India Audit Regulator Says Principal Auditors Responsible For Group Audits
The clarification came after NFRA observed gross negligence and audit failure in audits of group financial statements involving various companies
(The Corner Office Journal) -- India’s National Financial Reporting Authority (NFRA) clarified that the responsibility for consolidated financial statements lies with the management and board of directors of the holding company and the principal auditors.
The clarification came after the audit regulator observed gross negligence and audit failure in audits of group financial statements involving various companies, NFRA said in a circular dated 3 October.
The instances include Reliance Capital Ltd., Reliance Home Finance Ltd., Reliance Commercial Finance Ltd. (together accounting for alleged fraud of 29,000 crore rupees), Coffee Day Enterprises Ltd. (alleged fraud of 3,500 crore rupees), Dewan Housing and Finance Corporation Ltd. (alleged fraud of 34,000 crore rupees), and audit quality review of IL&FS (which collapsed with a debt of 90,000 crore rupees), it added.
In these cases, moneys were diverted through subsidiaries and associates, NFRA said.
The regulator said 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 Standards on Auditing 600 (SA 600) to not go into these issues and instead completely relied upon the clean audit reports of the component auditors.
‘SA 600 - Using the work of another auditor’ deals with the requirements in the audit of group financial statements, according to the circular.
SA 600 provides that principal auditor would normally be entitled to rely upon the work of component auditors unless there are special circumstances to make it essential for him to visit the component and/or examine the books of accounts and other records of the said component, it said.
NFRA noted that the existing obligations on statutory auditors are not being interpreted correctly by a section of auditors of the public interest entities under the regulator’s 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 said.
NFRA directed the auditors to scrupulously adhere to the latest circular in carrying out their audits of the PIEs.
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