Deloitte Haskins and Sells LLP (DHS) failed to meet auditing standards when it vetted the books of IL&FS Financial Services Ltd (IFIN) for the 2017-2018 financial year, the country's audit watchdog said on Thursday.IFIN is an offshoot of Infrastructure Leasing & Financial Services (IL&FS), a major Indian infrastructure financing and construction firm that defaulted on some debts last year, triggering wider concerns about risk in India's financial industry. The reverberations of those defaults continue to be felt.Non-bank financial companies (NBFCs), or shadow banks, began to face a severe liquidity crunch following the collapse late last year of IL&FS, a major player in this space. That led to a surge in borrowing costs, forcing NBFCs to freeze, or tighten lending practices.The government has taken control of the group and has appointed a team to turn it around.An audit quality review disclosed that Deloitte Haskins failed to comply with required standards on auditing (SAs), the National Financial Reporting Authority (NFRA) said in a statement."The instances of failure noticed are of such significance that it appears to NFRA that DHS did not have adequate justification for issuing the audit report asserting that the audit was conducted in accordance with the SAs," NFRA said.A spokesman for Deloitte India told Reuters the IFIN audit for financial year 2017/2018 was a joint audit, adding that the firm's "audits have been performed in accordance with applicable laws, regulations and professional standards in India".DHS and KPMG affiliate BSR & Associates jointly conducted the 2017/2018 audit.India has been seeking to ban both auditing firms for five years, alleging lapses in their audits of IFIN, according to a filing by the corporate affairs ministry, Reuters reported in June. Both firms denied any wrongdoing.NFRA said the audit quality review identified non-compliance with the requirements of SAs and spelled out insufficiencies in the quality controls of audit firms, but was not a rating tool.The failures noted in the NFRA report included compromising the independence of DHS by "provision of non-audit services for substantial fees" and not challenging IFIN management on issues such as inflation of profit.The NFRA said it would separately decide whether to initiate disciplinary action against DHS.With inputs from Reuters.