Facts of the Case

The National Financial Reporting Authority (NFRA) examined the statutory audit conducted by M/s Dhiraj & Dheeraj, CA Piyush Patni (Engagement Partner), and CA Pawan Kumar Gupta (Engagement Quality Control Review Partner) in relation to Reliance Home Finance Limited (RHFL) for the Financial Year 2018-19.

RHFL, a listed Non-Banking Finance Company (NBFC), was originally audited by Price Waterhouse & Co Chartered Accountants LLP. The previous auditor reported suspected fraud under Section 143(12) of the Companies Act, 2013 and subsequently resigned before issuing the audit report for FY 2018-19.

Thereafter, M/s Dhiraj & Dheeraj was appointed as statutory auditor to fill the casual vacancy. NFRA initiated proceedings after examining the audit file and observing prima facie failures in compliance with the Companies Act, 2013, Standards on Auditing (SAs), quality control requirements, and professional obligations.

NFRA noted that RHFL had significant exposure through General Purpose Corporate Loans (GPCLs), amounting to approximately ₹7,849.89 crore, advanced to entities with questionable business rationale and recoverability concerns. The previous auditor had raised concerns regarding recoverability, end use of funds, and business justification of such loans.

 

Issues Involved

  1. Whether the Audit Firm accepted the audit engagement in violation of the Chartered Accountants Act, 1949 and auditing standards.
  2. Whether the Auditor failed to exercise professional skepticism and due diligence regarding the matters reported by the previous auditor.
  3. Whether adequate audit procedures were performed concerning GPCL transactions, diversion of funds, expected credit loss (ECL), and going concern assumptions.
  4. Whether the Audit Firm obtained sufficient appropriate audit evidence before issuing its audit opinion.
  5. Whether the Engagement Quality Control Review Partner conducted an objective and independent review.
  6. Whether the audit report issued by the Auditor was appropriate in the circumstances.

 

Petitioner’s / NFRA’s Arguments

NFRA contended that:

  • The Audit Firm accepted the audit engagement before properly communicating with the previous auditor and before receiving a No Objection Certificate (NOC).
  • The Auditor failed to adequately investigate the serious concerns raised by the previous auditor regarding GPCL transactions and suspected fraud.
  • Professional skepticism was not exercised despite knowledge that the previous auditor had filed a fraud report under Section 143(12).
  • Sufficient and appropriate audit evidence was not obtained regarding:
    • Recoverability of loans.
    • Expected Credit Loss (ECL) provisions.
    • Going concern assumptions.
    • Diversion and siphoning of funds.
  • The Auditor relied excessively on management representations without conducting independent verification.
  • The EQCR review lacked objectivity and failed to identify material deficiencies.
  • The qualified audit opinion issued by the Auditor was inappropriate; an adverse opinion or disclaimer of opinion should have been considered.

Respondents’ Arguments

The Audit Firm, Engagement Partner, and EQCR Partner submitted that:

  • Engagement acceptance was subject to obtaining NOC from the previous auditor.
  • No audit work was allegedly commenced before receipt of the NOC.
  • Efforts were made to obtain information from the previous auditor.
  • The previous auditor did not provide certain documents citing confidentiality concerns.
  • The Audit Firm relied on information and explanations provided by management regarding matters raised by the previous auditor.
  • The audit procedures performed were claimed to be adequate and compliant with applicable standards.

 

Court Order / Findings

NFRA rejected the explanations offered by the Audit Firm and held that:

1. Improper Acceptance of Audit Engagement

The Audit Firm accepted the engagement before completing communication with the previous auditor and commenced audit activities before receiving the NOC, thereby violating statutory and professional requirements.

2. Failure to Exercise Professional Skepticism

The Auditor failed to adequately investigate the serious allegations and concerns previously reported by the outgoing auditor.

3. Deficient Risk Assessment and Audit Procedures

The Auditor failed to identify and respond appropriately to risks of material misstatement arising from:

  • GPCL disbursements.
  • Lending to financially weak entities.
  • Diversion or siphoning of funds.
  • Loan recoverability concerns.

4. Inadequate Evaluation of Expected Credit Loss and Going Concern

NFRA found that the Auditor failed to perform sufficient procedures regarding:

  • Adequacy of ECL provisions.
  • Going concern assessment.
  • Valuation and recoverability of significant loan exposures.

5. Failure of Quality Control and EQCR Review

The EQCR Partner failed to perform an objective review and did not detect serious deficiencies in the audit process.

6. Unreliable Audit Opinion

NFRA concluded that the audit report issued by the Auditor was unreliable and that the circumstances warranted a disclaimer of opinion or an adverse opinion rather than the qualified opinion issued.

Accordingly, NFRA held the Audit Firm, Engagement Partner, and EQCR Partner guilty of professional misconduct.

 

Penalties Imposed

On the Audit Firm

  • Monetary Penalty: ₹1,00,00,000 (Rupees One Crore)

On CA Piyush Patni (Engagement Partner)

  • Monetary Penalty: ₹50,00,000
  • Debarment: 5 Years

On CA Pawan Kumar Gupta (EQCR Partner)

  • Monetary Penalty: ₹10,00,000
  • Debarment: 3 Years

The debarment prohibits appointment as auditor, internal auditor, or undertaking audits relating to financial statements or internal audit functions of any company or body corporate during the respective period.

 

Important Clarification

This order highlights that:

  • Communication with the predecessor auditor is mandatory before accepting an audit engagement.
  • Auditors must independently verify matters involving suspected fraud and cannot merely rely on management explanations.
  • Professional skepticism is a fundamental requirement throughout the audit process.
  • Where material uncertainties and significant deficiencies exist, issuance of a qualified opinion may be inadequate.
  • Failure to comply with auditing standards, quality control requirements, and professional obligations may result in severe monetary penalties and debarment by NFRA.

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 143(12)
  • Section 139

Chartered Accountants Act, 1949

  • Clause 8 of Part I of the First Schedule

Standards on Auditing (SAs)

  • SA 200 – Overall Objectives of the Independent Auditor
  • SA 220 – Quality Control for an Audit of Financial Statements
  • SA 230 – Audit Documentation
  • SA 300 – Planning an Audit of Financial Statements
  • SA 500 – Audit Evidence

Standard on Quality Control

  • SQC 1 – Quality Control for Firms Performing Audits and Reviews

Link to download the order -NFRA Order No. 012/2024 (26.04.2024) – Reliance Home Finance Limited Audit Matter

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