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National Financial Reporting Authority (NFRA) on Wednesday pointed out holes in the statutory audit of Infrastructure Leasing & Financial Services Limited (IL&FS) carried out by SRBC & Co LLP. and alleged that the auditor appointment itself breached independence norms.

The audit watchdog’s findings came in the latest audit quality review of IL&FS in terms of compliance with the auditing standards and the effectiveness of the quality control procedures of the audit firm. The government had in 2018 superseded the board of directors of IL&FS on account of a series of defaults by the group companies.

“NFRA observes that the initial appointment of SRBC & Co LLP and the continuation of SRBC & Co LLP as statutory auditor of IL&FS Ltd was violative of the norms of independence. This is because its network (Ernst & Young Global Limited/EY) provided prohibited services to the IL&FS group and also had a business relationship with the auditee (IL&FS) group," the regulator alleged in its report.

NFRA pointed out that the audit firm said in its preliminary submissions that NFRA has wrongly concluded the auditor as guilty of the violation of the provisions of the Companies Act, ICAI Code of Ethics, and other applicable laws.

A spokesperson for SRBC expressed confidence in the firm’s full compliance with the norms. “Over the past three years, SRBC & Co LLP (SRBC) has co-operated fully with NFRA. We are currently reviewing the audit quality review report. We remain confident of our audits which have been performed in accordance with applicable laws and professional standards," the spokesperson said.

NFRA alleged that the audit firm failed to properly verify the investments of IL&FS shown in the standalone financial statements. It also alleged that the audit engagement suffered from self-review and self-interest threats, hence, failed to meet the independence norms and SRBC should not have accepted the appointment as auditor in the first place.

The financial woes of IL&FS stemmed from the liquidity pressures faced by the non-banking sector and an asset liability mismatch, according to industry experts. Statutory auditors maintain the view that there is ambiguity in the law on the non-audit services that an auditor can provide to its client. (ends)

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