The National Financial Regulatory Authority (NFRA) has barred the Ex-C.E.O. of Deloitte Udayan Sen who is also the Engagement Partner in the audit of IL&FS Financial Services Ltd. for a period of 7 years and also imposed Rs.25 Lakhs as a penalty on him for his alleged professional misconduct and mistakes made while performing his duties as an auditor of the NBFC.

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NFRA has stressed in its order that the statutory auditor has “compromised” his independence while he was performing the audit of IL&FS Financial Services and there was a “colossal” failure from the side of the audit engagement partner Udayan Sen.

On the 22nd July 2020, NFRA issued an order against Udayan Sen which states that “he will be prohibited from being appointed as the auditor, whether in the form of the internal auditor or statutory auditor and also will not be allowed to undertake any audit of financial statements” that will come into effect from 31st July 2020.

This case has a background from 2018 when all of a sudden a series of defaults began showing up by IL&FS Group which ultimately resulted in creating a liquidity crisis in the Indian Financial Markets and forced the Government to acquire the group to avoid a further spread of this type of disease in the market.

LEGAL ISSUES & ACCUSATIONS-

When NFRA started investigating the role of the engagement partner during the audit of IL&FS Financial Services in 2017-18, it issued in January a Show Cause Notice (SCN) to Udayan Sen. As a result of which Mr.Sen went to Delhi High Court for getting a stay order on the Show Cause Notice and also to question the significance of certain sections of Companies Act 2013 and NFRA rules based on which the notice was issued. The High Court rejected his petition regarding the stay order on the Show Cause Notice and directed him to respond to the notices.

NFRA stated these accusations-

  • The Auditor failed to examine as per ICAI’s Standard on Auditing SA-200 auditor’s independence requirements and also did not practised Professional Skepticism. He also completely negligent about his duties as an auditor and did not act ethically.
  • As per SA 220 requirements, the engagement partner failed to follow the quality control procedures for an audit of financial statements like ethical requirements, audit evidence documentation, independence requirements and acceptance and communication procedures with IL&FS management due to which the quality of audit suffered.
  • Mr.Sen also 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 which shows his negligence that he was not fulfilling the requirements laid down under the law.
  • Mr.Sen also failed to communicate with “Those charged with governance” regarding the mistakes and red flags raised on financial conditions by Reserve Bank Of India.
  • And Lastly, he also failed to obtain sufficient and appropriate evidence regarding the derivative assets valuation of shares of Tata Teleservices which was being held by the company.

Mr.Sen replied in his defense that he has performed the audit with due diligence and as per the guidelines of applicable Accounting Standards and the information regarding related matters shared by RBI was communicated to those charged with governance and he has also denied about all the charges that were presented by NFRA.

Delloite’s reaction also came on this matter 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 despite the question of its jurisdiction being sub-judice and awaiting adjudication and disposal by the Delhi High Court”.

With Warm Regards,

CL Bureau

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