India’s top audit regulator fires a warning shot at the Big Four
The National Financial Reporting Authority (NFRA) conducted audit quality inspections of two firms within the Price Waterhouse & Affiliates network during 2025–26 under Section 132 of the Companies Act, 2013, to assess compliance with auditing standards and the effectiveness of quality control systems. The scope was extensive, encompassing follow-up on past findings, firm-wide quality control systems, and five selected audit engagements for FY 2023–24 financial statements.
The inspections covered major audit firms including Price Waterhouse Chartered Accountants LLP along with Price Waterhouse & Co Chartered Accountants LLP, SRBC and Co LLP (EY affiliate), MSKA and Associates (BDO affiliate), and BSR Affiliates Network (KPMG affiliate).
Key Lapses at PwC Network Firms
The findings at PwC’s Indian affiliates were particularly pointed.
Independence Breaches: NFRA highlighted several issues regarding the independence of six partners for PwC-affiliated companies. Critical independence breaches included partners holding securities in audit clients, violating governance firewalls.
The Fake CA Certificate: One of the most striking revelations was a recruitment failure. A Chartered Accountant employed by Price Waterhouse Chartered Accountants LLP (PWCA) was found to have a fake CA degree — and this came to light only through formal verification conducted two years after the appointment. PWCA stated it was an isolated event and that the employee had been dismissed.
Arm’s Length Loan Scrutiny: In its inspection report for PWCA, the NFRA noted that the firm had stated that loans to its subsidiaries were given at an interest rate of 8.5% per annum and were therefore at arm’s length. However, the NFRA found no evidence that the firm had conducted sufficient audit procedures to evaluate whether the interest rate and other terms aligned with what an unrelated lender would charge a borrower with a similar risk profile.
CBI Probe Ignored: In one particular case, the NFRA noted that the PWCA audit report did not contain an explicit evaluation of the material impact of a CBI investigation against the holding company of the entity being audited.
Documentation Gaps: Irregularities were found in audit work on investments held for sale, and some controls on other expenses and related payments were not backed by sufficient documentation.
Other Big Four Firms Also in the Dock
The NFRA’s scrutiny was not limited to PwC alone.
EY Affiliate (SRBC & Co.): The regulator found a need for a better system to monitor whether firm-wide independence policies are working in practice, and issues were noted in assessing the fair market price of related-party transactions, especially for shares and investments.
KPMG Affiliate (BSR Affiliates Network): NFRA said that KPMG’s BSR Affiliates Network mostly follows the rules for independence requirements and has fixed earlier quality issues found in past inspections. However, it also noted that the company should be more careful when taking on non-audit work from clients it recently audited.
BDO Affiliate (MSKA & Associates): MSKA and Associates exhibited governance and network-wide control deficiencies. NFRA advised tighter monitoring of non-audit services and mandated partner re-approval for any post-audit report modifications.
The Bigger Picture: Systemic Issues
The regulator flagged deficiencies in audit independence, documentation, fraud-risk assessment, and scrutiny of related-party transactions, describing these findings as not merely routine technical observations but as reflections of deeper governance and process deficits.
A key ongoing challenge is the growing complexity of modern corporate structures — large business groups today operate through intricate networks of subsidiaries and cross-border entities and undertake related-party transactions, making it harder for auditors to verify financial statements with precision. Capacity constraints also play a role, with a lack of professionals leading to weak supervision,
poor documentation, and gaps in assessing fraud risk.
What NFRA Is Doing Next
In 2025–26, the NFRA expanded its audit inspection programme to cover 35–40 firms, up from about 25 earlier.
The regulator has also endorsed a sweeping revamp of Indian auditing standards, with a new regime set to take effect in April 2026. A major proposal is to classify Standards on Quality Management (SQM 1 and SQM 2) as auditing standards, which would formally embed network-wide controls — over non-audit services, documentation, and oversight — into the core of the audit mandate.
NFRA itself struck a measured tone, stating: ” These inspections aim to deliver timely regulatory feedback to audit firms, enabling improvements in their quality control systems early in the financial reporting cycle. Overall, inspections assist in the goals of strengthening overall financial market integrity and investor and creditor protection.”
The Way Forward
Business Standard’s editorial commentary put it succinctly: Audit firms must strengthen internal governance by creating independent quality-control mechanisms; invest in human capital through rigorous recruitment verification and continuous training; place technology at the centre of auditing through data analytics and AI tools; ensure a clearer separation between audit and non-audit services; and institutionalise regulatory coordination between the NFRA and ICAI to avoid overlaps and ensure consistent enforcement.
The NFRA’s findings are a clear signal that India’s financial oversight ecosystem is tightening — and that the era of light-touch regulation for even the most prestigious audit firms is firmly over.
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