Economic Fraud
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 unveiled critical lapses in the audit practices of two leading firms—BSR & Co. LLP, a KPMG network sub-licensee, and Lodha & Co. LLP. The recently published inspection reports highlight significant shortcomings in audit documentation, independence controls, and the verification of related party transactions, underscoring the urgent need for enhanced audit standards.
BSR & Co. LLP: Gaps in Compliance and Related Party Transactions
NFRA’s August 2024 inspection of BSR & Co. LLP exposed alarming deficiencies in verifying related party transactions (RPTs) and compliance with the Companies Act, 2013. The audit of “Company A” revealed non-compliance with Section 143(1)(e), which mandates auditors to check for improper charging of personal expenses to company revenue.
One major finding involved the issuance of Rs 550 crore in non-convertible debentures (NCDs) to repay debts of a promoter-controlled entity, signaling potential misuse of company funds. NFRA also flagged violations of Section 185 of the Companies Act, which prohibits using company funds for personal purposes.
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Despite these issues, NFRA acknowledged BSR’s progress in addressing prior deficiencies, particularly in personnel independence policies and firm-wide quality controls.
In response, BSR & Co. LLP committed to strengthening its audit practices, stating:
“We are dedicated to adhering to the highest auditing standards and have implemented significant improvements since the last inspection. Additional measures will ensure full compliance with the Companies Act and auditing standards.”
Lodha & Co. LLP: Audit Documentation and Independence Concerns
NFRA’s March-April 2024 inspection of Lodha & Co. LLP identified critical gaps in audit documentation and inconsistent application of independence standards across its branches. Key issues included inadequate monitoring of independence compliance, lapses in Engagement Quality Control Reviews (EQCRs), and reliance on paper-based documentation prone to integrity risks.
NFRA advised the firm to modernize its documentation processes, recommending a shift to electronic or hybrid systems to ensure compliance with SQC 1 and international auditing standards.
Lodha & Co. LLP acknowledged the findings, stating:
“We value NFRA’s feedback and are committed to enhancing our audit documentation practices and internal controls to meet the highest professional standards.”
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Timeline of Inspections
Both inspections followed a rigorous timeline involving on-site evaluations, off-site reviews, and detailed exchanges of observations and responses. NFRA’s final reports, published in December 2024, emphasize ongoing monitoring to ensure corrective actions are effectively implemented.
Strengthening India’s Audit Ecosystem
NFRA’s inspections highlight systemic challenges in India’s audit landscape, particularly in critical areas like RPT verification, documentation integrity, and auditor independence. While both firms have made strides in addressing deficiencies, the reports underscore the need for sustained efforts to achieve robust and transparent audit practices.
As NFRA continues its oversight, these inspections serve as a pivotal step toward reinforcing India’s audit ecosystem, ensuring greater accountability and adherence to global standards.
