The National Financial Reporting Authority (NFRA) has found serious lapses in the statutory audit of IL&FS Transportation Networks Ltd (ITNL) for the 2017-18 fiscal, including that the company's losses were understated by at least Rs 2,021 crore.
The statutory audit was conducted by SRBC & Co LLP, Chartered Accountants.
In its Audit Quality Review Report (AQRR) of the statutory audit of ITNL for 2017-18, the regulator concluded that the initial appointment and continuation of SRBC & Co LLP was "prima facie illegal and void".
In a statement, SRBC said it was disappointed with the conclusions in the AQRR and was doing a detailed review of it.
The watchdog also flagged the failure of the auditor to appropriately evaluate the use of the going concern basis of accounting by the management and implications thereof in the auditor's report.
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, NFRA said.
"The company's losses during 2017-18 were understated by at least Rs 2,021 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 2,654 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," according to an official release issued on Thursday.
Further, the NFRA noted that the audit firm's EQC (Engagement Quality Control) partner failed to report material misstatements known to him to appear in a financial statement with which he is concerned in his professional capacity. It also said that he did not exercise due diligence to obtain sufficient information to objectively evaluate the significant judgements of the engagement team and conclusions reached by them.
"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," the release said.
SA refers to Standard on Auditing.
"Over the past two years, we have co-operated fully with NFRA and provided the requested information. We are disappointed with the conclusions in the Audit Quality Review report of ITNL for FY2017-18," SRBC said in the statement.
According to the statement, SRBC had performed the audit as per the applicable standards and highlighted the issue relating to going concern in its limited review report for the June 2018 quarter. "We are presently doing a detailed review of the report," it added.
ITNL is part of the IL&FS group where financial irregularities came to light in late 2018 and subsequently the corporate affairs ministry had also superseded the IL&FS board.