Audit Regulator NFRA Finds Serious Lapses In Deloitte’s Audit Of IL&FS Financial Services 

Audit firm Deloitte, Haskins & Sells LLP allowed the management of IL&FS Financial Services Ltd. to conceal negative capital ratios so as to save the company's NBFC license, said the audit regulator in a report published today.

In its very first such audit quality review report, the National Financial Reporting Authority found serious lapses in Deloitte's audit of IFIN's financial statements for financial year 2017-18. The AQR was prompted by financial troubles and allegations of mismanagement and fraud at the IL&FS group of companies in 2018. It was carried out under section 132 (2) (b) of the Companies Act, 2013 that requires NFRA to monitor and enforce compliance with accounting and auditing standards.

Over 11 months of review the NFRA found that Deloitte failed to comply with the requirements of auditing standards and that “the instances of failure noticed 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 auditing standards”.

Of the most egregious failures on the part of Deloitte, NFRA found that Deloitte accepted the non-banking financial company management's decision not to disclose that net owned funds and capital to risk assets ratio were both negative. Reporting of negative NOF and CRAR would have led to cancellation of the firm's NBFC license.

The net owned funds of the company were negative Rs 45.93 crore as on Mar. 31, 2015, and sharply declined to negative Rs 4,124 crore as on Mar. 31, 2016. The RBI mandates maintaining minimum Rs 2 crore in net owned funds. The IFIN's capital to risk weighted asset ratio was (-)0.40 percent in FY15, and (-) 42.61 percent in FY16, against the minimum requirement of 15 percent, the report said.

The AQR also stated

• Deloitte did not display the required professional skepticism, and did not challenge the management on important issues.
• Deloitte did not adequately question the going concern assumption on basis of which management prepared financial statements.
• The independence of the auditor was compromised by the provision of non-audit services for substantial fees. These non-audit services were clearly prohibited by company law. Mandatory approval of audit committee was also not obtained.
• Deloitte did not question management and challenge inflation of profit by over Rs 180 crore.
• The Engagement Quality Control Review was “a complete sham”.
• Deloitte failed to appropriately deal with identification, categorisation and minimisation of engagement risk. The engagement partner signed the audit report without discharging most of the important duties that such an audit partner has to fulfill. Deloitte also violated standards by appointing two engagement partners, thereby leading to loss of accountability.

NFRA concluded that Deloitte's quality control system and processes are “severely inadequate and ineffective” and will examine whether disciplinary proceedings need to be initiated against the firm or its partners.

The Deloitte India spokesperson shared this comment on the AQR - “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”.

Deloitte, along with KPMG network firm BSR & Associates is currently also facing action by the government which has petitioned the National Company Law Tribunal to ban the two firms for five years. The matter is currently sub-judice.