New Delhi, Jun 22 (PTI) Finding large-scale lapses in the audit of IL&FS in the 2017-18 fiscal, watchdog NFRA on Wednesday said that tens of thousands of crores of losses could have been averted if the non-compliance was detected earlier.

The National Financial Reporting Authority (NFRA) has found "large scale non-compliance" professional standards and regulatory requirements by SRBC & Co LLP, an Ernst & Young Global Limited firm, in the auditing of IL&FS for the 2017-18 financial year.

Also Read | Jammu and Kashmir: Flash Floods, Landslides Due to Heavy Rains and Snowfall; Schools Shut In Several Districts; Jhelum Crosses Danger Mark in Anantnag.

Issuing its Audit Quality Review Report (AQRR) for Infrastructure Leasing & Financial Services Ltd (IL&FS), the watchdog noted that there have been lapses in "almost all stages of the audit".

Further, it said, "as detailed in the AQRR, the audit documentation (a basic requirement) maintained by the Audit Firm (such as those relating to Investment Policy, impairment testing of investments, use of materiality etc) failed to provide a clear record of the professional judgements made and significant decisions made. Such lapses are viewed seriously by audit regulators across the world."

Also Read | Xiaomi Mi Smart Band 7 With Always-on-Display, 14 Days of Battery Life Launched.

The audit quality is thus seriously compromised due to the large-scale noncompliance with professional standards and regulatory and legal requirements, and the inappropriate reporting made by the firm.

These lapses prevented the investors, creditors and stakeholders from knowing on time the true and fair picture of the state of affairs of IL&FS.

"If the audit firm had been vigilant, shown professional skepticism, sufficiently challenged management assumptions and claims and strictly complied with its audit responsibilities, such lapses by IL&FS perhaps could have been detected much earlier and the tens of thousands of crore of losses and haircuts that the banks, creditors, and investors were ultimately saddled with would have been averted," it said.

The collapse of the IL&FS led to a liquidity crunch in the market and NBFCs and Housing Finance Companies came under stress.

Pointing out the audit lapses, the report said, the total value of investments shown in the standalone financial statements of IL&FS as of March 31, 2018, amounts to Rs 12,320 crore, which is almost 50 per cent of its balance sheet size.

The audit firm SRBC & Co LLP failed to properly verify these investments in almost 80 per cent of the cases, it said, adding that the deficiencies are observed in the areas of use of valuation experts, fair valuation, and impairment loss evaluation.

Also, there are certain investments (Rs 1,637 crore) for which no evidence of verification is available in the audit documentation, it added.

Citing another instance, the report said, IL&FS had disbursed loans amounting to Rs 8,124 crore to approximately 26 related parties during the 2017-18 and these transactions were made in violation of section 177 of the Companies Act, 2013.

"A company's policy dealing with related party transactions cannot override the provisions of the Act. The Audit Firm failed in designing and performing sufficient and appropriate audit procedures to mitigate the risks, including risks of management override of internal controls, associated with the sanction of these loans, and disbursement of loans by the company," it said.

The firm ignored potential cases of evergreening and rollover of loans and failed to understand its implications on the financial statements of the company.

NFRA reviewed the statutory audit done by SRBC & Co LLP IL&FS Ltd for the FY 2017-18 following a reference made to the regulator by the Central Government in September 2019.

The IL&FS group consists of around 250 subsidiaries (listed as well as unlisted), associates and joint ventures as of March 31, 2018, engaged in the infrastructure sector.

As per books of accounts, the group's revenue was around Rs 17,672 crore and it had total assets of Rs 1,15,814 crore and total external liabilities of Rs 1,06,543 crore as of March 31, 2018.

It reported a net loss of Rs 1,886 crore (consolidated) and a profit of Rs 584 crore (standalone) in FY'18.

NFRA is an independent regulator for the auditing profession which comes under the Ministry of Corporate Affairs.

(The above story is verified and authored by Press Trust of India (PTI) staff. PTI, India’s premier news agency, employs more than 400 journalists and 500 stringers to cover almost every district and small town in India.. The views appearing in the above post do not reflect the opinions of LatestLY)