The National Finance Reporting Authority has found a number of gaping holes in the audit of Infrastructure Leasing & Financial Services (IL&FS) for the year 2017-18. These include failure to comply with the basic requirements of audit and violation of norms on quality control and auditor independence. The auditor was SRBC & Co.

In its report released on Tuesday, NFRA has also found lapses in the audit on loans & advances.

The report observed that the initial appointment of SRBC & Co and the continuation of the firm as statutory auditor of IL&FS was violative of the norms of independence. This is because its network (Ernst & Young Global/EY) provided prohibited services to the IL&FS group and also had a business relationship with the auditee. SRBC, its partners and employees have been using the brand, name, email domain, policy documents etc of the EY.

SRBC had also admitted that it is a part of the network of EY. Therefore, the report says, there is no doubt that SRBC is a network firm of EYG. EYG entities have been earning significant non-audit revenues from IL&FS which is audited by one of its network firms — SRBC. Even SRBC, too, has directly earned non-audit revenue from IL&FS group entities. The total non-audit fees of Rs 4.57 crore earned by EYG entities, including SRBC, from IL&FS and its group entities (for the relevant period of 4 years up to the financial year 2017-18) was much more than the audit fee of Rs 2.3 crore from IL&FS.

NFRA said there have been lapses in the audit of Investments too. The total value of investments shown in the standalone financial statements of IL&FS as on March 31, 2018 amounts to Rs 12,320 crore, which is almost 50% of its balance sheet size.

The audit firm, NFRA said, failed to properly verify these investments in almost 80% of the cases. 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.

There is also no evidence that the audit firm has ensured that the management had tested each investment individually for impairment. The audit firm also failed to notice non-compliance with the provision of Section 177 of the Companies Act, 2013, which requires prior approval of the audit committee for related party transactions. However, the transactions were approved post-facto by the audit committee. The audit firm’s assertion that post-facto approval is sufficient because the word ‘prior approval’ is not mentioned in the law is misplaced, NFRA said.