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The National Financial Reporting Authority (NFRA) has issued a significant warning about “gross negligence and audit failure” in the audits of Group Financial Statements (GFS) from several well-known companies.
In a circular released on Thursday, the NFRA stressed that principal auditors must mandatorily comply with not only Standards on Auditing (SA) 600 but also the related standards and codes mentioned in the Companies Act, 2013.
Major Concerns
The NFRA’s findings are linked to investigations of large corporations, including Reliance Capital, Reliance Home Finance, Dewan Housing Finance, Coffee Day Enterprises, and IL&FS. These audits were plagued by serious financial misconduct, with allegations of funds being misappropriated through subsidiaries and related companies. The NFRA noted that principal auditors failed to act on obvious signs of fraud and financial trouble, often relying on misleading interpretations of auditing standards to avoid responsibility. “They relied on fallacious interpretations of SA 600 to ignore these issues and instead completely depended on the clean audit reports of the Component Auditors,” the circular stated.
“The combined effect of these failures has led to losses amounting to tens of thousands of crores, severely impacting investors, including retail investors, and creditors,” the NFRA added.
Key Issues
The NFRA highlighted several critical issues in these audits:
Lack of Communication: There was insufficient coordination and discussion with Component Auditors during the audit process.
Ignored Discrepancies: Significant differences between the number of components reported in Consolidated Financial Statements (CFS) and those filed with the Ministry of Corporate Affairs (MCA) went unchecked.
Misplaced Trust in Management: Many principal auditors wrongly assumed that it was solely management’s job to prepare CFS, neglecting their responsibility to ensure accurate financial reporting.
Misinterpretation of SA 600: Some principal auditors incorrectly believed they could rely only on the work of Component Auditors, even when red flags were present.
A Call for Accountability
In response to these findings, the NFRA made it clear that all principal auditors must fully comply with the rules set out in SA 600 and other relevant standards to meet their obligations under the Companies Act. The authority emphasised that all auditors share the same goals when conducting financial statement audits, stating, “Principal auditors cannot justify not doing enough simply because a specific standard didn’t seem to require it.”
The NFRA further stated that every principal auditor is “mandatorily required to perform all the procedures specified in SA 600 and related SAs in fulfillment of their obligations under the Companies Act, 2013, read with the overall objectives provided under SA 200.”
“The overall objectives of auditing financial statements are the same for a principal auditor and 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 did not require them to do so,” it added.
“Any narrow interpretation of audit standards that allows auditors to escape their duty to provide a fair view of a company’s finances is unacceptable,” the NFRA said.
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