Observed ‘gross negligence and audit failure’ in audits of GFS: NFRA
Source: Business Standard
The National Financial Reporting Authority (NFRA), in a circular on Thursday, said it has observed “gross negligence and audit failure” in the audits of group financial statements (GFS) in several cases. It stated that Principal Auditors must mandatorily comply not only with Standards on Auditing (SA) 600 but also with the related standards and codes mentioned in the Companies Act, 2013.
The authority cited examples of audits of Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial Finance Limited, Coffee Day Enterprises, Dewan Housing and Finance Limited, and IL&FS.
Click here to connect with us on WhatsApp
“In these cases, money was diverted through subsidiaries and associates. The Principal Auditors did not raise red flags at the right time despite indicators of fraud, going concern issues, and diversion of funds, as they relied on fallacious interpretations of SA 600, choosing not to address these issues and instead completely relying on the clean audit reports of the Component Auditors,” the circular said.
“The combined effect of these actions has resulted in a loss of tens of thousands of crores in the financial and capital market, adversely impacting investors, including retail investors, and creditors, involving huge public interest,” it added.
The authority also noted gaps, including inadequate discussion with Component Auditors at most stages of the audit and non-assessment of the management’s inclusion of unaudited financial statements for some components in the consolidated financial statements.
“Such interpretations appear to have partly arisen due to the selective reading of the requirements in SA 600 and treating them as independent by themselves, unconnected with the overall responsibilities of auditors under the Companies Act 2013 and other SAs, including SA 200, which is fallacious,” NFRA said.
Under Section 143 of the Companies Act 2013, auditors have the right of access to all books and vouchers of the company, including the right of access to the records of all subsidiaries, insofar as it relates to the consolidation of its financial statements with those of its subsidiaries.
NFRA said that every Principal Auditor is “mandatorily required to perform all the procedures specified in SA 600 and related SAs in fulfilment of their obligations under the Companies Act 2013, read with the overall objectives provided under SA 200”.
“The overall objectives of the audit of financial statements are the same for a Principal Auditor or a Component/Other auditor. Thus, Principal Auditors cannot contend that they did not perform adequate procedures in audits of GFS if, in their opinion, a particular SA, by itself, did not require them to do so,” NFRA added.
NFRA has been advocating for new auditing norms in line with international standards, which suggest that the group auditor would be responsible for the audit work done by other auditors for group entities.
The Institute of Chartered Accountants of India (ICAI) has opposed this view, stating that it would harm smaller firms in India. However, NFRA has released the revised standards for public consultation.
First Published: Oct 03 2024 | 7:37 PM IST
