The National Financial Reporting Authority (NFRA) on Friday released inspection reports finding gaps in the practices of six audit firms, including the affiliates of Deloitte and Grant Thornton.
Networking Denial
The NFRA report on Walker Chandiok & Co (WCCL), an affiliate of Grant Thornton International (GTIL), said that even though GTIL has significant influence and control over WCCL through its policies, procedures and key decision-making, the firm was not ready to accept that it’s part of the GTIL network. This stance, as per NFRA, undermines the independence requirements mentioned under Section 141 and Section 144 of the Companies Act, 2013.
“WCCL directly follows GTIL policies and procedures and is being controlled by GTIL to meet its business strategy, to protect its brand and to have a key role in the decision-making of the fees to be charged from the auditee clients. The firm continues to deny being part of the GTIL Network, directly or indirectly, in absence of any direct membership agreement with GTIL. Denial of the firm in this regard has implications for assessing compliance with independence requirements,” the report said.
The report on WCCL also said that the firm, and other network entities of GTIL in India, provided prohibited non-audit services which is a serious issue. “Even when certain non-audit services are permitted, they also need to be provided after obtaining approval from the board of directors or audit committee, while considering all the entities of the network complying with this requirement,” it said.
The WCCL’s reply to NFRA said that its independence policies have been, and continue to be fully compliant with all applicable laws and standards. “The independence principles have been consistently applied across WCCL, Grant Thornton Bharat (GTBL), s Grant Thornton Advisory (GTAPL), and their related entities, as demonstrated during the inspection,” the WCCL said.
Prohibited Services
A separate report on three Deloitte network firms, including Deloitte Haskins & Sells (DHS), noted that the audit firms’ non-audit service (NAS) policy applied only to Deloitte India entities, and did not provide safeguards to prevent indirect provision of prohibited NAS by non-India network firms to holding or group entities of Indian audit clients, as mandated by Section 144 of the Companies Act.
Apart from this, NFRA pointed out issues with the firms’ individual audit engagements. In one instance, the firm’s evidence to arrive at arm’s length was lacking.
Deloitte responded to NFRA by stating that it complies with the requirements of Section 144 of the Companies Act and ICAI’s Code of Ethics. It also asked the regulator to provide mandatory guidance on the prohibited NAS – management services – contained in Section 144 for consistent application to all audit engagements of NFRA-regulated public interest entities.
In the current inspection round, NFRA also released inspection reports for the first time on four domestic firms – Singhi & Co., CNK & Associates, B D G & Co, Umamaheswara Rao & Co.—flagging firm-specific instances of auditing lapses.