Shrikrishna: Hello, Arjun, all set to usher in New Year?
Arjun: Yes, Lord. Planning so many ambitious things!
Shrikrishna: Very good. For example?
Arjun: I am taking a pledge. I won’t start any work unless and until I am properly appointed.
Shrikrishna: Why? What makes you think that way? Of course, it is a good thing.
Arjun: Our friends are suffering unnecessarily for this reason.
Shrikrishna: What happened?
Arjun: Bhagwan, you know everything. Still, you are asking me?
Shrikrishna: True, I know what you are referring to. But tell it again so that other Pandavas also know.
Arjun: Fine. There was a large listed NBFC engaged in housing finance.
Shrikrishna: OK. What of that?
Arjun: Now it is facing many enquiries due to a big fraud of a few thousand crores!
Shrikrishna: Mostly, such frauds are sponsored by the management itself. One has to be very careful.
Arjun: True. For over 15 years, the company has been appointing only statutory auditors.
Shrikrishna: OK. Then?
Arjun: Then the company started appointing 25 to 30 SME firms to conduct branch audit of over 200 branches. This was in consultation with the statutory auditors.
Shrikrishna: So, the branch auditors were not appointed by the company directly in its annual general meeting. Right?
Arjun: Yes. The appointment letter of branches stated all terms and conditions in a couple of annexures and specified the fees.
Shrikrishna: Where was the problem?
Arjun: The branch auditors addressed their report to the statutory auditors, not the company! The company paid the fee to the branch auditors. This went on smoothly for several years!
Shrikrishna: Then, what is the issue?
Arjun: Now, NFRA has issued long notices to all branch auditors. Apart from other points, two basic points raised by NFRA are: The appointment of branch auditors itself is invalid since it was not made in the company’s general meeting, and the branch auditors did not give any engagement letter to the company!
Shrikrishna: Strange! And interesting! What are the branch auditors saying? And what was the fate of their branch audit reports?
Arjun: Statutory auditors have stated in their audit report that they have dealt with the branch auditors’ report while finalising the audit.
Shrikrishna: What about SA 210 regarding engagement letter?
Arjun: The appointment letter contained detailed terms and conditions and also the methodology of conducting the audit. The branch auditors accepted the appointment letter. So, no need was felt for a separate engagement letter. Moreover, they had been doing branch audits for many years. In such a case, the engagement letter every year was not warranted.