IFIN case: NFRA says appointment of DHS as statutory auditor in 2017-18 'illegal'

With the auditor not considering certain items, including unjustified valuation of a derivative asset, profit of IFIN was inflated by Rs 609 crore in 2017-18, it said.The latest conclusions are part of the Supplementary Audit Quality Review Report SAQRR dated December 7, 2020.

The National Financial Reporting Authority (NFRA) has said that appointment of Deloitte Haskins and Sells LLP as the statutory auditor of IL&FS Financial Services Ltd (IFIN) for 2017-18 was ''illegal''. With the auditor not considering certain items, including unjustified valuation of a derivative asset, profit of IFIN was inflated by Rs 609 crore in 2017-18, it said.

The latest conclusions are part of the Supplementary Audit Quality Review Report (SAQRR) dated December 7, 2020. A Deloitte India spokesperson said that Deloitte Haskins and Sells (DHS) LLP will review the report.

The watchdog conducted an Audit Quality Review (AQR) of the statutory audit of IFIN for 2017-18 period. The AQR Report was issued on December 12, 2019. The SAQRR covers issues which were not covered in the AQR Report. According to the SAQRR, the appointment of DHS as the statutory auditor of IFIN for the year 2017-18 was ''illegal'', since the entity was not eligible to be appointed as an auditor due to violations. Those are ''subsisting business relationships on the date of appointment'' and ''provision of non-audit services directly or indirectly'' of the Companies Act, 2013.

The watchdog said that DHS failed to comply with the requirements of the Standards on Auditing (SAs). ''The instances of failure noticed are of such significance that it appears to NFRA that DHS did not have adequate justification for issuing the audit report asserting that the audit was conducted in accordance with SAs,'' as per the executive summary of the SAQRR.

In a statement, the Deloitte India spokesperson said DHS LLP will review the supplementary report in relation to IFIN which was a joint audit for 2017-18. ''We have been cooperating with the NFRA in respect of the review and remain confident that our audits including our appointment have been performed in accordance with applicable laws, regulations and professional standards in India,'' the spokesperson said in a statement.

IFIN is part of the diversified IL&FS group, where major financial irregularities came to light in 2018. Later, the government had superseded its board. NFRA said there are other violations that deal with determination of materiality amounts on the basis of non-relevant factors, deficiencies in applying analytical procedures, failure to respond to subsequent events and inadequacies in auditing of creation of charges on assets mortgaged with the company, it noted.

The latest report said that IFIN's reported Profit Before Tax was Rs 201.96 crore in 2017-18 but the amount does not take into account three items, including unjustified valuation of a derivative asset at Rs 184 crore. The reversal of general contingency provision of Rs 225 crore and non-provision for impairment in the value of investments to the tune of Rs 200.20 crore were also not considered.

According to the NFRA, the total of Rs 200.20 crore excludes some investments in respect of which it has not been able to arrive at a specific amount for the impairment. Citing these instances, the regulator said DHS ''has not obtained sufficient, appropriate audit evidence, as required by the SAs, to support the specific numbers finally reported in the financial statements'' ''The total of the three items mentioned above alone have led to an inflation of the profits of IFIN by Rs 609 crore,'' it added.

Further, the NFRA said that the Engagement Quality Control Review (EQCR) mechanism was found to be completely inadequate for the intended task. As per the executive summary, the regulator also extensively studied the IT processes and platform that are used by DHS for their Audit File documentation.

''NFRA found that the IT processes/ platform have deficiencies that are systemic and structural in nature and arise from a complete disregard for basic principles of IT security in the software used. This makes the audit documentation completely unfit for the intended purpose,'' it noted. In December last year, the NFRA had said DHS failed to comply with auditing standards in carrying out statutory audit of IFIN. Besides, actions have been taken by the regulator against some individual auditors.