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". The latest conclusions are part of the Supplementary Audit Quality Review Report (SAQRR) dated December 7, 2020.
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 Deloitte Haskins and Sells LLP (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.
There was no immediate comment from Deloitte. 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 Later, the government had superseded its board.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.
Further, 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.