Observed 'gross negligence and audit failure' in audits of GFS: NFRA

Not only SA 600 but Principal Auditors must fulfil duties under Companies Act 2013, it says

The National Financial Reporting Authority (NFRA) in a circular on Thursday said that it has found “gross negligence and audit failure” in audits of group financial statements in several cases and said that the principal auditors must mandatorily comply with not only Standards of Audit 600 but also the related standards and codes mentioned in the Companies Act, 2013.

NFRA gave the examples of audits of Reliance Capital Limited, Reliance Home Finance Limited, Reliance Commercial Finance Limited, Coffee Day Enterprises, Dewan Housing and Finance Limited and IL&FS.

“In these cases, moneys 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.

“The combined effect of these have resulted in a loss of tens of thousands of crores in the financial and capital market, adversely impacting investors, including retail investors, and creditors, involving huge public interest,” it added.

The authority also said that the gaps it has noticed include inadequate discussion with component auditors at most stages of audit and non-assessment of inclusion by management of unaudited financial statements for some components in the consolidated financial statement.

“Such interpretations appear to have partly arisen due to the selective reading of the requirements in SA 600 and treating them as being independent by themselves, unconnected with the overall responsibilities of auditors under CA 2013 and other SAs, including SA 200, which is fallacious,” it said.

Under the Section 143 of the Companies Act 2013, auditors have a right of access to all books and vouchers of the company including right of access to the records of all the subsidiaries of the companies, in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

NFRA said that every principal auditor is “mandatorily required to perform all the procedures specified in SA 600 and related SAs in fulfilment of his obligations under CA 2013 read with the overall objectives provided under SA 200”.

“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 if in their opinion a particular SA, by itself, did not require them to do so,” it added.