NFRA finds deficiencies in BSR’s audit of IL&FS Financial Services
The National Financial Reporting Authority (NFRA) said in its audit quality review report released on Monday that BSR and Associates, LLP, was not eligible for appointment as the statutory auditor of IL&FS Financial Services Ltd (IFIN) as it violated the provision of non-audit services and had a subsisting business relationship with the company on the date of its appointment.
In a statement, BSR said, “We are concerned to note the conclusions by NFRA in the audit quality review as they do not give due consideration to all the facts and circumstances that were transparently shared by us with NFRA during their review.”
BSR said that it was reviewing the report in detail and will determine its response in due course. “Audit quality remains the cornerstone of our profession and we recognise the challenges that lie ahead to improve audit quality across the profession in India. We remain committed to support NFRA’s efforts in this regard,” the statement said.
NFRA’s report on the statutory audit for the year 2017-18 of IFIN said that BSR and other entities in its network de facto use the KPMG trademark and brand name for all their audit and non-audit services, while making a “clearly futile attempt” to show a de jure (legal) separation from KPMG.
“The non-audit services provided technically by the KPMG labelled entities of the network are clearly services indirectly provided by BSR entities, and result in gross violations of the independence requirements for auditors laid down under the Companies Act, as well as the Code of Ethics mandated by the Institute of Chartered Accountants of India,” NFRA said in its report.
BSR did not obtain sufficient, appropriate audit evidence, as required by the standards of audit, to support the specific numbers finally reported in the financial statements, according to the audit review report.
IFIN’s reported profit before tax for 2017-18 was Rs 201.96 crore without providing for a reversal of general contingency provision, unjustified valuation of a derivative asset and non-provision for impairment in the value of investments.
“The three items mentioned above alone have led to an inflation of the profits of IFIN by Rs 609 crore,” NFRA said.
The audit review report has found violations with respect to the assessment of the use of the going concern assumption by the management and improper evaluation of the risk of material misstatements.
NFRA also found systemic and structural deficiencies in the information technology processes and platforms used by BSR.
“…(They) arise substantially from a complete disregard for basic principles of IT security in the software used. This renders the audit documentation completely unfit for the intended purpose,” NFRA said.
NFRA also said that IFIN was not compliant with the minimum net owned funds and capital to risk assets ratio prescribed for an NBFC of its type, as of 31st March, 2018. “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,” the report said.
NFRA said that BSR failed to highlight a material misstatement of major magnitude and fundamental importance.
