Major lapses in Deloitte audit of IL&FS Financial Services, says SFIO

The preliminary probe by the Serious Fraud Investigation Office (SFIO) has found that audit firm Deloitte was responsible for falsification of financials of IFIN, a subsidiary of Infrastructure Leasing & Financial Services (IL&FS), according to an official in the know. The serious fraud office, which is reaching a closure in the case, would submit its probe report next month, it is learnt.

The SFIO has come across many irregularities in the books of IL&FS, specifically relating to the IL&FS Financial Services (IFIN) account. “They were partners along with the IFIN old board and it seems a lot of flaws in the books had been overlooked. The evidence clearly indicates misrepresentation of financials, raising serious concern over the conduct of the audit firm,” said an official quoted above.

The SFIO may recommend invoking Section 140 (5) of the Company’s Act to the Ministry of Corporate Affairs (MCA) in the case, another official said. That would allow debarring an audit firm for at least five years.

In an email response, a Deloitte spokesperson said, “No such action has been proposed. The investigations on the company (IFIN) are in progress and we are cooperating fully. We reaffirm that we have conducted our audits in accordance with the standards on auditing and the applicable laws and regulations.”

The serious fraud office had on Wednesday quizzed Deloitte former chief executive officer Udayan Sen and two others over the alleged audit.

The excessive remuneration paid to Deloitte at a time when IL&FS firms were facing liquidity crunch has come under the scanner too. 

The books of IL&FS group have shown that default on loans worth Rs 94,000 crore started late last year. In a move to repair the damage, the government sacked the old board, replacing it with a new one.

Sources said the SFIO had examined every allegation made by the whistle blower in a letter written to several central agencies and regulators.  

The whistle blower had said that in order to protect the auditor’s position, Deloitte agreed to rely on the management’s explanations and comfort letters whenever there were dubious findings. “Internally several views in matters of audit opinion were watered down by Deloitte leadership in the first instance,’’ the communication said.

Probe heat on auditor

• Preliminary investigation raises serious concern over Deloitte's conduct 
• Indications of misrepresentation of IFIN financials 
• Auditors got excessive remuneration even when IL&FS firms were facing cash crunch 
• Flawed facts in the books of IL&FS arms overlooked 
• SFIO may recommend invoking Section 140 (5) of Company’s Act, which allows debarring an audit firm for at least 5 years