NFRA Unveils Audit Gaps and Independence Concerns at EY Affiliate Firm SRBC & Co LLP

In a recent move, the National Financial Reporting Authority (NFRA) has highlighted significant audit gaps and independence concerns at SRBC & Co LLP, an affiliate firm of the global auditing giant Ernst & Young (EY). This inspection report underscores the ongoing challenges faced by major audit firms in maintaining stringent audit quality and adhering to regulatory norms, particularly those related to auditor independence and non-audit services.

Background and Current Findings

The NFRA's inspection report, focusing on SRBC & Co LLP's audit practices, follows previous reviews aimed at ensuring compliance with Indian financial regulations. Specifically, SRBC has been a member of Ernst & Young Global since 2013, yet its internal policies fail to fully acknowledge the implications of this affiliation on its operations and regulatory compliance. The report emphasized that despite deep working relationships with EY network firms, SRBC's policies do not adequately address these connections, potentially compromising auditor independence.

The NFRA evaluated three financial year 2023 audits, concentrating on revenue-related internal controls, related-party transactions, and non-financial asset impairment. Key gaps identified include:

• Deficient Audit Procedures: The firm's audit procedures for related-party transactions were deemed insufficient, with failures to verify loan uses, assess arm's length pricing claims, and evaluate management's expert work.
• Non-Audit Services: In several cases, the EY network provided non-audit services to SRBC's audit clients, raising independence concerns, particularly where non-audit fees exceeded audit fees.

Regulatory Concerns

1. Auditor Independence: NFRA emphasized the need for SRBC to address its independence policies to comply with the Companies Act and relevant auditing standards. This includes properly disclosing non-audit services provided by EY network entities.

2. Lack of Governance Structure: The firm was found to lack a robust leadership structure, notably missing an independence leader within the audit leadership team, which is recommended by NFRA for effective oversight.

3. Information Delivery Delays: SRBC faced criticism for delaying the provision of necessary information, hindering the NFRA's ability to verify full compliance with regulatory requirements.

Response and Recommendations

• SRBC Response: The firm has acknowledged NFRA's findings and expressed commitment to enhancing audit quality and independence. SRBC intends to amend its independence policy and provide detailed information on non-audit services offered by EY entities to its clients.

• NFRA Recommendations: Key suggestions include revising SRBC's independence policies to adhere to Indian regulations, avoiding exclusions in non-audit services, and treating the EY network as a single entity for independence assessments.

Broader Implications

This development highlights broader challenges faced by Big Four audit firms—Deloitte, EY, KPMG, and PwC—regarding audit quality, regulatory compliance, and maintaining independence. The global auditing landscape is increasingly scrutinized for issues related to auditor independence, non-audit services, and quality control frameworks.

Conclusion

The NFRA's findings on SRBC & Co LLP underscore the importance of strong regulatory oversight in maintaining the integrity of the auditing profession. As the auditing landscape evolves, firms must adapt to ever-stringent regulatory requirements, ensuring that independence and quality control standards are rigorously upheld.

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