News Analysis

IL&FS: NFRA’s ban on Deloitte’s Daruvala shows regulator will focus on audit firms’ review processes

Vivek Ananth BL Research Bureau | Updated on July 26, 2020

After the ban on former Chief Executive Officer of Deloitte India Udayan Sen in the IL&FS case, the National Financial Reporting Authority has also banned Rukshad Daruvala for five years, partner at Deloitte India’s audit affiliate Deloitte Haskins and Sells (DHS).

Daruvala was in-charge of reviewing the work done by DHS’ audit engagement team during the audit of IL&FS Financial Services (IFIN). This decision by NFRA to penalise even the quality control reviewer of audit engagements, opens up a new front in the new audit regulator’s effort to make sure audit of public interest entities is of the highest quality.

Even if there are any future appeals against this order, or the fact that the order’s operation is in abeyance till July 31, 2020 by the Delhi Hight Court, this finding by NFRA could completely change internal audit review conducted by audit firms. It seems like the NFRA is setting the standard that it expects from those it will supervise.

What does this mean for future audits of such entities by chartered accountants?

No more checklist reviews

After the collapse of Satyam in 2009, the Institute of Chartered Accountants of India had instituted a process of internal quality review of audits done by chartered accountants. This was to make sure that there was an independent review conducted before an audit report was signed by the auditor.

In the case of Daruvala, the NFRA has found him guilty of not applying his mind as the engagement quality control reviewer while reviewing the audit work done by the DHS’ IFIN audit engagement team.

In his responses to NFRA’s charges, Daruvala had frequently referred to a checklist of the work done by him to review the audit procedures, documents and the audit file that were maintained by the IFIN audit engagement team. But, the NFRA has held that merely ticking a box on a checklist which states either “Yes” or “No” in response to a questionnaire, does not mean that the review was carried out properly.

NFRA’s order in Daruvala’s case seems to imply that to maintain quality control, engagement quality control review teams will have to exercise far more supervision over audit engagements. And this will include documenting the steps and procedures undertaken to make sure the audit conducted is of the highest quality in compliance with auditing standards.

Quality control vs audit

The quality control review process in audit firms usually used to review the work done by the audit engagement team by making sure that the documentation was in order, that various processes were followed, and an overall checklist based approach to reviewing audit engagements. What the NFRA order seems to imply is that quality control review process cannot stop at just these procedures.

NFRA’s order has interpreted auditing and audit quality control standards to act as a check on the audit engagement team. According to the NFRA, the audit quality control reviewer must not blindly agree with the audit procedures, audit documentation and any other audit related opinion that the audit engagement team has arrived at. The reviewer is expected to make sure that all necessary steps are taken to make sure that an audit of an entity is conducted in accordance with auditing standards and other legal provisions.

This includes making sure the audit engagement is not affected by questions on independence due to provision of non-audit services by affiliates of the firm. The NFRA also seems to imply that matters related to the audit, such as communications related to RBI inspection reports with the entity being audited, are taken seriously by the engagement quality control reviewer.

The review process of an audit engagement has to be undertaken to make sure that all necessary legal provisions, auditing standards and code of ethics related provisions are adhered to by the audit team. This has to be done before the signing of the audit report. This will put more burden on the partners at audit firms, who review audits done by engagement teams.

Final authority on audit quality

Although Udayan Sen has been penalised by the NFRA on many counts, the order in Daruvala’s case makes it clear that the NFRA might henceforth penalise even partners in audit firms who have the responsibility of maintaining audit quality.

Daruvala was the engagement quality review partner who was overseeing DHS’ IFIN engagement team’s audit work. Daruvala was ultimately responsible for reviewing the audit work done by the IFIN audit engagement team. The NFRA’s order has held the engagement quality control review partner has to make sure that documentation in the audit file is up to the mark, and that auditing standards are followed before the signing of the audit report.

Even if there are lapses on the part of the audit engagement team, the ultimate responsibility to maintain the highest quality of audit, in the NFRA’s view, is on the quality control reviewer. This order might change the engagement quality control review process in audit firms because the NFRA has imposed costs on oversight even by the partner involved in quality control of audits.

Published on July 25, 2020

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