
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The ICAI’s guidance note stresses that auditor independence is a subjective matter. NFRA’s emphasis on non-audit services is evident in its inspection reports and actions taken against auditors engaged in professional misconduct.
Earlier, The inspection report for 2022 by the National Financial Reporting Authority ( NFRA ) had identified deficiencies in the audit processes of BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants ( PwC ), as disclosed on Friday.
During the comprehensive review of BSR & Co’s audit control systems, NFRA deemed the firm’s assertion of independence from KPMG India entities unacceptable. NFRA noted that BSR failed to furnish information about its leadership structure, KPMG Network entities, and non-audit services provided by those entities to the firm’s audit clients during the inspection.
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NFRA’s inspection report on SRBC & Co had revealed that the independent policies of the audit firm did not acknowledge the direct and indirect relationships between it and its network members of the international network Ernst & Young Global Ltd.
The NFRA had recommended that the audit firm should reassess all its ongoing engagements, considering EY Network entities as directly or indirectly related to SRBC Entities.
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The inspection report emphasized that identified weaknesses should be viewed as areas for potential improvement and not as a negative assessment of the audit firm’s work, unless specifically indicated otherwise.
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