Audit quality review. NFRA asks for audit files from Adani Group firm auditors

The audit regulator, the National Financial Reporting Authority (NFRA), has approached various firms involved in the audit of listed companies in the Adani Group, seeking files and communications relating to the workings of these audit firms on this diversified conglomerate.

The regulator’s move — at a preliminary level — covers multiple audit firms across the seven listed companies of the Adani Group and spans different financial years up to March 2022, sources familiar with the development said. This is seen as a prelude to NFRA undertaking an audit quality review (AQR) of the multiple audit firms under the scanner.

Adani Group has, over the years, engaged over 35 audit firms to look into the statutory audit work of its various listed and unlisted firms in India and abroad. These audit firms include a mix of the big six audit firms as well as some reputed homegrown audit firms.

• Read: Audit regulator NFRA updates database on companies, auditors

Adani Group, which faced a short-seller investigation from Hindenburg Research this January, has always maintained that it has adopted the “best governance practices” and the “highest standards” in the appointment process of its auditors over the years.

Adani Group has denied Hindenburg’s allegations of corporate malfeasance but is facing a court-mandated investigation by SEBI.

Representatives of NFRA didn’t respond to requests for comment on the move to seek audit files of the Adani Group.

Under the lens

A Bloomberg report on Wednesday said that SR Batliboi, an EY Member firm and longtime auditors of Adani Group, is under the NFRA lens and that the audit regulator has, in recent weeks, started an inquiry into the audit firm.

It may be recalled that SR Batliboi had previously audited the books of IL&FS and come under the disciplinary action of the NFRA for failing to comply with the basic audit requirements.

Ever since the Hindenburg allegations surfaced, various Adani Group companies have seen several auditor resignations and exits, citing reasons including concerns over insufficient disclosures by the companies as regards transactions with some entities.

Experts said NFRA is not required by law or its procedures to make public the actions it has initiated against any audit firms. Only when the final orders are passed does one get to know the disciplinary action taken against the auditors or the audit firms, sources said.

NFRA, which became operational from October 1, 2018, is the sole independent audit regulator in the country and has the mandate to monitor, investigate, and take disciplinary action against the auditors of all listed companies in the country.

As the regulator of audit firms of listed companies, NFRA is well within its right to seek audit files that could shed light on the quality of financial reporting and corporate’s adherence to various accounting standards prescribed by law, a source said.

NFRA’s birth came at a time when IL&FS  Financial Services had just defaulted on payment obligations of bank loans, which had roiled the financial markets and triggered panic among equity investors even as several NBFCs faced turmoil amid a default scare.

Given this backdrop and several other financial frauds like the Nirav Modi-perpetrated fraud on PNB that came to light in 2018, NFRA as a regulator straight away went into an enforcement approach rather than taking a supervisory-styled framework involving incremental steps to bring errant auditors to book.

While NFRA has been proactive in its enforcement actions, there is still some legal dispute as to whether the regulator has the right to proceed against audit firms in respect of years prior to the constitution of the Authority.

ADANI: In compliance

Reacting to the <italic>Bloomberg</italic> report on NFRA, a spokesperson for the Adani Group said, “We strongly reject any suggestion that Adani Group and its businesses have not acted as per the regulations and accounting standards of the jurisdictions in which we operate. The Adani Group has always conducted its business in compliance with all applicable laws and regulations and is confident about its practices, governance and disclosures.”

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