New Delhi, Aug 18 : IL&FS Financial Services (IL&FS) was not compliant with the minimum Net Owned Funds (NOF) and Capital to Risk Assets Ratio (CRAR) prescribed for an NBFC of its type as of March 31, 2018, and the then statutory auditor KPMG-arm BSR & Associates did not highlight the matter despite knowing about it, an NFRA report said.
During its Audit Quality Review (AQR) of the audit of IFIN for 2017-18 by BSR & Associates, the auditor cited an alleged letter by the management to the Reserve Bank of India as audit evidence, and did not highlight the non-compliance.
Further, on the doubts regarding the authenticity of the letter, the audit firm tried to put blame on the joint auditor, which it said should have highlighted the fact that the letter could not be relied upon.
“The audit firm goes on to indicate that the joint auditor, who had significant understanding and knowledge of the history of the auditee, did not bring to their attention the fact that the letter could not be relied upon,” said that the Audit Quality Review Report (AQRR). The joint auditor in this case was Deloitte Haskins & Sells LLP.
The NFRA said that BSR was convinced that the IFIN management was clearly in the wrong. However, they went along with the wrong numbers disclosed in the financial statements, contenting themselves with only an Emphasis of Matter (EOM) para in the auditor’s report, when such EOM is justified only when the disclosure requirements as per the standards of auditing are fulfilled.
“Thus, BSR failed to highlight a material misstatement of major magnitude and fundamental importance,” it said.
According to the authority, the fact that the BSR relied on the joint auditor for such an important element of audit evidence shows the lack of independent analysis by the firm.
“The audit firm is trying to mislead the authority by stating that the extract which was provided by the management was obtained from other sources. Thus, in view of Para 9 of SA 500, the audit firm has failed to obtain sufficient appropriate audit evidence,” it said.
The NFRA also assessed the auditor’s submission through “Annexure 5, despite the fact that such Annexure does not form part of the true copy of audit file as submitted to the authority”.
It is noted that these documents are nothing but the company’s internal documentation of matters discussed in the RBI office.
“In no circumstances can these be construed as approved minutes of the meetings since the counter-party, i.e. RBI’s officials, have not signed these documents. Therefore, in light of Paras 9 and 11 of SA 500, as stated above, these WPs (working papers) cannot be construed as valid evidence.”
The NFRA said that the argument of the audit firm that in November 2017, the “RBI provided the company time till March 31, 2019, to reduce its group exposures so as to be in line with the RBI’s views on how group exposures should be reckoned for the purposes of NOF computations, cannot be accepted at all”.
This shows gross negligence and the total lack of due diligence on the part of the engagement team, said the NFRA report.
BSR & Associates and Deloitte Haskins and Sells have been under the lens in the alleged IFIN fraud case. In March this year, the National Company Law Appellate Tribunal (NCLAT) had dismissed the pleas of both the audit firms, along with independent directors, to challenge their impleadment in the alleged fraud.
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