NFRA Uncovers Audit Shortcomings at KPMG's BSR & Co.
NFRA Uncovers Audit Shortcomings at KPMG's BSR & Co.

NFRA Flags Lapses by KPMG’s BSR & Co. LLP in Related Party Transactions and Companies Act Compliance

India’s National Financial Reporting Authority (NFRA) has revealed significant shortcomings in the audit practices of two prominent firms—BSR & Co. LLP, a KPMG network sub-licensee, and Lodha & Co. LLP. The recent inspection reports emphasize critical deficiencies in audit documentation, independence controls, and the verification of related party transactions, highlighting an urgent need for improved audit standards.

The NFRA’s inspection of BSR & Co. LLP in August 2024 uncovered alarming issues with verifying related party transactions (RPTs) and adhering to the Companies Act, 2013. The audit for “Company A” revealed violations of Section 143(1)(e), which requires auditors to assess the proper allocation of personal expenses against company revenue.

A notable finding was the issuance of Rs 550 crore in non-convertible debentures (NCDs) aimed at repaying debts of a promoter-controlled entity, indicating possible misappropriation of company funds. NFRA also pointed out breaches of Section 185 of the Companies Act, which prohibits using company resources for personal use.

Despite these challenges, NFRA recognized BSR’s efforts to tackle earlier deficiencies, particularly regarding personnel independence policies and quality control measures across the firm.

In response, BSR & Co. LLP expressed its commitment to advancing its audit methodologies, asserting:
“We are dedicated to upholding the highest auditing standards and have made substantial improvements since the previous inspection. We will be implementing further measures to ensure complete compliance with the Companies Act and auditing regulations.”

Lodha & Co. LLP: Concerns Over Audit Documentation and Independence

The NFRA’s inspection of Lodha & Co. LLP in March-April 2024 revealed significant weaknesses in audit documentation and uneven application of independence standards across its offices. Major concerns included insufficient oversight of independence compliance, lapses in Engagement Quality Control Reviews (EQCRs), and dependence on paper-based documentation susceptible to integrity issues.

NFRA recommended that the firm modernize its documentation processes, suggesting a transition to electronic or hybrid systems to ensure compliance with SQC 1 and international auditing standards.

Lodha & Co. LLP acknowledged the findings, stating:
“We appreciate NFRA’s insights and are committed to improving our audit documentation practices and internal controls to uphold the highest professional standards.”

Timeline of Inspections

Both inspections followed a comprehensive timeline, including on-site assessments, off-site evaluations, and in-depth exchanges of observations and responses. NFRA’s final reports, published in December 2024, emphasize the importance of ongoing monitoring to ensure that corrective actions are effectively implemented.

Strengthening India’s Audit Ecosystem

NFRA’s inspections reveal systemic challenges within India’s audit landscape, particularly in crucial areas like RPT verification, documentation integrity, and auditor independence. While both firms have made progress in addressing deficiencies, the reports highlight the necessity for sustained efforts to establish robust and transparent audit practices.

As NFRA continues its oversight, these inspections represent a vital step towards strengthening India’s audit ecosystem, ensuring greater accountability, and adhering to global standards.