The National Financial Reporting Authority (NFRA), the country’s sole independent audit regulator, has found several deficiencies in the statutory audit conducted by EY member firm SRBC & Co LLP of Infrastructure Leasing & Financial Services (IL&FS) for the financial year 2017-18.

In its 390-page audit quality review report (AQRR), the NFRA has concluded that the audit firm did not have adequate justification for issuing the audit report asserting that the audit was conducted in accordance with the Standards of Auditing and the financial statements give a true and fair view.

The audit quality is thus seriously compromised due to the large-scale non-compliance with professional standards and regulatory and legal requirements, and the inappropriate reporting made by the audit firm, the AQRR said.

“These lapses prevented the investors, creditors and stakeholders from knowing on time the true and fair picture of the state of affairs of IL&FS. If the audit firm had been vigilant, shown professional scepticism, sufficiently challenged management assumptions and claims and strictly complied with its audit responsibilities, such lapses by IL&FS perhaps could have been detected much earlier and the tens of thousands of crore of losses and haircuts that the banks, creditors, and investors were ultimately saddled with would have been averted,” the report added.

Violative of norms

Moreover, NFRA has also highlighted that the initial appointment of SRBC & CO LLP and its continuation as statutory auditor for 2017-18 was violative of the norms of independence. This is because its network (Ernst & Young Global Limited/EY) provided prohibited services to the IL&FS group and also had a business relationship with the auditee (IL&FS) group.

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Based on the AQRR observations, NFRA has concluded that the audit firm (SRBC & Co LLP) has formed an opinion on the financial statements of the company and issued its audit report without obtaining reasonable assurance about whether the financial statements as a whole were free from material misstatement, whether due to fraud or error and thereby failed to meet the requirements of Standards on Auditing 700 (SA 700). 

AQRR’s findings

It highlighted that Para 15 of SA 200 requires that the auditor shall plan and perform an audit with ‘professional scepticism’ recognising that circumstances may exist that cause the financial statements to be materially misstated. The AQRR identifies instances such as impairment of investments, evergreening of loans, approval of related party transactions, recording of revenue, violation of capital and leverage ratios, and numerous other instances given in the AQRR where the audit firm failed to exercise professional scepticism and failed to challenge the management assumptions and claims in key areas of financial reporting. I

The AQRR identified lapses in almost all stages of the audit, such as at the planning stage, substantive testing and adherence to independence norms.

NFRA has reviewed the said statutory audit done by SRBC& Co LLP of IL& FS for the FY 2017-18 following a reference made to audit regulator by the Central Government on September 25, 2019 .

The IL&FS group consists of around 250 subsidiaries (listed as well as unlisted), associates and joint ventures as on March 31, 2018, engaged in the infrastructure sector. 

As per books of accounts, the group’s revenue was around ₹17,672 crore and it had total assets of ₹115,814 crore and total external liabilities of ₹1,06,543 crore as on the said date. It reported a net loss of ₹1,886 crore (consolidated) and a profit of ₹584 crore (standalone) for the said period. 

As per the reference from the government, NFRA had earlier completed the Audit Quality Review of two of the major subsidiaries of IL&FS, i.e, IL&FS Financial Services Ltd for the financial year 2017-18 (joint audit by Deloitte Haskins and Sells LLP, Chartered Accountants and BSR and Associates LLP, Chartered Accountants) and IL&FS Transportation Networks Ltd (Audit by SRBC & Co LLP) for the same financial year.

Over the past three years, SRBC & Co LLP (SRBC) has co-operated fully with NFRA. “We are currently reviewing the Audit Quality Review report. We remain confident of our audits which have been performed in accordance with applicable laws and professional standards.”