By Mr. Abhay Ray 
Introduction
India’s apex audit regulator, the National Financial Reporting Authority (NFRA), has raised significant concerns over the audit practices of several prominent firms. Following a series of firm-wide Audit Quality Inspections (AQIs) conducted between late 2024 and early 2025, the regulator uncovered systemic deficiencies that, if left unaddressed, could undermine public confidence in India’s financial reporting framework.
The most alarming issue identified independence. Several firms were found to have allowed the provision of non-audit services (NAS) to their audit clients, a clear breach of Section 144 of the Companies Act, 2013. NFRA emphasized that such practices create potential conflicts of interest, eroding the credibility of the auditing process.
Auditor Independence Compromised
NFRA found several firm violating Section 144 of the Companies Act, 2013, which prohibits auditors from offering certain non-audit services (NAS) to their audit clients or related entities. At MSKA, PwC affiliates, and SRBC, network firms provided advisory or consulting services to clients whose financials were also audited by the firm, creating potential conflicts of interest. NFRA directed firms to revise and submit updated independence policies.
Inadequate Scrutiny of Related Party Transactions (RPTs)
Auditors regularly failed to identify, verify, and document RPTs, especially in high-risk engagements. For example, BSR & Co.LLP overlooked red flags in a INR 550 crore non-convertible debenture transaction used to repay debts of a promoter-linked entity. MSKA, PwC, SRBC, and Walker Chandiok were criticized for failing to assess the arm’s length nature of RPTs, ignoring critical factors such as terms, guarantees, and commercial substance. These lapses violated both Ind AS 24 and Companies Act provisions.
Weak Audit Documentation and Post-Facto Adjustments
Audit documentation, essential for audit defensibility, was found to be incomplete, altered after the audit, or signed off with blank spaces in several instances. MSKA and Lodha & Co. were flagged for poor documentation integrity, with MSKA’s systems allowing modifications without proper sign-off. Lodha & Co. was advised to transition from paper-based to digital documentation systems.
Insufficient Testing of Internal Controls and Impairment Reviews
NFRA found that auditors often skipped or inadequately tested internal financial controls over revenue recognition and asset impairment two key areas prone to misstatements. Firms such as Walker Chandiok, Deloitte, and MSKA were criticized for not performing necessary tests related to revenue recognition and for undocumented impairment testing assumptions, raising concerns about asset overstatement.
What Firms Are Saying
Most firms have issued public statements acknowledging NFRA’s observations and pledging corrective action.
BSR & Co. LLP: “We recognize the importance of upholding audit integrity and have implemented measures to address gaps identified during the inspection.”
Lodha & Co. LLP: “We are transitioning to modern documentation systems and reaffirm our commitment to regulatory compliance.”
MSKA: “We are overhauling our governance structure and independence protocols to align with NFRA’s expectations.”
PwC Affiliates: “We are updating our independence policies and enhancing verification processes for RPTs.”
The Way Forward: NFRA’s Oversight Continues
NFRA has made it clear that these are not one-off audits. The regulator will conduct ongoing monitoring and follow-up inspections to ensure promised reforms are implemented effectively. “Audit quality improvements must go beyond paper,” NFRA cautioned. “Firms must demonstrate consistent, system-wide changes to ensure integrity and transparency in financial reporting.”
A Wake-Up Call for the Audit Profession
NFRA’s inspection series has laid bare the fault lines in India’s audit ecosystem ranging from outdated documentation practices to compromised independence. For a country aspiring to be a global investment hub, robust and credible audits are not optional they are essential.
As Indian capital markets mature and regulatory scrutiny tightens, audit firms must shift from a compliance mindset to a quality-first culture, where ethics, rigor, and accountability guide every engagement. This shift is essential for restoring trust in the financial reporting ecosystem and ensuring that audits are both credible and reliable.
Governance and Leadership Oversight Weaknesses
NFRA identified gaps in firm governance structures, particularly regarding role clarity, leadership accountability, and engagement-level supervision. MSKA, for example, could not produce documented evidence of how leadership roles were appointed or held accountable. SRBC was instructed to revise policies to define “Key Managerial Personnel” and ensure audit personnel across the EY network were not creating indirect business relationships that impair objectivity.
Conclusion
The NFRA’s inspections underscore systemic weaknesses in the auditing ecosystem, revealing critical gaps in auditor independence, documentation standards, and professional skepticism. These findings raise serious concerns about the reliability of audits conducted by some of the country’s most prominent firms. As regulatory scrutiny tightens, it is clear that reforms are needed to restore trust, ensure compliance, and uphold the integrity of financial reporting. The onus now lies on audit firms to address these deficiencies proactively and align with global best practices to safeguard stakeholder interests.
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