NFRA's next inspection to target audit firms with large client base

Feb 28, 2025

Synopsis
The NFRA plans to focus on auditing firms with significant listed company audits, using data analytics to detect potential issues. Chairman Ajay Bhushan Prasad Pandey emphasized the need for auditors' independence and professionalism. Upcoming inspections of firms like Deloitte and E&Y will assess improvements in processes. Earlier reports highlighted deficiencies in related party transactions and documentation.

The National Financial Reporting Authority (NFRA) could soon select accountancy firms that undertake audits of a large number of listed companies for the next round of its annual inspection, its chairman Ajay Bhushan Prasad Pandey told ET on Thursday, indicating a more focussed supervisory approach in future.

He said the audit regulator will also use data analytics to "pick audit firms (for inspection) where we find indications of potential negligence and wrongdoings". The NFRA will select firms on the basis of their "impact on the audit ecosystem", instead of just raising the number of entities for scrutiny.

"We may have to give due weightage to the firms which audit a large number of listed companies because ensuring robust processes in such firms will have a salutary impact on the audits of a whole lot of companies that they audit," Pandey said.

He called on auditors to "exercise professional scepticism and remain independent", instead of just toeing the line of their clients' managements.

Pandey also said that the NFRA will release within a month its reports on the remaining audit firms that it inspected last year to gauge the standards and processes being followed by them.

The NFRA is expected to come out with its reports on four-five more entities, including those related to Deloitte, E&Y and Grant Thornton, which were inspected last year.

Since December 2023, the regulator has released its inspection reports on Lodha & Co, BSR & Co. LLP (KPMG sub-licensee), MSKA & Associates (BDO International affiliate) and two PwC entities.

In the reports, the NFRA has flagged severe deficiencies in audit practices, especially pertaining to related party transactions, documentations and independence controls, at the audit firms. However, it has also acknowledged certain progress.

"In general, there has been an improvement in the processes followed by audit firms in the latest round of inspections vis-a-vis last year, including in areas of auditors' independence. But there is room for further improvement as well," Pandey said on Thursday.

In the report on MSKA & Associates, the regulator had underscored the "absence of formal documentation regarding the firm's governance and management structure".

In the case of Price Waterhouse Chartered Accountants LLP, NFRA found "a significant deficiency in the verification of related party transactions and arm's length price testing".

Lodha & Co's forms and checklists for personnel independence declarations, the regulator said, "need consistent application across all branches, with updated definitions of related parties aligned with the Companies Act and the policies and procedures for monitoring independence compliance require strengthening".

It detected a deficiency in BSR & Co's verification of related party transactions in one of the engagement files selected for review.

In their responses, the audit firms committed to removing deficiencies and improving their procedures and practices.

[The Economic Times]