Facts of the Case

The National Financial Reporting Authority (NFRA) initiated proceedings against CA Neeraj Bansal, Engagement Partner (EP) and Statutory Auditor of Religare Finvest Limited (RFL) for FY 2017-18. The proceedings arose from findings relating to substantial deficiencies in the audit of RFL, a subsidiary of Religare Enterprises Limited (REL).

The matter involved irregularities in RFL’s Corporate Loan Book (CLB) portfolio, which had already been highlighted by the Reserve Bank of India (RBI). The RBI had pointed out concerns regarding loans granted without adequate appraisal, monitoring, documentation and recovery mechanisms.

NFRA examined whether the auditor complied with the Companies Act, 2013 and applicable Standards on Auditing (SAs), particularly in relation to fraud reporting, audit evidence, professional skepticism, deferred tax assets, investments, audit opinion and consolidation procedures.

After investigation, NFRA concluded that the auditor failed to exercise due professional care and failed to comply with multiple auditing standards while issuing the audit report for FY 2017-18.

Issues Involved

  1. Whether the auditor failed to report suspected fraud to the Central Government through Form ADT-4 as required under the Companies Act, 2013.
  2. Whether the auditor failed to perform proper risk assessment procedures and identify fraud risks.
  3. Whether sufficient appropriate audit evidence was obtained regarding:
    • Corporate Loan Book portfolio;
    • Deferred Tax Asset (DTA);
    • Investments in OSPL;
    • Consolidation adjustments involving RHDFC.
  4. Whether the auditor failed to exercise professional skepticism and professional judgment.
  5. Whether the auditor improperly issued an audit opinion despite material deficiencies in audit procedures.
  6. Whether the auditor complied with Standards on Auditing and ethical obligations applicable to statutory auditors.

Petitioner’s Arguments (Auditor)

The auditor contended that:

  • The RBI communication did not conclusively establish fraud and therefore reporting under Section 143(12) was not warranted.
  • Fraud reporting requires sufficient evidence and not mere suspicion.
  • The audit team had performed risk assessment procedures in accordance with SA 315.
  • The RBI inspection reports related to prior periods and events before his appointment as auditor.
  • Adequate procedures were performed regarding DTA, investments and consolidation.
  • The auditor had obtained management explanations and supporting information before forming audit conclusions.
  • The qualified opinion issued in the audit report appropriately reflected concerns relating to the Corporate Loan Book portfolio.
  • Certain investments and DTA balances were commercially justified and supported by management representations and available records.

Respondent’s Arguments (NFRA)

NFRA argued that:

  • The RBI letter and inspection findings clearly indicated serious irregularities requiring deeper audit examination.
  • The auditor deliberately delayed and failed to report suspected fraud through ADT-4 despite having sufficient warning signs.
  • The auditor failed to perform adequate fraud-risk assessment procedures under SA 240 and SA 315.
  • Audit documentation demonstrated contradictions regarding fraud risk assessment and management override controls.
  • No sufficient audit evidence existed to support significant balances including:
    • Deferred Tax Asset of approximately Rs. 495.63 crore;
    • Investments in OSPL amounting to approximately Rs. 200 crore;
    • Consolidation adjustments relating to RHDFC.
  • The audit file lacked evidence of professional skepticism and independent verification.
  • The auditor issued an audit opinion without obtaining sufficient appropriate audit evidence as required by auditing standards.

Court Order / Findings

NFRA held that the charges against the auditor were proved.

The Authority found that:

1. Failure to Report Fraud

The auditor failed to report suspected fraud to the Central Government by filing Form ADT-4 despite significant indicators of fraud in the Corporate Loan Book portfolio.

2. Inadequate Risk Assessment

The auditor failed to appropriately assess risks of material misstatement due to fraud and did not properly address management override controls.

3. Lack of Sufficient Audit Evidence

The auditor failed to obtain sufficient appropriate audit evidence relating to:

  • Corporate Loan Book irregularities;
  • Deferred Tax Asset (DTA);
  • Investments in OSPL;
  • Consolidation adjustments involving RHDFC.

4. Failure of Professional Skepticism

The auditor relied excessively on management representations and did not exercise the degree of professional skepticism expected under auditing standards.

5. Improper Audit Opinion

The auditor issued an audit opinion despite substantial deficiencies in audit procedures and lack of supporting evidence.

Accordingly, NFRA concluded that the auditor committed professional misconduct under the Chartered Accountants Act, 1949 and violated the Companies Act, 2013 and Standards on Auditing.

Penalty / Final Order

NFRA imposed the following penalties:

Monetary Penalty

  • ₹5,00,000 (Rupees Five Lakhs)

Debarment

  • Debarred for five years from:
    • Being appointed as auditor or internal auditor of any company or body corporate; and
    • Undertaking any audit relating to financial statements or internal audit functions.

Important Clarification

Mere Suspicion May Trigger Auditor’s Duty

The order reiterates that auditors are expected to act when credible indicators of fraud emerge and cannot ignore warning signs merely because fraud has not yet been conclusively established.

Professional Skepticism is Mandatory

Reliance solely on management representations is insufficient where circumstances indicate heightened risk.

Audit Documentation is Critical

Contradictions or inadequacies in audit working papers can be used as evidence against auditors during regulatory proceedings.

Qualified Opinion Does Not Cure Audit Deficiencies

Issuing a qualified opinion cannot substitute for obtaining sufficient appropriate audit evidence.

Failure to Comply with Standards on Auditing Can Lead to Personal Liability

Engagement partners can face individual penalties and debarment for audit failures.

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(c)
  • Section 143(12)

Companies (Audit and Auditors) Rules, 2014

  • Rule 13

Companies (Accounts) Rules, 2014

Standards on Auditing (SAs)

  • SA 200 – Overall Objectives of the Independent Auditor
  • SA 230 – Audit Documentation
  • SA 240 – Auditor’s Responsibilities Relating to Fraud
  • SA 315 – Identifying and Assessing Risks of Material Misstatement
  • SA 500 – Audit Evidence
  • SA 540 – Auditing Accounting Estimates
  • SA 560 – Subsequent Events

Chartered Accountants Act, 1949

  • Clause 5, Part I of Second Schedule
  • Clause 6, Part I of Second Schedule
  • Clause 7, Part I of Second Schedule
  • Clause 8, Part I of Second Schedule

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2025/01/202501301822215952.pdf

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