NEW DELHI : The National Financial Reporting Authority (NFRA) has indicted Deloitte Haskins and Sells LLP for what it called significant failures in the statutory audit of IL&FS Financial Services Ltd (IFIN) for 2017-18 and is examining whether disciplinary proceedings against the auditor need to be initiated, the audit regulator said on Thursday.

NFRA’s review of Deloitte’s quality of audit has shown that the failures were of such significance that the firm did not have adequate justification for claiming that the audit was done as per standards, the regulator said in a report posted on its website.

“NFRA has concluded that the quality control system and processes of Deloitte Haskins and Sells are severely inadequate and ineffective...," said the regulator’s quality review report. NFRA advised Deloitte to revamp its quality control systems and processes and to ensure rigorous compliance with the revamped system. The audit regulator also said that it will “examine whether disciplinary proceedings under section 132 (4) of the Companies Act 2013 need to be initiated," said the report.

The watchdog also pointed out that the independence of the auditor “was compromised by the provision of non-audit services for substantial fees." Auditors accepting juicy non-audit assignments from their clients being audited have been a worry for policy makers for a long time.

“DHS (Deloitte Haskins and Sells) LLP will conduct a detailed review into NFRA’s report and is exploring its available options in relation to the joint audit of IFIN for FY 2017-2018. We remain confident that our audits have been performed in accordance with applicable laws, regulations and professional standards in India," said a Deloitte India spokesperson.

The Companies Act explicitly prohibits statutory auditors from directly or indirectly offering eight specified services, including internal audit and actuarial and investment banking services, to their clients. Auditors are barred from offering such services to the audited entity’s parent or subsidiary. However, there are other lucrative services that are outside the purview of this list, such as tax audit, secretarial services, transfer pricing-related services, and mergers and acquisitions advisory that statutory auditors are free to offer to their clients.

The government had last year replaced the board members of IFIN’s parent, Infrastructure Leasing and Financial Services Ltd (IL&FS), and some of them are currently being probed for negligence, diversion of funds and the company’s inability to manage risks. IL&FS’ payment defaults signified an acute liquidity crunch faced by the non-bank sector, which subsequently became more evident.

The role of auditors has been debated among professionals and policy makers for some time since the scam involving Satyam Computer Services came to light in 2009. While regulators tend to point fingers at statutory auditors for failing to unearth wrongdoings in the company, auditors often claim that their job is to certify the financial statements of the company as fair and true representation of the health of the company and not to act like investigators questioning the authenticity of every document handed to them by the management. Industry watchers say there is a serious gap about what regulators expect from auditors and what they are able to deliver.

NFRA’s report accused Deloitte of not displaying “the required professional scepticism" and failing to challenge the management on important issues. The regulator also claimed that the auditor “did not adequately question the going concern assumption on the basis of which the management had prepared the financial statements."

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