IFIN case: Audit regulator now faults BSR’s appointment, work

The National Financial Reporting Authority has found that not only was the appointment of BSR & Associates LLP as auditors of IL&FS Financial Services (IFIN) for 2017-18 illegal, but its audit quality was also wanting. The KPMG network firm is now in the dock after the NFRA found lapses by Deloitte Haskins & Sells. BSR and Deloitte were joint auditors of IFIN for that year.

The NFRA has concluded that the “independence” requirements for auditors, laid down under the company law and the Code of Ethics of the CA Institute, were violated in BSR’s appointment.

Violation of company law

In its 256-page Audit Quality Review report, the NFRA said BSR was not eligible to be appointed a statutory auditor due to violation of Section 141(3)(e) — subsisting business relationships on the date of appointment — and Section 141(3)(i) — provision of non-audit services directly or indirectly — of the Companies Act, 2013.

The report also found BSR in violation of the Standards of Auditing and highlighted that the firm did not have the justification to issue the audit report. The compliance failure included “material misstatement of major magnitude” when IFIN was not compliant with the RBI-stipulated capital adequacy norms; going concern assumption by the management; complete absence of communication with those charged with governance, and determination of materiality amounts on the basis of non-relevant factors.

The report will now form the basis for any disciplinary proceedings against the audit firm.

The report highlighted that BSR and other entities in its network de facto use the KPMG trademark and brand name for all their audit and non-audit services, while making a clearly futile attempt to show a de jure separation from KPMG. This attempt will have to fail in view of the clear public perception of the BSR network entities being part of the larger KPMG global network, and also the legal agreements between them, it said.

The NFRA showed that incorrect accounting from just three items — Reversal of General Contingency Provision (₹225 crore); Unjustified Valuation of a Derivative Asset (₹184 crore), and On-provision for Impairment in the Value of Investments (₹200.2 crore) — have led to an inflation of profits by ₹609 crore for that year, when IFIN reported a profit of ₹201.96 crore.

Not all facts considered: BSR

In its response, BSR said: “We are concerned to note the conclusions by the NFRA in the Audit Quality Review as they do not give due consideration to all the facts and circumstances that were transparently shared by us with the NFRA during their review. We are reviewing the report in detail and will determine our response in due course. Audit quality remains the cornerstone of our profession and we recognise the challenges that lie ahead to improve audit quality across the profession in India. We remain committed to support NFRA’s efforts in this regard.”

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