The National Financial Reporting Authority (NFRA) has debarred two auditors of Dewan Housing Finance Ltd (DHFL) for 5 and 10 years respectively over audit lapses. NFRA is an autonomous regulatory body in India that oversees and regulates the auditing and accounting profession. The regulatory body has debarred CA Jignesh Mehta (Engagement Partner ([EP]) for 10 years and CA Amit Vinay Chaturvedi (EQCR) for 5 years. In January 2019, news reports suggested that the directors of DHFL might have misused around Rs. 31000 crore of public funds. NFRA, as per its responsibility under the Companies Act, 2013, and NFRA Rules, 2018, looked into the quality of the audit done by C&S for DHFL in the 2017-18 financial year. After a thorough review, NFRA found that the auditor (EP) didn’t fulfil professional duties according to the law and auditing standards. As a result, NFRA sent a notice (SCN) to the auditor, asking for an explanation and why legal action under Section 132 (4) of the Act shouldn’t be taken for professional misconduct. According to NFRA, in the case of EP, he did not gather enough audit evidence to assess if the company could continue its operations.
The EP overlooked clear signs that should have raised concerns about the company’s ability to keep going. Additionally, the EP did not fulfil professional duties by not questioning management’s assessment of the company’s viability, neglecting to test supporting evidence, and not evaluating the risk of management bias. This failure to comply with SA 570 (Revised) means the EP did not have enough information to express an opinion on Internal Financial Controls over Financial Reporting (ICFR). The EP issued an unfounded audit report on ICFR under Section 143(3)(i) of the Act. Overall, the EP did not maintain professional scepticism, competence, and due care during the ICFR audit.
Thus, based on the investigations, NFRA imposed Rs. 5 lakhs penalty on the auditor and debarred for 10 years. Read More: NFRA can Check Pre-Formation Audit Misconducts, Superior than ICAI: NCLAT The regulatory authority found that the EQCR failed to meet relevant requirements of the SAS and violated the Act in significant areas. The audit documentation lacked objective evaluation by the EQCR Partner regarding the EP’s judgments and conclusions in formulating the audit report. The EQCR relied on a standard WP template, and the checklist used only served as a means to avoid overlooking significant matters, not as conclusive evidence of an actual objective review. Moreover, the EQCR failed to objectively evaluate and question the EP when violations occurred. These findings are detailed in NERA Order No. 63/2023 dated 05.12.2023, issued in the case of the EP.
The major lapses identified in the order included false reporting in the Independent Auditor’s Report, failure to report material misstatements in the Consolidated Financial Statements, negligence in examining non-compliance with NHB Directions, failure to verify internal financial controls, oversight in assessing the risk of material misstatements, failure to evaluate the going concern assumption, and neglect in verifying Related Party Transactions. Thus, based on the investigations, NFRA imposed a monetary penalty of Rs. 5 lakhs and debarred him for 5 years on EQCR.