Context: The National Financial Reporting Authority (NFRA) has found deficiencies in the audit processes of BSR & Co, Deloitte Haskins & Sells, SRBC & Co, and Price Waterhouse Chartered Accountants (PwC) in its inspection report 2022, released on 22nd Dec 2023.

NFRA Detects Deficiencies in Big Four Audit Processes

• Lack of complete independence: In its firm-wide review of audit control systems of BSR & Co, the NFRA found the firm’s claim to being independent of KPMG India entities was wrong.
• Audit Procedure not up to standards: In respect to three of five selected company audits, the BSR’s audit procedure relating to impairment of investment was found deficient.
• Quality of Audit Documentation: There were deficiencies in audit documentation which can lead to challenges in justifying audit conclusions and procedures.

What are the Big Four Companies and their Audit Firms?

• The “Big Four” is the name used for the four largest accounting firms globally, as measured by revenue. 
  • They are Deloitte, Ernst & Young (EY), PricewaterhouseCoopers (PwC), and Klynveld Peat Marwick Goerdeler (KPMG).
  • These four firms audit the financial statements for most publicly held companies.
• Audit Role: Auditing firms check, verify and measure the accounts by an independent authority to ensure that all activities of accounts are done fairly. They ensure compliance with laws and regulations and maintain timely, fair, and accurate financial reporting.
• Other Activities: In addition to their auditing services, the Big Four provide tax, consulting, valuation, market research, assurance, and legal advisory services.

About NFRA

• The National Financial Reporting Authority (NFRA) was constituted in 2018 by the Government of India under section 132 of the Companies Act, 2013.
• Members: It shall consist of members not exceeding fifteen part-time and full-time members.

Background: 

• Need: Due to accounting scams, there was a need to establish an independent regulator to enforce auditing standards and ensure the quality of audits.
• Establishing Authority: The Companies Act of 2013’s Section 132 grants the Central Government the power to establish such an authority.
• A Parliamentary Standing Committee suggested the establishment of an NFRA as a means of institutionalizing the National Advisory Committee on Accounting Standards.

NFRA: Its Functions and Duties

• Recommend accounting and auditing policies and standards to be adopted by companies for approval by the Central Government;
• Monitor and enforce compliance with accounting standards and auditing standards;
• Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service;
• Power to investigate matters: It can investigate chartered accountants (CA) or CA companies for professional misconduct either suo-moto or on a Central Government recommendation, impose penalties, and debar them for up to 10 years.

News Source: BS