NFRA finds huge gaps in Deloitte's audit of IFIN, says will examine further

Topics Deloitte | audit | Auditing

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Deloitte Haskins and Sells LLP (DHS) has failed to comply with the standards of auditing and compromised its independence by providing prohibited non-audit services for substantial fees in the matter of IL&FS Financial Services (IFIN), an audit quality review by the National Financial Reporting Authority (NFRA) has found.

In its report issued on Thursday, in the first case referred to the audit regulatory body by the government, the NFRA said quality control systems and processes at DHS were “severely inadequate and ineffective”. 

“The instances of failure are of such significance that DHS did not have adequate justification for issuing the audit report asserting that the audit was conducted in accordance with the standards on auditing,” it said. 

The audit and accounting regulatory body has advised Deloitte to take action to revamp its processes and ensure compliance.

“We will examine it to see if anything further needs to be done,” Rangachari Sridharan, chairperson, NFRA, told Business Standard.

A Deloitte India spokesperson said: “DHS LLP will conduct a detailed review into NFRA’s report and is exploring its available options in relation to the joint audit of IFIN for FY 2017-2018. We remain confident that our audits have been performed in accordance with applicable laws, regulations and professional standards in India.” 

The NFRA could initiate disciplinary proceedings under the Companies Act, 2013, in connection with its report.  The Act empowers the NFRA to impose penalties on auditors or debar them for a maximum period of 10 years. This is the first audit quality review done by the NFRA. 

The authority is also likely to come up with a supplementary report to deal with matters that have not been covered. 

DHS ruled out the “risk of misstatement due to fraud”, leading to inadequate audit responses, and failed to deal with identifying, categorising, and minimising engagement risk, especially looking at the size and economic significance of the company, the NFRA said.

It also pointed in its review that the auditor did not display the required professional scepticism and accepted the management stand about not disclosing that net-owned funds and the capital to risk-assets ratio of IFIN as of March 31, 2018 were negative, and that this situation would lead to the cancellation of the company’s licence to operate as a non-banking financial company. Instead, Deloitte Haskins accepted the explanations of the management and certified these ratios as positive. 

The Serious Fraud Investigation Office too in its complaint had said the auditors had failed to verify the end-use of bank finances and the money raised through non-convertible debentures (NCDs), despite it being a regulatory mandate for verifying such things.

The Ministry of Corporate Affairs has sought a five-year ban on the former auditors of IL&FS under the Companies Act. The Bombay High Court had granted interim relief to the auditors against any coercive action in November.

DHS did not communicate to those charged with the governance of IFIN any matter arising out of the audit, even though mandated by the standards of auditing, the NFRA said.

The auditor, NFRA said, in an “entirely unjustified” move did not question or challenge the inflation of profit by over Rs 180 crore through including the value of a derivative asset. NFRA also found that the engagement quality control review, as said to have been carried out has been a “complete sham.”

The engagement partner – designated by Deloitte Haskins as the overall in charge of the statutory audit work had signed the audit report without discharging most of the important duties. Naming two engagement partners also led to loss of accountability, NFRA said. 

NFRA which has been in existence for a little over a year started its audit review process on February 25, 2019 and issued a draft report to Deloitte seven months later on September 23, 2019. Deloitte gave its oral submission in response to the report on October 30 and a written reply in the following week.

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