Following the establishment of professional misconduct and considering the severity of violations alongside the principles of proportionality, the National Financial Reporting Authority ( NFRA ) has imposed a penalty of Rupees One crore on the Audit Firm M/s Dhiraj & Dheeraj.
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The NFRA imposed the penalty on M/s Dhiraj & Dheeraj, whose managing partner is an active member of the Central Council of the Institute of Chartered Accountants of India ( ICAI ). CA Piyush Patni (Engagement Partner) and CA Pawan Kumar Gupta (Engagement Quality Control Review Partner) were fined Rs. 50 lakhs and Rs. 10 lakhs, respectively.
Additionally, CA Piyush Patni and CA Pawan Kumar Gupta are barred from being appointed as auditors, internal auditors, or undertaking any audit-related functions for five years and three years, respectively.
The penalties stem from an examination of the audit file for RHFL’s statutory audit, revealing failures to discharge professional duties under the law and auditing standards. NFRA’s bench highlighted the auditors’ lack of diligence, leading to material misstatements in RHFL’s financial statements.
On examination of the Audit file for the Statutory Audit of RHFL conducted by the Audit
Firm Dhiraj& Dheeraj, which was called for under Section 132 (4) of the Act, we were of
the prima facie view that the Auditor had not discharged their professional duties under the
Act as well as the Standards on Auditing (SA). Consequently, the SCN was issued to the
Auditor asking them to show reason why action under Section 132(4) of the Act should not
be initiated against them for professional misconduct.
As per the financial statements, RHFL’s total assets were Rs. 18,100 crore and total external liabilities were around Rs. 16,300 crore as of 31.03.2019. The external liabilities included a debt of over Rs. 14,800 crore, consisting of debentures, borrowings from banks, commercial papers etc. It had a total revenue of around 2000 crore and reported a net profit of Rs. 67 crore for FY 2018-19. PW reported suspected fraud regarding loans amounting to approximately 7900 crore as on 31.03.2019.
It was noted by the NFRA Bench of Chairperson Dr Ajay Bhushan Prasad Pandey, Dr Praveen Kumar Tiwari (Full-Time Member) and Smita Jhingran (Full-Time Member) that, “Given the high degree of public interest in this listed entity, it was the duty of the Auditor to conduct the audit with the highest level of professional skepticism and due diligence and report their opinion in an unbiased manner.”
It was further observed that, “Despite the resignation of the previous auditor and a reporting of suspected fraud, the Auditor failed to conduct the audit as per standards on auditing. The major lapses started from the acceptance of the initial appointment of Dhiraj & Dheeraj as statutory auditors and continued throughout the audit of loans, going concern evaluation, risk assessment and reporting. The Auditor did not conduct the audit as per professional standards. The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditor in disregard of their responsibilities under the Act and SAs. The deficiencies in the audit resulted in rendering the audit opinion unreliable as the material misstatements in the financial statements assertions remain unreported.”
The Auditors also demonstrated a lack of professionalism by rationalizing the actions of the Company, inappropriately evaluating the work of the previous auditor, and ignoring the fundamentals of auditing. Such actions of the Auditors necessitate stricter sanctions and penalties taking into account the letter and spirit of the law, remarked the National Financial Reporting Authority ( NFRA ) Bench.
As famously quoted by Lord Acton, “Power tends to corrupt, and absolute power corrupts absolutely,” highlighting the potential ethical pitfalls when individuals in positions of authority fail to uphold professional standards, as seen in the NFRA’s penalties on audit firms and individuals in the RHFL audit deficiency case.
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