NFRA calls for stronger internal controls, documentation at audit firms
New Delhi, Mar 16, 2026
Inspection reports on four major audit firms highlight gaps in internal controls, documentation and oversight of non-audit services, while urging stronger compliance and monitoring systems
Strengthening network-wide controls over non-audit provisions, improving documentation, and better assessment of keeping arm’s length in giving loans to subsidiaries are among the range of observations made across four separate inspection reports of four big audit firms released on Monday by the National Financial Reporting Authority of India. The inspection reports cover firms including Price Waterhouse Chartered Accountants, BSR & Co, S R B C & Co and MSKA & Associates for activities undertaken in FY 2025–26.
NFRA in its inspection report for PWCA said that the firm provided loans to its subsidiaries at an interest rate of 8.5 per cent per annum and therefore said that the transaction was done at arm’s length. NFRA said, however, it found no evidence that the firm conducted sufficient audit procedures to evaluate whether the interest rate and other terms align with what an unrelated lender would demand from a borrower of similar risk.
In a particular case, NFRA noted that the PWCA audit report did not have an explicit evaluation of the material impact of the CBI case against the holding company of the entity being audited.
With respect to human resource policies, NFRA found that a CA employed by PWCA was found to have a fake CA degree through a formal verification process that was conducted two years after the appointment. PWCA stated that it was an isolated event and remedial action of separation had already been taken.
“The areas of weaknesses or deficiencies observed in the inspection reports should be viewed as areas of potential improvement and not as a negative assessment of the work of the audit firms unless specifically indicated,” NFRA said in its report.
In case of BSR, NFRA found the firm to be generally compliant with independence requirements and previous years’ inspection findings. The regulator, however, said, “The policies on acceptance of non-audit services for the immediate past audit clients and the root cause analysis policies require strengthening.”
In case of one audit engagement of an unlisted company, NFRA observed insufficient evidence supporting the audit opinion. The Authority said that in the case of one audit report it found inadequate supervision and insufficient review with various deficiencies in the audit documentation.
The firm told NFRA that it had taken note of its feedback and started working on an action plan.
Inspection report of SRBC, a network firm of SR Batliboi & Affiliates, said that the firm has policy and procedures to ensure firm-wide independence with provisions that EY network firms will not provide non-audit services (subject to some exceptions) to NFRA-regulated audit clients. NFRA, however, added that there was a need for a monitoring mechanism “to ensure that the firm’s policies and procedures on firm-wide independence are operating effectively and complied with, in practice.”
The report also raised issues with appropriate audit procedures not being performed to evaluate arm’s length price of a related-party transaction. This was in the context of an acquisition by a company through a 100 per cent share swap.
SRBC in its response to the regulator said, “The audit team will further enhance the clarity and robustness of its documentation in respect of the evaluation performed and the basis for its conclusions on arm’s length price testing.”
MSKA & Associates, a network firm of BDO International, NFRA said is required to strengthen network-wide controls over the provision of non-audit services and ensure mandatory re-sign-off by the engagement partner for any post-issuance modifications.
NFRA said that audit quality inspections are intended to bring about systemic improvements in the overall financial reporting framework in the country.
“They are typically, worldwide, distinct from investigations, as inspections are intended to afford an opportunity to the firm to remediate observed shortcomings,” NFRA said.
The regulator stressed that such inspections provide an opportunity for feedback and course correction to the audit firms and, at the same time, foster a greater mutual understanding of the policies and procedures that underlie audit quality management.
[The Business Standard]
