NFRA pulls up SRBC & Co for ITNL audit

Audit regulator National Financial Reporting Authority (NFRA) in its audit quality review report in the case of IL&FS Transportation Networks Limited (ITNL) has pulled up the auditor, SRBC & Co, part of EY India network, and said that appointment of the firm was “illegal and void” under the standards of auditing (SAs).

NFRA, part of the Ministry of Corporate Affairs (MCA), in a 343-page report on Thursday said that the audit firm did not issue proper red flags in critical areas like going concern, evaluation of ITNL’s investments and loans among other things.

The regulator has also questioned the independence of the auditor in the audit, claiming that the firm which is associated with EY India, provided “non-audit” services as well.

NFRA has still not come up with any penalty for the audit firm.

“The Audit Firm has failed to maintain documents as per SAs. The integrity of the Audit File is questionable due to tampering and inconsistency pointed out at several places in the AQRR (audit quality review report),” the NFRA report said.

The report said that SRBC has failed in meeting the requirements set under the SA in preparing the financial statements of ITNL for FY 2017-18.

The report said that the audit firm has to be independent and has violated several regulations mandated for the audit firms.

“The services provided directly by SRBC to ITNL, are in the nature of accounting and bookkeeping services, design and implementation of a financial information system, and management services, which are violative of the code of ethics and are prohibited services under Section 144 of Companies Act,” the report said.

The report also alleged that the auditor had not properly categorised certain entries that led to the corporate governance issues in the company.

“The company’s losses during 2017-18 were understated by at least Rs. 2021 crore on account of unjustified reversal of Expected Credit Loss (ECL) on loans given to the SPV and on trade receivables, and due to incorrect impairment valuation. This is excluding the impact due to incorrect treatment of the letter of comforts amounting to Rs 2654 crore, which should have been correctly treated as financial guarantees as per the accounting standards, the effect of which on profit/loss is not quantified. NFRA further concludes that there is a clear attempt to obscure material information in the Financial Statements by vague and misleading disclosures by the management regarding ECL reversal,” the report said.

NFRA had launched an investigation into audits of IFIN, Infrastructure Leasing and Financial Services (IL&FS) and IL&FS Transportation Networks Ltd (ITNL).

NFRA’s investigation is focused on the IL&FS fraud after the infrastructure financier failed to meet its debt obligations last autumn, triggering a confidence crisis in India’s non-bank lending industry.

Deloitte, EY and KPMG were three main auditors that audited IL&FS, ITNL and IFIN at different times.

NFRA has already come out with similar reports for other two auditors, Deloitte and BSR & Associates, part of KPMG India network, of IL&FS group.

“If during a subsequent review of the audit process, it is found that some of the audit procedures detailed in the SAs were not in fact complied with, it may tantamount to the auditor making a deliberately false declaration in his report and the consequences for the auditor could be very serious indeed,” NFRA report warned.

“Over the past two years, we have been cooperating with NFRA and have provided the requested information. We are disappointed with the conclusions in the Audit Quality Review report of ITNL for FY2017-18. SRBC & Co LLP (SRBC) had performed the audit as per the applicable standards and highlighted the issue relating to going concern in our limited review report for the June 2018 quarter. We are presently doing a detailed review of the report,” an SRBC & Co spokesperson said.