NFRA finds Deloitte's appointment as IFIN auditor for FY18 illegal and in violation of Companies Act

The national audit regulator has found the appointment of Deloitte Haskins and Sells LLP as the statutory auditor of IL&FS Financial Services Ltd for 2017-18 prima facie illegal and in violation of the Companies Act, 2013.

“NFRA (National Financial Reporting Authority) has found that the appointment of DHS as the statutory auditors of IFIN for FY18 was prima facie illegal, and therefore void ab initio, for violations of Sections 141(3)(e) and 141(3)(i) of the Companies Act, 2013,” the regulator said in its supplementary audit quality review (AQR) report dated December 7.

The mentioned sections of the Companies Act state that a person or a firm is ineligible to be appointed as auditor of a company if they directly or indirectly have a business relationship or render services to the company, its subsidiaries or associated firms.

The main point of contention here was that of management services which, as per the Companies Act, auditors are barred from offering to their clients.

While the industry felt that there was confusion regarding the definition of such services, the authority took a firm stand that these provisions were violated, compromising the independence of the audit.

“DHS LLP will review NFRA’s supplementary AQR report in relation to IFIN, which was a joint audit for FY 2017-2018,” a Deloitte India spokesperson said, adding that the firm has been cooperating with the regulator and was of the view that its audit, including the appointment, were in accordance with applicable laws and standards.

The IFIN audit in FY18 was jointly conducted by DHS and KPMG-affiliated BSR and Associates.

While NFRA had brought up the issue of management services in its AQR report on the DHS audit in December last year, the regulator found the BSR audit as suffering from similar issues and that BSR’s appointment as auditor was illegal, as per an AQR report in August this year.

According to industry sources, the additional point of illegality of appointment in the supplementary AQR report was made by NFRA to align its assessment of the two audit firms.

In three successive orders in July, the authority had slapped fines of up to Rs 25 lakh and banned for up to seven years from practice three chartered accountants (CAs) associated with Deloitte who worked on the IFIN engagement, on grounds of professional misconduct. These included former CEO Udayan Sen and partners, Shrenik Baid and Rukshad Daruvala.

All three CAs have challenged the NFRA’s orders both in Delhi High Court and the National Company Law Appellate Tribunal. Both cases remain pending as of date.