The IL&FS crisis, which shook the foundation of non-banking financial services in India, has taken a new turn after the National Financial Reporting Authority (NFRA) released its new report today. In the Audit Quality Review Report (AQRR), the NFRA mentioned that the appointment of BSR as the statutory auditor of IL&FS Financial Services Ltd for the year 2017-18 was illegal since BSR was not eligible to be appointed as such auditor. Thus the BSR’s continuation as such statutory auditor was violative, it said. It added that IL&FS was not compliant with the minimum Net Owned Funds (NOF) and Capital to Risk Assets Ratio (CRAR) prescribed for an NBFC of its type, as of 31 March 2018.
In a major finding, the NFRA revealed that these numbers were heavily negative, and this non-compliance had continued for some time against a minimum positive requirement and this non-compliance had continued for some time. BSR was convinced that the IFIN management was clearly in the wrong, still, they went along with the wrong numbers disclosed in the Financial Statements, the AQRR report said.
Inflating profit figures
The government said that IL&FS reported Rs 201.96 crores as Profit Before Tax (PBT) for the year 2017-18, which was after including the credit. It added that the reversal of General Contingency Provision (Rs 225 crores); unjustified valuation of a derivative asset (Rs 184 crores); and non-provision for impairment in the value of Investments (Rs 200.20 crores); alone have led to an inflation of the profits by Rs 609 crores.
In all the above cases, BSR has reportedly not obtained sufficient and appropriate audit evidence, as required by the Standards of Auditing, to support the specific numbers finally reported in the Financial Statements. Failures related to complying deals with material misstatements of major magnitude and fundamental importance; going concern assumption by the management; the complete absence of the required communication with those charged with governance; determination of materiality amounts on the basis of non-relevant factors; etc, have also been unearthed.
Further, NFRA found that the IT processes and platforms used by BSR have deficiencies that are systemic and structural in nature. The Ministry of Corporate Affairs said that NFRA will examine whether disciplinary proceedings need to be initiated in connection with the AQRR.