Facts of the Case

The National Financial Reporting Authority (NFRA) initiated proceedings against CA Jignesh Mehta, Engagement Partner (EP) of M/s C&S LLP, who conducted the statutory audit of Dewan Housing Finance Corporation Limited (DHFL) for Financial Year 2017-18.

DHFL was a listed Non-Banking Housing Finance Company (NBFC) operating through approximately 250 branches across India. In January 2019, media reports alleged diversion and siphoning of approximately ₹31,000 crore of public money by DHFL promoters. Pursuant to these reports, NFRA ordered an investigation into the audit conducted by the statutory auditors of DHFL.

After examination of the Audit File and other relevant records, NFRA formed a prima facie view that the Engagement Partner had failed to discharge his professional duties in accordance with the Companies Act, 2013, Standards on Auditing (SAs), and other applicable requirements.

A Show Cause Notice dated 29.09.2021 was issued alleging multiple audit failures relating to branch audits, consolidation of financial statements, going concern assessment, internal financial controls, compliance with laws and regulations, related party transactions, and risk assessment procedures.

 

Issues Involved

  1. Whether the auditor failed to conduct and document audit procedures in accordance with the Standards on Auditing.
  2. Whether the auditor failed to obtain sufficient appropriate audit evidence regarding branch operations and branch audits.
  3. Whether the auditor improperly excluded a wholly owned subsidiary from consolidated financial statements.
  4. Whether the auditor failed to evaluate DHFL’s ability to continue as a going concern.
  5. Whether the auditor failed to identify and assess risks of material misstatement.
  6. Whether the auditor failed to verify compliance with NHB Directions and other regulatory requirements.
  7. Whether the auditor failed to evaluate Internal Financial Controls over Financial Reporting (IFCR).
  8. Whether the auditor failed to identify, verify, and report Related Party Transactions (RPTs).
  9. Whether such failures constituted “Professional Misconduct” under the Companies Act, 2013 and Chartered Accountants Act, 1949.

 

Petitioner’s / Noticee’s Arguments (CA Jignesh Mehta)

The Noticee contended, inter alia, that:

  • M/s C&S LLP was the sole statutory auditor of DHFL and branch auditors were engaged separately by the company.
  • Reliance was placed upon branch auditors’ reports while conducting the statutory audit.
  • There was no requirement to document certain risk assessment procedures in the manner alleged by NFRA.
  • The exclusion of DHFL Investments Limited from consolidation was based upon management representation and expert opinion.
  • The auditor had considered available information while evaluating the going concern assumption.
  • Compliance with NHB Directions was examined through audit procedures and management representations.
  • Internal financial controls were tested through walk-throughs and control testing procedures.
  • Related party transactions were reviewed through declarations, approvals and management representations.
  • The audit opinion was formed based on professional judgment and available audit evidence.

 

Respondent’s Arguments (NFRA)

NFRA argued that:

  • The auditor remained solely responsible for the statutory audit and could not shift responsibility to branch auditors.
  • No valid appointment of branch auditors under the Companies Act was established.
  • The auditor failed to obtain branch audit reports as required under Section 143(8).
  • Material branch operations were not subjected to adequate audit procedures.
  • DHFL Investments Limited ought to have been consolidated under Accounting Standard (AS) 21.
  • The auditor ignored significant indicators affecting DHFL’s going concern status.
  • The auditor failed to identify and assess Risks of Material Misstatement (ROMM) as mandated by SA 315 and SA 330.
  • Documentation requirements under SA 230 were grossly deficient.
  • Internal Financial Controls were inadequately tested and evaluated.
  • Related Party Transactions were not properly identified, verified, or reported.
  • The auditor failed to exercise due professional care, skepticism, and diligence.

 

 

Court Order / Findings

NFRA held that the Engagement Partner committed professional misconduct and failed to comply with the mandatory requirements of auditing standards.

Key findings included:

1. Failure in Branch Audit Procedures

The auditor failed to establish that valid branch audits were conducted for approximately 250 branches and failed to obtain adequate audit evidence relating to branch operations.

2. Incorrect Non-Consolidation of Subsidiary

DHFL Investments Limited was a wholly owned subsidiary and should have been consolidated in accordance with AS 21. The exclusion resulted in material misstatement of the financial statements.

3. Failure to Evaluate Going Concern

The auditor ignored significant indicators affecting DHFL’s ability to continue as a going concern and failed to perform adequate audit procedures under SA 570.

4. Non-Compliance with NHB Directions

The auditor failed to appropriately examine compliance with NHB regulatory requirements and failed to evaluate the impact of violations on the financial statements.

5. Inadequate Risk Assessment

The auditor failed to identify, assess and document Risks of Material Misstatement (ROMM) as required by SA 315 and SA 330.

6. Deficient Internal Financial Controls Testing

The auditor failed to obtain sufficient appropriate evidence regarding Internal Financial Controls over Financial Reporting.

7. Failure Regarding Related Party Transactions

The auditor failed to obtain sufficient audit evidence relating to related party transactions and failed to properly report the same.

8. Professional Misconduct Established

NFRA concluded that the auditor had demonstrated lack of professional skepticism, lack of due diligence, inadequate documentation, and serious non-compliance with auditing standards.

 

Final Order

NFRA held CA Jignesh Mehta guilty of professional misconduct under Section 132(4) of the Companies Act, 2013.

The Authority imposed the following penalties:

Monetary Penalty

  • ₹5,00,000 (Rupees Five Lakh)

Debarment

  • Debarred for 10 years from being appointed as:
    • Auditor
    • Internal Auditor
    • Undertaking any audit in respect of financial statements or internal audit functions of any company or body corporate

The order was directed to become effective after 30 days from the date of issuance.

 

Important Clarification

  1. The statutory auditor cannot avoid responsibility by relying on branch auditors without complying with the requirements of Section 143(8) and applicable auditing standards.
  2. Documentation is a fundamental audit requirement. Failure to document audit procedures may itself amount to non-compliance with auditing standards.
  3. Professional skepticism is an indispensable element of audit quality.
  4. Going concern evaluation must be supported by adequate audit evidence and cannot be based solely on management representations.
  5. Consolidation requirements under AS 21 must be applied based on control and substance of the relationship rather than management assertions.
  6. The auditor is required to independently evaluate compliance with regulatory directions where such compliance may materially affect financial statements.

Sections / Provisions Involved

Companies Act, 2013

  • Section 132(4)
  • Section 132(4)(c)
  • Section 143(3)
  • Section 143(8)
  • Section 129
  • Section 139
  • Section 143(1)

Chartered Accountants Act, 1949

  • Section 22
  • Clause 5 of Part I of Second Schedule
  • Clause 6 of Part I of Second Schedule
  • Clause 7 of Part I of Second Schedule
  • Clause 8 of Part I of Second Schedule
  • Clause 9 of Part I of Second Schedule

Standards on Auditing (SAs)

  • SA 200
  • SA 230
  • SA 240
  • SA 250
  • SA 315
  • SA 330
  • SA 500
  • SA 520
  • SA 530
  • SA 550
  • SA 570
  • SA 700

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/12/202312142005445600.pdf

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