NFRA Debars Deloitte’s IL&FS Audit Engagement Partner For Seven Years

India’s audit watchdog has debarred Udayan Sen—Deloitte’s engagement partner in the audit of IL&FS Financial Services Ltd.—for a period of seven years and has imposed on him a penalty of Rs 25 lakh for his alleged professional misconduct and serious lapses while discharging duties as an auditor of the non-bank lender.

The National Financial Regulatory Authority has observed in its order that the independence of statutory auditor was totally “compromised” during the audit of IL&FS Financial Services and there was a “colossal” failure by Sen as an audit engagement partner.

The order, which comes into effect on July 31, debars Sen from being appointed as an auditor, internal auditor or from undertaking audit of financial statements. It comes on the heels of an earlier audit quality review of Deloitte Haskins & Sells, when the watchdog found similar lapses.

The case stems from a string of surprise defaults by IL&FS group entities in 2018 which sparked a liquidity crisis in the Indian financial markets and prompted the government to take over the infrastructure conglomerate to avoid a contagion. Deloitte was the statutory auditor of the non-bank lender between FY07 and FY17, while BSR was appointed as its joint auditor for FY18.

Allegations and Arguments

The audit watchdog began its investigation into the role of Udayan Sen during audit of IL&FS Financial services in 2017-18 and issued a show cause notice in January.

Sen moved the Delhi High Court seeking to quash the notices and also challenged the validity of certain sections under the Companies Act, 2013, as well as the NFRA rules. He sought postponement of the hearing after the court refused a stay and directed him to respond to the notices.

NFRA made the following allegations:

• Sen failed to examine auditor independence requirements as per the ICAI’s Standard on Auditing—SA 200—and exercising due diligence relating to prohibited services under the Companies Act. He was grossly negligent in the conduct of his professional duties and didn’t adhere to ethical requirements.
• The audit quality suffered due to Sen’s failure to discharge the role of an engagement partner. Certain important assignments like independence evaluation, risk assessment, audit evidence and communication with IL&FS’ management weren’t directed, supervised or reviewed by him despite requirements under the SA 220.
• The engagement partner violated the provisions of Companies Act, standards on auditing as well as the RBI regulations. He signed an unmodified audit report despite a huge gap in the audit procedures. As such, he was grossly negligent by not adhering to the requirements laid down under the law.
• Sen did not exercise due diligence in communicating material and serious red flags raised by the Reserve Bank of India on the company’s financial condition with individuals classified as “Those charged with governance”.
• He failed to notify material departure from generally accepted procedure of audit or deviation from applicable auditing standards in certain instances. He also failed to implement an audit plan to address risk of material misstatements and in obtaining sufficient information on non performing assets.
• Lastly, Sen failed to obtain sufficient and appropriate evidence on the valuation of derivative assets pertaining to the shares of Tata Teleservices which were held by the company.

In his rebuttal, Sen denied all the charges, arguing he discharged his duties as per applicable accounting standards. The information shared by RBI was communicated to those charged with governance. Observations on violation of independence requirements weren’t supported by facts alleged by the NFRA.

NFRA’s Findings

Concluding its seven-month-long investigation, the audit regulator found that certain charges against Sen were proved. It debarred and penalised him on the following factors:

• There was a loss of the statutory auditor’s independence and a serious lapse in discharge of duty by Sen.
• While an auditor must have a critical and questioning attitude and is required to do a diligent and methodical cross verification of the data, Sen failed to exhibit such qualities during the audit.
• And lastly, Sen went along with the fraudulent presentation of the financial statements by the company.

The watchdog has noted that certain findings necessitated imposition of a severe penalty.

Auditor Reaction

Reacting to the order, a spokesperson for Deloitte told BloombergQuint in an emailed statement that it’s “surprised and concerned as a professional accounting firm that the NFRA has chosen to issue and make public an order against a former partner in spite of the question of its jurisdiction being sub-judice and awaiting adjudication and disposal by the Delhi High Court”.