NFRA finds lapses in SRBC & Co’s FY18 audit of IL&FS arm

The National Financial Reporting Authority (NFRA) has found the appointment of SRBC & Co. LLP as the statutory auditor of IL&FS Transportation Networks Ltd (ITNL) for FY18 to be illegal and void on first impression and has alleged lapses in the audit.

In the final audit quality review report made public on Thursday, NFRA charged SRBC & Co. with failing to sufficiently evaluate the management’s use of the going concern basis of accounting and failing to note the implications in its report. Managements have to make their assessment about the going concern status of the firm and auditors have to audit and report. If managements are not sure of the company’s survival, they have to make the financial statements on liquidation basis, not on the basis of a going concern. If managements pretend to be all fine despite a threat to survival, then auditors can and should qualify the audit report.

The audit regulator had issued a draft report in March. The final report takes into account the responses of the auditor and have dropped conclusions wherever the auditor has provided satisfactory responses or has pointed out inaccuracies in it.

ITNL’s financial exposure to its subsidiaries, associates and joint ventures amounting to ₹3,346 crore was not properly valued according to the applicable accounting standards, NFRA said.

It also said the company’s losses during FY18 were understated by at least ₹2,021 crore. The report also said that the audit firm did not discuss the susceptibility of the financial statements to material misstatement because of fraud.

SRBC & Co., has, however said that it has fully cooperated with NFRA. “We are disappointed with the conclusions in the audit quality review report... SRBC & Co. had performed the audit as per the applicable standards and highlighted the issue relating to going concern in (the) limited review report for the June 2018 quarter,” the auditor said in a statement while sharing that it is currently working on a detailed review of the report.