Audit Misconduct: NFRA debars CAs from Audits, slaps Rs. 4.5 Cr Penalty [Read Order]

The National Financial Reporting Authority (NFRA) has taken strict action against Pathak HD & Associates (PHD), a former joint auditor for Reliance Capital, along with two of its chartered accountants. This follows the identification of numerous lapses in their audit work and a failure to report suspected fraud.

The action stems from concerns raised by the resigning auditor, Price Waterhouse (PW). PW flagged potential fraud of ₹12,571 crore by Reliance Capital and highlighted serious irregularities in loan practices. NFRA’s investigation found PHD and its key personnel, Parimal Kumar Jha and Vishal D Shah, to be negligent in their duties.

They are accused of breaching the Companies Act and violating ethical codes. Despite warnings from PW, PHD allegedly failed to report “material mis-statements” in Reliance Capital’s financial statements.  The auditors were also faulted for relying solely on assurances from Reliance Capital’s promoters and neglecting to verify the legitimacy of loans or scrutinize bank statements for suspicious activity. In result, Jha and Shah have been barred from conducting audit work for 10 and 5 years, respectively. PHD has been penalized ₹3 crore. Jha and Shah face additional fines of ₹1 crore and ₹50 lakh each

. This development comes after Reliance Capital underwent a change in ownership due to governance concerns and defaults. The Reserve Bank of India had replaced the board in November 2021. It was observed by the National Financial Reporting Authority  (NFRA)  that, “In FY 2018-19 RCL had loans from Banks of around ₹12000 crore and other external borrowings of around ₹32000 crores, consisting of debentures, commercial papers and pass-through certificates.

It was also noted that, “RCL was a Core Investment Company (CIC) investing primarily in its group companies. Given the high degree of public interest in this listed entity, it was the duty of the Auditors to conduct the audit with the highest level of professional skepticism and due diligence and report their opinion in an unbiased manner. Despite the resignation of the joint auditor and a reporting of suspected fraud, PHD, EP and EQCR Partner failed to conduct the audit as per standards on auditing.

The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditors in disregard of their responsibilities under the Act and SAs.” The NFRA action raises concerns about audit oversight and highlights the importance of due diligence in uncovering potential financial irregularities

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