Services of audit cos under lens of NFRA

The audit and non-services offered by the Big Four network and other firms to their clients are under the lens of the National Financial Reporting Authority (NFRA), the regulator for listed and large unlisted companies in the country.

The issue has been flagged in several of the inspection reports that have been released by the agency and also in at least half-a-dozen disciplinary actions initiated by it as the regulatory body sees a conflict of interest or independence issues in the work undertaken by the firms.

While NFRA does not have its own guidelines, it goes by the provisions of the Companies Act and the Institute of Chartered Accountants of India's audit standards and guidelines, including the Code of Ethics, which lists out possible threats, including those related to self-interest, self-review, advocacy, familiarity and intermediation.

In some of the cases that the regulatory body has dealt with and taken disciplinary action, there were multiple violations. For instance, in some of the cases the firm had breached the prescribed ceiling for revenue from non-audit services. Then there have been instances of a breach in the cap on revenue from one client.

In one case the partner of a firm and related entities had a large shareholding in one of the companies that was audited, which NFRA believes is a conflict of interest.

While these instances have been found in several of the smaller firms, the role of some of the network affiliates of the Big Four is also under the scanner. For instance, in an inspection report released last week, NFRA has concluded that Walker Chandiok & Co, Grant Thornton Bharat, Grant Thornton Advisory and Grant Thornton International are "'directly or indirectly' related" entities, although the firms denied any relationship.

NFRA has also found instances of firms undertaking prohibited non-audit work through a web of their affiliates. In certain cases, such as BSR & Co, the firm did not provide details of KPMG network entities, and non-audit services provided by those entities to audit clients.

There are certain services such as management or tax-related work that is allowed, the corporate affairs ministry as well as NFRA are of the view that the fee structure allows for possible conflict of interest, especially as the payment for non-audit work can be front-loaded or staggered as the guidelines do not provide for a framework over a period of time.