The National Financial Reporting Authority has identified significant audit quality lapses at Deloitte Haskins & Sells LLP and its affiliated entities. In its latest inspection report, the apex regulator highlighted deficiencies across critical financial areas, including the scrutiny of loans, assessment of expected credit losses, and adherence to independence protocols. The findings, based on a review of five audit engagements for the 2024 fiscal year, raise concerns regarding the sufficiency of audit evidence and the robustness of internal governance within the network firms.
Scrutiny of loans and related party transactions
A major portion of the report focused on inadequate documentation and oversight regarding large financial transfers. NFRA discovered that one company extended loans totaling Rs 890 crore to a foreign subsidiary without sufficient evidence of mandatory audit committee reviews or end-use verification. The regulator also questioned the arm’s length basis for these loans, noting they were issued below the company’s weighted average cost of capital. Furthermore, the inspection flagged instances where credit extensions to major debtors were classified as not due without formal board approval, relying instead on the authorization of a single executive director.
Impairment assessments and ECL concerns
The regulator raised red flags over the evaluation of future cash flows and asset impairments. Auditors reportedly relied on non-binding documents, such as draft agreements and MoUs, to justify exposures exceeding Rs 2,700 crore to a loss-making foreign subsidiary. NFRA stated that such reliance failed to meet the standards of Ind AS 36, as these documents did not provide an appropriate basis for the existence or valuation of future cash flows. The report also criticized the merging of management assertions with independent auditor findings in representation letters, specifically regarding CARO reporting.
Independence and non-audit services policy
Beyond specific engagement lapses, NFRA reiterated concerns regarding firm-wide independence frameworks. The regulator noted that Deloitte’s policy on non-audit services remains restricted to its Indian entities, failing to provide safeguards against prohibited services provided by overseas network firms. Despite previous warnings, the firms have reportedly not aligned these policies with Section 144 of the Companies Act, 2013. While the audit firms maintained that their practices followed commercial norms and were supported by management forecasts, NFRA has advised a significant strengthening of documentation and statutory alignment.
