NFRA finds deficiencies in Statutory Audit of IL&FS Transportation Networks
File No. NF-11011/10/2019-NFRA
Statutory Audit of:
IL&FS Transportation Networks Limited
(ITNL) for the Financial Year 2018
SRBC & Co LLP,
Firm Registration Number (FRN):
SEPTEMBER 23, 2021
National Financial Reporting Authority
Government of India
7th Floor, Hindustan Times House, K.G. Marg,
New Delhi – 110001
AQR Report on Statutory Audit of ITNL, FY 2017-18
1.1. Section 132(2)(b) of the Companies Act, 2013 requires the National Financial Reporting Authority (NFRA) to, inter alia, monitor and enforce compliance with accounting standards and auditing standards in such manner as may be prescribed.
1.2. Rule 8 of the NFRA Rules, 2018 provides that for the purpose of monitoring and enforcing compliance with auditing standards under the Act, NFRA may–
1.2.1. review working papers (including audit plan and other documents) and communications related to the audit;
1.2.2. evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system by the auditor; and
1.2.3. perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be considered necessary or appropriate.
1.3 The statutory audit of IL&FS Transportation Networks Limited (ITNL) for the financial year 2017-18 (the “Engagement”) was carried out by SRBC & Co LLP (Firm Registration No. 324982E/E300003) (“Audit Firm/”Auditor””). Pursuant to the Companies Act and the NFRA Rules, NFRA has taken up the AQR of the statutory audit for the financial year 2017-18. This AQR has the objective of verifying compliance with the Requirements of Standards on Auditing (SAs) by the Audit Firm relevant to the performance of the Engagement. The AQR also has the objective of assessing the Quality Control System of the Audit Firm and the extent to which the same has been complied with in the performance of the Engagement.
1.4. The observations made in this AQRR are restricted to some significant deficiencies noted in the Engagement; they do not cover all the deficiencies that may have occurred in the performance of the Engagement by the Audit Firm.
1.5. NFRA commenced an Audit Quality Review (AQR) of the statutory audit of ITNL for the year 2017-18 and arrived at Prima Facie Conclusions (PFC), which were detailed in the PFC Report dated 24th March, 2020. A Supplementary PFC Report was issued on 17th April 2020. The response of the Audit Firm to the PFC Reports was received on 3rd July 2020. A Draft Audit Quality Review Report (DAQRR) was issued on 8th March, 2021. The Audit Firm submitted its written response to the DAQRR on 10th July, 2021. An oral presentation in response to DAORR was made by the Audit Firm on 8th September, 2021. A brief response to the questions posed by the NFRA during the oral presentation was also received on 11th September 2021. All this has been examined and taken into account while preparing the final AQRR.
1.6. Refer to Chronology of the events regarding AQR of the statutory audit of IL&FS Transportation Networks Limited for the financial year 2017-18 carried out by SRBC & Co LLP (Annexure 1), for details of communication between NFRA and the Audit Firm. All this material would need to be consulted to present the background to the present AQRR, and, when found necessary, to support the reasoning in the present AQRR in respect of any observation. Wherever the Audit Firm has provided satisfactory responses to the conclusions of the DAQRR, or has pointed out inaccuracies in the DAQRR, those issues have been dropped from the summary findings of the DAQRR that have been included in this AQRR. The detailed discussions on the evidence in the Audit File and in the responses of the Audit Firm to the prima facie conclusion/DAQRR on any matter, and NFRA’s analysis and conclusions thereon, is not repeated in the AQRR in the interest of conciseness.
1.7. The AQRR is designed to identify and highlight non-compliance with the requirements of the SAs, and to bring out insufficiencies in the Quality Control System of the Audit Firm and the shortcomings in the documentation of the audit process. The AQRR also evaluates the quality and adequacy of the supervisory procedures of the Audit Firm. The AQRR is, therefore, not to be treated as an overall rating tool.
Summary of AQRR
1.8. The following is a summary of the most important observations of the AQRR. Details of the evidence in support of these observations, and the reasoning leading thereto, are provided in the subsequent Sections of this DAQRR.
1.8.1. The initial appointment of SRBC & Co LLP, and the continuation of SRBC & Co LLP, as statutory auditor of ITNL, was prima facie illegal and void. Nevertheless, NFRA has proceeded to examine compliance by the Audit Firm with the SAs, in their performance of this Engagement, without prejudice to this finding.
1.8.2. The Audit Firm has failed to appropriately and sufficiently evaluate the use of the going concern basis of accounting by the Management and has thus failed to note the implications thereof in the Auditor’s Report.
1.8.3. In assessing the Risks of Material Misstatements (ROMM), the Audit Firm did not discuss the susceptibility of the financial statements to material misstatement due to fraud, did not identify and assess revenue recognition and management override of controls as serious potential risks, which ultimately resulted in several violations of applicable Ind AS and SAs, as highlighted in the AQRR, thus making the Financial Statements subject to serious material misstatements and therefore unreliable.
1.8.4. ITNL’s financial exposure to its subsidiaries, associates and joint ventures amounting to Rs. 3,346 crore was not properly valued as per the applicable Accounting Standards because the Audit Firm had failed to obtain sufficient appropriate evidence to justify the valuation of ITNL’s investment and loans to these entities.
1.8.5. The Company’s losses during 2017-18 were understated by at least Rs. 2021 crore on account of unjustified reversal of Expected Credit Loss (ECL) on loans given to the SPV and on trade receivables, and due to incorrect impairment valuation. This is excluding the impact due to incorrect treatment of the letter of comforts amounting to Rs 2654 crore, which should have been correctly treated as financial guarantees as per the accounting standards, the effect of which on profit/loss is not quantified. NFRA further concludes that there is a clear attempt to obscure material information in the Financial Statements by vague and misleading disclosures by the management regarding ECL reversal.
1.8.6. The Audit Firm has not evaluated the work done by Management’s Expert while adopting the Expert’s opinion, and thus the Auditor’s opinion expressed under the Companies’ (Auditor’s Report) Order, 2019 (CARO) clause (iii) stating that the terms and conditions of the Company’s loans of Rs. 111.20 crore to joint ventures and to the not-fully owned subsidiaries at zero interest rate are not prejudicial to the company’s interest, is not supported by sufficient appropriate evidence and is in violation of requirements of SA 500.
1.8.7. The Audit Firm’s EQC partner has failed to report material misstatements known to him to appear in a financial statement with which he is concerned in his professional capacity and has not exercised due diligence to obtain sufficient information to objectively evaluate the significant judgements of the Engagement Team and conclusions reached by them.
1.8.8. The Audit Firm has not determined the persons comprising TCWG. Further, NFRA has not found any communication to TCWG relating to Auditor’s independence, and the relationships and other matters between the firm, network firms.
1.8.9. The Audit Firm has failed to maintain documents as per SA 230. The integrity of the Audit File is questionable due to tampering and inconsistency pointed out at several places in the AQRR.
1.9. While reference has been made in most cases to SAs which have a direct bearing on the issues under consideration, it needs to be borne in mind that certain generally applicable requirements of the SAs, such as the need to exercise professional scepticism, the need to obtain sufficient appropriate evidence, performance of procedures to address the assessed risks, etc., are integral in all individual cases discussed in the AQRR even if they are not specifically included in individual paragraphs of the Report.
1.10. Based on the conclusions in the AQRR, it appears that the Audit Firm has failed to meet the requirements of SA 700, para 11 while forming their opinion on the Company’s Financial Statements for FY 2017-18. The instances discussed in this Report are of such significance that, in NFRA’s view, the Audit Firm did not have any justification for issuing the Audit Report asserting that the audit was conducted in accordance with the SAs. NFRA draws attention to Response 12 in the ICAI’s Implementation Guide on Reporting Standards (November 2010 edition) that says that “ a key assertion that is made in this paragraph is that the audit was conducted in accordance with the SAs”; and that “If during a subsequent review of the audit process, it is found that some of the audit procedures detailed in the SAs were not in fact complied with, it may tantamount to the auditor making a deliberately false declaration in his report and the consequences for the auditor could be very serious indeed” (emphasis added). Failure to comply with any of the requirements of applicable SAs indicates that the Audit Firm has failed to achieve the central purpose of audit, and that there was not an adequate justification for issuing the Audit Report.