Five of the top six audit firms in India have stopped providing non-audit services to their audit clients, with KPMG affiliate BSR & Affiliates and BDO affiliate MSKA & Associates being the latest to cease such engagements, aligning with the National Financial Reporting Authority‘s (NFRA) strict stance on conflict-of-interest issues.
SR Batliboi & Co, an EY affiliate and India’s largest audit firm, is the only one among the top six that still does permitted non-audit work with audit clients.
PricewaterhouseCoopers, Deloitte and Grant Thornton had already announced that they wouldn’t pick up non-audit assignments from audit clients after their global headquarters decided to follow the norm amid mounting pressure from regulators worldwide concerning conflict of interest and independence issues.
In India, too, the NFRA under the leadership of Ajay Bhushan Pandey has adopted a stringent stance on conflict-of-interest and independence issues concerning audit clients.
When asked about the development, BSR & Affiliates confirmed the development.
“BSR & Affiliates network entities and KPMG India entities have made a voluntary decision to not provide any non-assurance services to audit clients of BSR regulated by the NFRA. We have taken this step in response to NFRA observations and to address perceptions of conflict of interest. We believe this will help to build trust and confidence in audit,” said Sudhir Soni, head of audit at BSR & Co LLP.
An MSKA & Associates spokesperson said “the firm has taken the stance of not offering non audit work for audit clients”.
Section 144 of the Companies Act 2013 prohibits statutory auditors from providing a range of services to their clients, including internal audits, investment banking/advisory, actuarial services and management services.
But services outside of the list are permitted, and SR Batliboi & Co has maintained a stance that it would continue providing the permitted services. But sources said SR & Batliboi is also examining internally what path to take in the future.
EY said it has been in compliance with the extant laws and regulations. Given the regulator’s suggestions, it is internally discussing the expectations, a spokes- person said.
Except for KPMG, the non-audit work provided to audit clients contributed less than 1% to the revenue of these firms earlier.
But even the firms that have announced they won’t do non-audit work are finding ways to bypass the restrictions: some are slyly incorporating services like tax into audit services, some others are disregarding the self-imposed limitations when dealing with complex holding company scenarios, and almost all are providing non-audit services to audit clients (e.g., private companies) who fall outside the purview of the NFRA.
The NFRA rules apply to Indian companies with assets, capital, or turnover above certain thresholds, or those with securities listed outside India.
While top audit firms have had audit failures like PwC-Satyam, IL&FS-Deloitte, India’s largest professional services firm, EY, was involved in a messy conflict-of-interest engagement in 2014.
Private equity firm Bain Capital sued EY for a $60 million loss on its investment in Lilliput Kidswear, alleging that false financial reports contributed to the loss and highlighting EY’s conflicting roles then as both an advisor and auditor.
The Big Four firms say they follow global guidelines on which services to offer to audit clients and also follow the code of local administrators, like the Institute of Chartered Accountants of India.
In December 2022, the NFRA issued an audit quality inspection report that pointed out deficiencies and areas of weakness within the audit affiliates of the Big Four firms in a first-of-its-kind assessment.
In the BSR & Co case, the regulator pointed out issues related to a lack of transparency in disclosing KPMG Network entities and providing non-audit services that could impact independence. On SR Batliboi & Co, it pointed out violations of independence policies regarding relationships with network members.
