IL&FS controversy: Appointment of BSR as auditor of IFIN was ab initio illegal, says NFRA

The National Financial Reporting Authority (NFRA) on Monday issued the audit quality review report (AQRR) of the audit of IL&FS Financial Services (IFIN) for FY18, stating that appointment of BSR as statutory auditor of the crisis-hit IL&FS group’s subsidiary was “ab initio illegal and void”.

“The instances of failure to comply with requirements of the Standards of Auditing (SAs) by BSR are significant and BSR did not have adequate justification for issuing the Audit Report asserting that the audit was conducted in accordance with SAs,” NFRA said the AQR report.

The failure to comply deals with material misstatement of major magnitude and fundamental importance, going concern assumption by the management, complete absence of the required communication with those charged with governance, determination of materiality amounts on the basis of non-relevant factors, among others, it added.

In the report’s findings, NFRA said, “The appointment of BSR as statutory auditor of IFIN for FY18 was illegal, since BSR was not eligible to be appointed as such auditor due to violation of Sec 141(3)(e) (subsisting business relationships on the date of appointment) and Sec 141(3)(i) (provision of non-audit services directly or indirectly) of the Companies Act, 2013.”

“The instances of failure to comply with the requirements of SAs that have been documented in the AQRR are of such significance that it appears to NFRA that BSR did not have adequate justification for issuing the Audit Report asserting that the audit was conducted in accordance with SAs,” the regulator said.

Further, NFRA also discovered that IT processes/platform used by BSR have deficiencies that are systemic and structural in nature, and arise substantially from a complete disregard for basic principles of IT security in the software used. This renders the audit documentation completely unfit for the intended purpose

“Separately, NFRA will examine whether disciplinary proceedings under Section 132(4) of the Companies Act, 2013, need to be initiated in connection with the AQR,” it pointed out.

Section 132 empowers NFRA to investigate suo moto or on a reference made by the central government for corporate or persons on matters of professional or other misconduct committed by any member or firm of chartered accountants (CAs).

The AQR process for IFIN started in February 2019. The regulator said it carried an extensive and detailed correspondence with BSR and Associates, LLP, (BSR). The auditor was also invited for an oral presentation to NFRA on July 27, 2020.