NFRA Warns Auditors on Group Audit Obligations

New Delhi, Oct 3 (PTI) The National Financial Reporting Authority (NFRA) on Thursday said existing obligations of statutory auditors are not being correctly interpreted by a section of auditors and emphasised that principal auditors cannot contend that they did not perform adequate procedures in the audits of group financial statements of companies.

In a circular on Thursday, NFRA said it has observed gross negligence and audit failure in audits of group financial statements or cases of group audits involving various companies.

The latest circular also comes against the backdrop of the regulator and chartered accountants' apex body ICAI being on different pages on revising the Standard of Auditing (SA) 600 which is applicable in the case of audit of companies which have subsidiaries and associates.

According to the regulator, audit of standalone financial statements, where the company has branches, and the audit of consolidated financial statements of companies with subsidiaries requires special consideration by the principal auditor and also by other auditors who undertake audits of components such as branches and subsidiaries.

SA 600 pertains to using the work of another auditor in the audit of group financial statements.

NFRA said it has observed gross negligence and audit failure in audits of group financial statements.

"Instances include Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial Finance Limited (together accounting for alleged fraud of Rs 29,000 crore), Coffee Day Enterprises Limited (alleged fraud of Rs 3,500 crore), Dewan Housing and Finance Limited (alleged fraud of Rs 34,000 crore), and audit quality review of IL&FS (which collapsed with a debt of Rs 90,000 crore)," it said.

In these cases, NFRA noted that monies were 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 to not go into these issues and instead completely relied upon the clean audit reports of the component auditors," the circular said.

While SA 600 does not mention specifically a review of audit work papers of the component auditor or other auditor by the principal auditor, NFRA said such a review may need to be applied by an auditor in appropriate cases.

"The overall objectives of 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 (Group Financial Statements) if in their opinion a particular SA, by itself, did not require them to do so," the circular said.

The watchdog has observed that the existing obligations on statutory auditors are not being interpreted correctly by a section of auditors of the Public Interest Entities under its purview.

"This circular is applicable to the auditors of all entities covered under Rule 3 of NFRA rules 2018 with immediate effect to prevent recurrence of audit failures and loss of confidence in audit of Public Interest Entities (PIEs)," it added.