The National Financial Reporting Authority (NFRA), the audit regulator, has pulled SRBC & Co LLP for failing to flag financial mismanagement in IL&FS Transportation Networks Ltd (ITNL) for FY2017-18.
In its audit quality review report (AQRR), the regulator says, "...it appears that the audit firm has failed to meet the requirements of statutory auditor (SA) 700, para 11 while forming their opinion on the company's financial statements for FY2017-18. The instances discussed in this report are of such significance that, in NFRA's view, the audit firm did not have any justification for issuing the audit report asserting that the audit was conducted in accordance with the statutory auditors."
In fact, NFRA says the "initial appointment and continuation of SRBC & Co as statutory auditor of ITNL, was prima facie illegal and void"; however, it decided to examine compliance by the auditor without prejudice.
According to the audit regulator, SRBC & Co, the audit firm has failed to appropriately and sufficiently evaluate the use of the going concern basis of accounting by the management of ITNL and has "thus failed to note the implications thereof in the auditor's report"
NFRA also says there is an apparent attempt to obscure material information in the financial statements by vague and misleading disclosures by the management regarding the reversal of expected credit loss (ECL).
Here are some issues highlighted by NFRA in its audit quality review report (AQRR)...
• In assessing the risks of material misstatements (ROMM), the audit firm did not discuss the susceptibility of the financial statements to material misstatement due to fraud, did not identify and assess revenue recognition and management override of controls as serious potential risks, which ultimately resulted in several violations of applicable Ind AS and SAs, as highlighted in the AQRR, thus making the financial statements subject to serious material misstatements and therefore unreliable.
• ITNL's financial exposure to its subsidiaries, associates and joint ventures amounting to Rs3,346 crore was not properly valued as per the applicable accounting standards because the audit firm had failed to obtain sufficient appropriate evidence to justify the valuation of ITNL's investment and loans to these entities.
• The company's losses during 2017-18 were understated by at least Rs2,021 crore on account of unjustified reversal of expected credit loss (ECL) on loans given to the special purpose vehicle (SPV) and on trade receivables, and due to incorrect impairment valuation. This is excluding the impact due to incorrect treatment of the letter of comforts amounting to Rs2,654 crore, which should have been correctly treated as financial guarantees as per the accounting standards, the effect of which on profit and loss is not quantified.
• The audit firm has not evaluated the work done by management's expert while adopting the expert's opinion, and thus the auditor's opinion expressed under the Companies' (Auditor's Report) Order, 2019 (CARO) clause (iii) stating that the terms and conditions of the company's loans of Rs111.20 crore to joint ventures (JVs) and to the not-fully owned subsidiaries at zero interest rate are not prejudicial to the company's interest, is not supported by sufficient appropriate evidence and is in violation of requirements of SA 500.
• The audit firm's engagement quality control (EQC) partner has failed to report material misstatements known to him to appear in a financial statement with which he is concerned in his professional capacity and has not exercised due diligence to obtain sufficient information to objectively evaluate the significant judgements of the engagement team and conclusions reached by them.
• The audit firm has not determined the persons comprising those charged with governance (TCWG). Further, NFRA has not found any communication to TCWG relating to auditor's independence and the relationships and other matters between the firm, network firms.
• The audit firm has failed to maintain documents as per SA 230. The integrity of the audit file is questionable due to tampering and inconsistency pointed out at several places in the AQRR.
"Failure to comply with any of the requirements of applicable SAs indicates that the audit firm has failed to achieve the central purpose of the audit, and that there was not an adequate justification for issuing the audit report," NFRA concludes in its AQRR.