Audit quality of Big 4 network firms to be conducted by NFRA
As per top officials, the onsite inspections of the five audit companies, including the network entities of the Big 4, will be performed by the National Financial Reporting Authority (NFRA) and will take place next month.
Chairperson of NFRA Ajay Bhushan Prasad Pandey in an interaction with the media told that Audit quality inspections will be mutually beneficial for the audit firms as well as NFRA. It will help an independent regulator like NFRA to get feedback and also help in overall improvement of the audit profession,”
The regulator (NFRA) will conduct inspections of five audit companies, the Big 4 network firms—Deleoitte, Haskins & Sells LLP, BSR & Co LLP, SRBC & Co LLP, and Price Waterhouse Chartered Accountants LLP—and Walker Chandiok & Co LLP.
KPMG and EY’s respective network firms are BSR & Co LLP and SRBC & Co LLP. The “Big 4″—PwC, Deloitte, EY, and KPMG—are the four largest international firms that specialize in auditing. As per news and media reports last week, the NFRA came out with audit quality inspection guidelines that are on par with the best practice followed by international audit regulators.
As per the NFRA Chairman, the regulator will review the firm’s quality control system and specific audit files in specific audit areas after understanding their governance/management structure and policy manuals. The majority of inspections will take place on-site. The locations and businesses to be seen will be determined later. The NFRA will choose four or five businesses that have been audited by each of these audit firms for individual audit file inspections of selected individual audit files. We’ll examine the financial statement audits of companies for the 2020–2021 financial year.
Before the end of the current financial year, the regulator expects to publish its report. Globally, various regulators, including the Public Company Accounting Oversight Board (PCAOB) in the US, the Financial Reporting Council (FRC) in the UK, and ASIC in Australia, have systems in place to carry out regular annual inspections of large audit firms and others.
The purpose of having a regular audit inspection framework is to give feedback on the audit quality apparatus of audit firms and act as a preventive tool to avoid serious audit failures. The inspection will concentrate on several aspects of auditing activities carried out by audit firms in an effort to strengthen audits of PIEs (public interest entities).
These include examining the firm’s internal controls, audit methodology, governance structure, partner and team member performance, and the preparation and implementation of company audits. For instance, the audit firm’s internal review process will be examined, and the NFRA will check how the firm conducts internal reviews of the audits after assigning them to their auditor partners and professional employees.
During the inspection, Pandey stated that the involvement of Engagement partner, EQCR, and adherence to the Standard on Quality Control (SQC), among others, would be looked at.
According to Pandey, the stakeholders’ comment on audit quality inspections was that there should be active involvement between the regulator and the audit companies when NFRA released a consultation paper on stakeholders’ engagement in 2021.
Chairman further continued that several audit firms had suggested conducting onsite inspections. Speaking more specifically about the exercise, Pandey explained that the main goal is to be proactive and contribute to increasing the quality of the auditing system as opposed to post-facto, when actions are performed only after adverse occurrences occur.
There have been instances of financial misdoings where the role of auditors and audit firms have come under the regulatory lens for their alleged lapses. NFRA has been acting against erring auditors and has also come out with various Audit Quality Review (AQR) reports.
In light of this, the NFRA chief declared that his organization’s teams will not approach inspections with any preconceived notions. The improvement of the auditing processes will be the main focus. The issue of taking more action against the negligent audit companies wouldn’t come up unless there were grave failures, violations of SQC, accounting rules, and conflicts of interest.
NFRA, he added, is doing its part to see that public interest entities (PIEs) are audited. The regulator, which was constituted in October 2018, has oversight over more than 8,000 public and unlisted enterprises. All publicly traded corporations as well as sizable unlisted public companies fall within the purview of the NFRA. It was established in accordance with subsection (1) of Section 132 of the 2013 Companies Act.
In a press release on the guidelines issued on November 14, the NFRA also clarified that inspections by nature are distinct from investigations. However, it had stated that in some circumstances, test-checks by the inspection teams could serve as a basis for enforcement or an investigation under the relevant provisions of the Act and Rules.