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NFRA finds lapses in ITNL audit: FY18 losses ‘understated by at least Rs 2,021 crore’

The audit quality report found that ITNL’s losses for FY18 were understated by at least Rs 2,021 crore and that its financial statements did not appropriately value the Rs 3,346-crore exposure to its subsidiaries, associates and joint ventures.

By: ENS Economic Bureau | New Delhi |
September 24, 2021 3:36:37 am
The report also found that the appointment of SRBC & Co as statutory auditor of ITNL was illegal, as firms related to the auditor had provided management and other non-audit services that they are prohibited from providing to their clients to ITNL in the relevant period.

THE NATIONAL Financial Reporting Authority (NFRA) has found major lapses in the audit of IL&FS Transportation Networks Ltd (ITNL) for FY18, conducted by EY network firm SRBC and Co LLP.

The audit quality report found that ITNL’s losses for FY18 were understated by at least Rs 2,021 crore and that its financial statements did not appropriately value the Rs 3,346-crore exposure to its subsidiaries, associates and joint ventures. The report also found that the appointment of SRBC & Co as statutory auditor of ITNL was illegal, as firms related to the auditor had provided management and other non-audit services that they are prohibited from providing to their clients to ITNL in the relevant period.

“The initial appointment of SRBC & Co LLP, and the continuation of SRBC & Co LLP, as statutory auditor of ITNL, was prima facie illegal and void,” the NFRA said. It has also previously given an audit quality report on the statutory audit of IL&FS Financial Services (IFIN) by KPMG network firm BSR & Co, finding similar violations of rules on the provision of non-audit services by statutory auditory and even debarred a former Deloitte India partner for his role as statutory auditor of IFIN for FY18.

Defaults by the IL&FS Group, including ITNL, in 2018 had led to a severe liquidity crunch for non-banking financial companies (NBFCs) and triggered the government to move to supersede the board of directors of the group.

“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,” the NFRA said in its audit quality report.

The regulator noted that there was a “clear attempt to obscure material information in the financial statements” regarding the ECL reversal.

“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,” a spokesperson for SRBC & Co said, adding the firm had fully cooperated with the NFRA over its two-year enquiry and provided all requested information.

The NFRA noted that the audit firm had failed to appropriately “evaluate the use of the going concern basis of accounting” by management and failed to note implications of this in its report.

The regulator also concluded that SRBC and Co’s engagement quality control partner “failed to report material misstatements known to him” and that he did not exercise due diligence in obtaining information to evaluate judgements made by the firm’s engagement team.

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