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Mumbai: The National Financial Regulatory Authority (NFRA) has barred former Deloitte Haskins and Sells LLP chief Udayan Sen from auditing for seven years and imposed a monetary penalty of 25 lakh for auditing lapses at Infrastructure Leasing & Financial Services Ltd (IL&FS). The watchdog has found Sen guilty of professional misconduct and not maintaining independence and quality in auditing accounts of the financial company.

The order is effective post 31 July.

Sen was the engagement partner of IL&FS in 2017-18. He stepped down as CEO in March 2015 and retired as a partner of the firm in March this year.

The role of the two auditors -- Deloitte and KPMG affiliate, BSR and Co. Llp, had come under the scanner after a debt crisis unfolded at the financial giant in September 2018. The IL&FS crisis had left a 1 lakh crore hole in the financial markets. The investigative authorities were quick to question the auditors in an attempt to unearth the layers of alleged discrepancies.

Sen was issued a show cause notice in January by the audit watchdog for professional misconduct under section 132(4) of Companies Act 2013. Under this section, NFRA has the power to impose a monetary penalty and bar a firm from both internal and external audit.

Interestingly NFRA passed this order despite Sen’s writ petition pending in the Delhi high court. Sen had approached the court questioning NFRA’s jurisdiction. The high court on 26 June had ruled that the watchdog cannot give effect to its ruling till 31 July.

In an 88-page order, NFRA found Sen guilty of professional misconduct as he failed to disclose material facts in financial statements known to him, failed to report material misstatement in IL&FS accounts, and did not exercise due-diligence and for gross negligence. The watch dog also found Sen failing to obtain sufficient information necessary for expressing an opinion, and also failing to invite attention to material departure from acceptable audit procedures.

The most damaging finding of NFRA is with respect to loss of independence of statutory auditor. NFRA observed that there was a serious lapse in the discharge of duty by Sen.

“In this case it has been clearly shown that the independence in mind and independence in appearance of statutory auditor has been totally compromised," said NFRA.

NFRA said since Sen has been managing partner and CEO of Deloitte for several years he should have been especially conscious of and sensitive to anything that could have impacted his and his firm’s independence.

The watchdog further said in the year 2017-18, IL&FS had actually incurred a loss but it was reported as a profit. It did this by assigning a value of 184 crore to put option of TTSL shares which resulted in loss being reported as a profit.

Sen went along with these fraudulent presentation of financial statements, said NFRA.

The watchdog also observed IL&FS was not complying with capital to risk weighted average ratio and net owned funds leading to misstatement of financials.

The auditor also failed to evaluate management’s assessment of IL&FS being a going concern. Audit ignored the fact that there is a consistent reduction in profits of IL&FS since March 2014. The decline in profits was substantial and a sharp decline in cash and cash equivalents in 2016-17 and 2017-18.

“As a professional accounting firm we are surprised and concerned that the NFRA has chosen to issue and make public an order against a former partner of the firm, in spite of the question of its jurisdiction being sub-judice and awaiting adjudication and disposal by the Hon’ble Delhi High Court," a spokesperson at Deloitte India said.

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