NFRA finds gaps in audit report of Deloitte Haskins and Sells on IFIN

Highlighting the seriousness of flaws, the NFRA pointed out that the instances of failure of such significance indicate that DHS did not have adequate justification for issuing audit report asserting that the audit was conducted in accordance with the SAs.

It further pointed out that the independence of the auditor was compromised by the provision of non-audit services for substantial fees, which were clearly prohibited services in terms of Section 144 of the Companies Act, 2013.

In another instance, the AQR noted that “DHS accepted that stand of the management about not disclosing the fact that the net owned funds and the capital to risk assets ratio of IFIN as on March 31, 2018, were both negative, and that this situation would lead to cancellation of the NBFC license of the company. DHS certified the accounts showing positive NoF and CRAR, accepting the explanations of the management which were clearly contrary to law.”

While NFRA will examine to initiate “disciplinary proceedings” under Section 132(4) of the Companies Act, 2013, the Section empowers the authority to impose penalty of up to ten times the fee received. The authority can also debar the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountants of India for a minimum period of six months or for such higher period not exceeding10 years.

Apart from the auditors, the Reserve Bank had in a separate report on IL&FS found that the erstwhile Board of the company failed to exercise oversight. As per a March 22, 2019, RBI inspection report on IL&FS, the group did not declare bad loans in the four fiscals till March 31, 2018.

The RBI inspection report also found that that non-performing assets (NPAs) on IL&FS’ books were as high as 70 per cent of its total loans and advances by March 31, 2018. It further said that “wide divergences were observed” between the reported and the assessed position of asset classifications and provisions at IL&FS.

“The erstwhile Board failed to exercise oversight over the functions of the entity. They did not monitor the affairs of the downstream entities in which investments were made,” RBI said in its report, adding that that serious deficiencies in credit appraisal, and loans were given to unrated or poorly rated borrowers.

Of the total debt of more than Rs 89,000 crore held by Indian entities of the IL&FS Group, as much as Rs 61,375.6 crore was held by 82 entities which were not able to meet payments to even senior secured financial creditors. The new board of IL&FS is now trying to deal with the mountain of NPAs that has gripped the financial sector through a series of defaults. The collapse of IL&FS engulfed the entire NBFC sector, leading to a broader slowdown in the economy and forcing the government to supersede its board.