NFRA circular on Responsibilities of Principal Auditor and Other Auditors in Group Audits
The National Financial Reporting Authority (NFRA) through its recent circular has issued a significant warning about “gross negligence and audit failure” in the audits of Group Financial Statements (GFS) from several well-known companies. NFRA stressed that principal must mandatorily comply with not only Standards on Auditing (SA) 600 but also the related standards and codes mentioned in the Companies Act, 2013.
The NFRA's findings are linked to investigations of large corporations, including Reliance Capital, Reliance Home Finance, Dewan Housing Finance, Coffee Day Enterprises, and IL&FS. These audits were plagued by serious financial misconduct, with allegations of funds being misappropriated through subsidiaries and related companies. The NFRA noted that principal auditors failed to act on obvious signs of fraud and financial trouble, often relying on misleading interpretations of auditing standards to avoid responsibility. As per the circular, “They relied on fallacious interpretations of SA 600 to ignore these issues and instead completely depended on the clean audit reports of the Component Auditors. The combined effect of these failures has led to losses amounting to tens of thousands of crores, severely impacting investors, including retail investors, and creditors.”
NFRA emphasised that all auditors share the same goals when conducting financial statement audits, stating, Principal auditors cannot justify not doing enough simply because a specific standard didn’t seem to require it.
