Quality control at Deloitte ‘severely inadequate, ineffective’: NFRA

The National Financial Reporting Authority (NFRA) on Thursday issued the audit quality review (AQR) report of the statutory audit of IL&FS Financial Services (IFIN) for FY18, stating that the quality control system of the auditor, Deloitte Haskins and Sells (DHS), was inadequate and inefficient. It is the first AQR report of the regulator since it was constituted in October 2018.

“NFRA has concluded in this AQR report that the failure to comply with standards on auditing (SAs) are of such significance that DHS did not have adequate justification for issuing the audit report, asserting that the audit was conducted in accordance with the SAs. Besides, the quality control system and processes of DHS were found to be severely inadequate and ineffective,” NFRA said in the report.

Separately, the regulator will examine whether disciplinary proceedings under Section 132 (4) of the Companies Act 2013 need to be initiated in connection with the AQR report. The AQR does not cover the entire scope of work involved in statutory audit. A supplementary report may be issued later to deal with matters that have not now been covered in the report.

NFRA said the AQR points out that independence of the auditor was compromised by provision of non-audit services for substantial fees, that these non-audit services were clearly prohibited services in terms of Section 144 of the Companies Act and the mandatory approval of audit committee that would have been required if the provision for such services was permissible was not obtained.

Further, the engagement partner i.e. the partner designated by DHS as the person in overall charge of the statutory audit, had signed the audit report without discharging most of the duties that she/he was required to fulfil. The audit firm also violated SQC1 and SA 220 by naming two partners as engagement partners, thereby leading to loss of accountability, the AQR pointed out.

“DHS did not display the required professional scepticism and did not challenge the management on important issues. DHS accepted the management’s stand about not disclosing the fact that net owned funds (NOF) and capital to risk assets ratio (CRAR) of IFIN as on March 31, 2018 were negative and this situation would lead to cancellation of the NBFC licence of the company. DHS certified the accounts showing positive NOF and CRAR, accepting explanation of the management, which were clearly contrary to law,” it added.

Deloitte did not adequately question the going concern assumption on the basis of which the management had prepared the financial statements. It did not question the management and challenge the inflation of profit by over Rs 180 crore through inclusion of the value of a derivative asset which was entirely unjustified.

It also did not communicate any matter arising out of the audit to those charged with governance of the IFIN, even though mandated by the SAs.

“NFRA has concluded that quality control system and processes of DHS are severely inadequate and ineffective, as has been brought out clearly by the details in the various sections of the AQR report. DHS has been advised to take necessary action to revamp its quality control system and process and rigorously ensure compliance with the said revamped system,” the regulator said.