NFRA Flags Independence Breaches in Walker Chandiok Audit

When Independence Becomes Just a Form

If your audit firm isn’t truly independent, the entire audit loses its credibility. NFRA just called that out- loud and clear.

Key Takeaways

• When Independence Becomes Just a Form If your audit firm isn’t truly independent, the entire audit loses its credibility.
• The VakilKaro Brief The Update NFRA flagged serious independence issues, non-audit service violations, and audit deficiencies in Walker Chandiok & Co.
• The Action Firms must strengthen independence checks, avoid prohibited services, and improve documentation and audit procedures.
• Background of the Inspection The National Financial Reporting Authority conducted an audit quality inspection of Walker Chandiok & Co.
• This matters because under Sections 141 and 144 of the Companies Act, independence is not just about the audit firm alone.

The VakilKaro Brief

The Update

NFRA flagged serious independence issues, non-audit service violations, and audit deficiencies in Walker Chandiok & Co. LLP.

The Impact

Audit credibility, compliance with Section 144, and audit quality standards come under serious doubt.

The Action

Firms must strengthen independence checks, avoid prohibited services, and improve documentation and audit procedures.

Background of the Inspection

The National Financial Reporting Authority conducted an audit quality inspection of Walker Chandiok & Co. LLP for FY 2023–24. The objective was not just to review individual audits, but to examine whether the firm’s overall systems policies, controls, documentation, and internal checks actually ensure compliance with auditing standards and the Companies Act, 2013.

What NFRA found was not a one-off lapse. It pointed towards deeper, structural weaknesses in how the firm operates.

Core Issue: Independence and Network Structure

The biggest red flag was auditor independence.

The firm maintained that it was not part of the Grant Thornton International network. However, NFRA didn’t buy this argument. It looked at how the firm actually functions shared audit tools, common policies, coordinated client acceptance systems, and brand alignment and concluded that in substance, the firm operates as part of a global network.

This matters because under Sections 141 and 144 of the Companies Act, independence is not just about the audit firm alone. It extends to network entities as well. If any related or network entity provides prohibited services, the independence of the auditor itself gets compromised.

NFRA’s message is clear here. You cannot deny being part of a network while simultaneously functioning like one. Substance will always override form.

Non-Audit Service Violations

Another major issue was the provision of non-audit services.

The law is strict. Section 144 clearly prohibits auditors from providing certain services like accounting, internal audit, financial system design, and management advisory to their audit clients, whether directly or indirectly.

NFRA found multiple instances where these boundaries were crossed. In some cases, the firm itself charged additional fees for work that looked like accounting or financial reporting assistance. In other cases, network entities provided services such as HR advisory or financial conversion work to audit clients or their subsidiaries.

The firm tried to justify some of these as part of audit scope or commercially separate arrangements. But NFRA rejected this reasoning. It emphasized that even if services are disguised or routed differently, what matters is the nature of the service. If it falls within prohibited categories, it is a violation.

Even more concerning was the failure to obtain mandatory approvals from audit committees for permitted non-audit services. That is a basic compliance requirement, and missing it reflects weak internal controls.

Audit Quality Deficiencies

Beyond independence, the inspection also revealed serious gaps in audit execution.

In multiple audit files, there was a lack of proper documentation. Sample testing of transactions did not have supporting evidence like invoices or bank records. In areas like revenue recognition and journal entries, the audit trail was incomplete, making it impossible to verify whether procedures were actually performed.

Loan assessments were another weak area. In one case, a company had significant exposure to a subsidiary facing financial stress, yet there was no proper evaluation of recoverability under expected credit loss principles.

Related party transactions were accepted as being at arm’s length without any real verification. The audit files lacked benchmarking or justification for pricing.

Impairment testing and valuation assumptions were also not critically examined. Auditors relied on management projections without adequately questioning key assumptions like growth rates or risk factors.

The most serious concern was around going concern assessments. Even when companies showed clear financial stress- high debt, losses, negative working capital- the audit documentation did not reflect sufficient skepticism or detailed evaluation. In some cases, reliance was placed on informal or uncertain future funding without proper evidence.

Taken together, these are not minor technical lapses. They go to the heart of what an audit is supposed to achieve.

Key Legal Takeaways

This report reinforces that auditor independence is absolute. It cannot be diluted through technical arguments or structuring. If there is any conflict of interest, the audit itself becomes questionable.

It also makes it clear that Section 144 must be interpreted broadly. Prohibited services are not just those directly provided by the audit firm, but also those provided through network entities or related arrangements.

Another important takeaway is that documentation is everything. If it is not documented, it is treated as not done. Audit quality cannot be defended later through explanations if the file itself is weak.

Finally, professional skepticism is not optional. Auditors are expected to question, verify, and challenge management assumptions, especially in high-risk areas.

Practical Implications

For audit firms, this is a wake-up call. Independence policies cannot remain on paper. They must work in practice across the entire network, including affiliates and related entities.

Firms also need to revisit how they classify services. Calling something “audit support” will not save it if it is actually a prohibited non-audit service.

On the audit side, teams need to strengthen documentation and evidence collection. Every conclusion must be backed by verifiable working papers.

For companies, this also matters. Engaging auditors who are not fully compliant can expose the company to regulatory scrutiny and reputational damage.

Conclusion

NFRA’s report sends a strong and necessary message.

Audit is built on trust. That trust comes from independence, transparency, and rigorous verification. Once those pillars weaken, the entire system is at risk.

This case shows that regulators are no longer willing to overlook systemic gaps. Audit firms will now be expected to not just claim compliance, but demonstrate it clearly—on paper and in practice.

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Official External Resources

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