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Mumbai: National Financial Reporting Authority (NFRA) on Monday found lapses in BSR and Associates LLP, a KPMG affiliate firm, audit of IL&FS Financial Services Ltd (IFIN).

The audit watchdog in BSR's 256-page audit quality review report (AQRR) found the audit firm in violation of standards of auditing. This report would form the basis on any further disciplinary and penal proceedings against the audit firm.

NFRA had started its examination in February 2019 following the collapse of Infrastructure Leasing and Financial Services (IL&FS) in October 2018. The government and NFRA were examining the role of auditors in collapse of the entity which left a 1-trillion hole in India's financial systems.

NFRA has examined the role of two auditors so far—Deloitte Haskins and Sells LLP and BSR. NFRA has already barred Deloitte's former head Udayan Sen from audit for seven years following lapses in audit of IFIN.

In its AQRR report, the watchdog said IFIN was not compliant with the minimum Net Owned Funds (NOF) and Capital to Risk Assets Ratio (CRAR) prescribed for an NBFC of its type, as of 31 March 2018. These numbers for IFIN were highly negative and as per the Reserve Bank of India (RBI) norms, the NBFC has to disclose these numbers. IFIN's management contested RBI's methodology and reported positive numbers.

"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," said NFRA in its report. "Thus, BSR failed to highlight a material misstatement of major magnitude and fundamental importance," it added.

“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. We are reviewing the report in detail and will determine our response in due course. Audit quality remains the cornerstone of our profession and we recognize 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," BSR & Associates LLP said in a statement.

NFRA further stated that IFIN's profit in 2017-18 of 201.96 crore was after considering wrongful credit and not providing for certain non-performing accounts. The three items incorrectly accounted for by IFIN include—not providing for impairment of investments, unjustified valuation of derivative asset and general contingency provisions. As the result of these incorrect accounting, IFIN's numbers were inflated by 609 crore.

The AQRR report also pointed to several other violations which include assessment of the use of the going concern assumption by the management, the complete absence of the required communication with those charged with governance, inadequate and improper evaluation of the risk of material misstatements, determination of materiality amounts on the basis of non-relevant factors.

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