NFRA Imposes Rs 1 Crore Monetary Penalty on Audit Firm M/s Dhiraj & Dheeraj

Following an investigation and proceedings under section 134(4) of the Companies Act, a significant verdict has been reached against an audit firm and its key personnel. After due process, the Audit Firm M/s Dhiraj & Dheeraj, along with CA Piyush Patni (EP) and CA Pawan Kumar Gupta (EQCR), have been found guilty of professional misconduct. The verdict entails substantial monetary penalties and sanctions, highlighting the seriousness of the violations.

The outcome of the proceedings under section 134(4) of the Companies Act has brought to light serious breaches of professional conduct by the Audit Firm M/s Dhiraj & Dheeraj and its associated partners. This verdict serves as a stark reminder of the importance of upholding integrity and transparency in financial audits.

Key Points

Monetary Penalties

• The Audit Firm faces a monetary penalty of Rupees One crore, indicating the severity of the misconduct.
• CA Piyush Patni (EP) and CA Pawan Kumar Gupta (EQCR) have been individually fined Rs 50,00,000/- (Rupees Fifty Lakh) and Rs 10,00,000/- (Rupees Ten Lakh) respectively.

Debarment

• In addition to monetary penalties, stringent sanctions have been imposed. CA Piyush Patni (EP) is debarred for five years, while CA Pawan Kumar Gupta (EQCR) is debarred for three years.
• The debarment prevents them from holding positions as auditors or internal auditors and undertaking any audit-related responsibilities within companies or corporate bodies for the specified duration.

Official Copy of the Order Released by NFRA is as follows

ORDER
Order under Section 132(4) of the Companies Act 2013 in respect of Mis Dhiraj & Dheeraj (Firm Registration. No. 102454W), CA Piyush Patni (ICAI Membership No. 143869) and CA Pawan Kumar Gupta (Membership No. 051713)

This Order disposes of the Show Cause Notice ('SCN') dated 25.07.2023, issued to Mis Dhiraj & Dheeraj the 'Audit Firm', CA Piyush Patni, who was the Engagement Partner (the 'EP') and CA Pawan Kumar Gupta, who was the Engagement Quality Control Review Partner (the 'EQCR Partner') for the statutory audit of Reliance Home Finance Limited, for the Financial Year (FY) 2018-19 (the Audit Firm, the EP and the EQCR Partner are collectively referred to as 'the Auditor' hereafter). This Order is divided into the following sections:

A. Executive Summary
B. Introduction and Background
C. Major Lapses and Violations
D. Findings on the Articles of Charges of Professional Misconduct
E. Penalties and Sanctions

A. EXECUTIVE SUMMARY

1) Reliance Home Finance Limited (RHFL) is a Non-Banking Finance Company (NBFC) listed on both the Bombay Stock Exchange and the National Stock Exchange. Mis Price Waterhouse & Co Chartered Accountants LLP (PW) was initially appointed as the auditor of RHFL for FY 2018-19. The Director General of Corporate Affairs (DGCoA), Ministry of Corporate Affairs (MCA), Government of India, vide its letter dated 29.05.2020 informed the National Financial Reporting Authority (NFRA) that PW had filed a report to MCA under section 143(12)1 of the Companies Act, 2013 (the Act) on 03.06.2019. PW then resigned from the audit on 11.06.2029, without issuing an audit report for FY 2018-19. Mis Dhiraj & Dheeraj were appointed by the board of directors of RHFL on 29.06.2019 as statutory auditors of RHFL to fill the casual vacancy caused by the resignation of PW. Further, the Securities and Exchange Board of lndia (SEBI) vide its letter dated 21.03.2022 informed NFRA that Mis Dhiraj & Dheeraj had issued a qualified opinion for FY 2018-19 without making adequate disclosures in the audit report, including the impact of 'GeneralPurpose Corporate Loans' (GPCL) on financial statements.

2) 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.

3) As per the financial statements, RHFL's total assets were Rs 18,100 crore and total external liabilities were around n6,300 crore as of 31.03.2019. The external liabilities included a debt of over n4,800 crore, consisting of debentures, borrowings from banks, commercial papers etc. It had a total revenue of around Rs 2000 crore and reported a net profit of Rs 67 crore for FY 2018-19. PW reported suspected fraud regarding loans amounting to approximately Rs 7900 crore as on 31.03.2019.

4) 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 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 opinion unreliable since the material misstatements in the financial statement assertions remain unreported. The Auditor also demonstrated a lack of professionalism by rationalising the actions of the Company, inappropriately evaluating the work of the previous auditor, and ignoring the fundamentals of auditing.

5) After examining his detailed submissions, including written and oral, this Order concludes that the Auditor failed to meet the relevant requirements of the SAs and violated the Act, and the Code of Ethics in respect of several significant areas of audit. In the areas of the audit identified in this Order, the Auditor was grossly negligent, failed to apply professional skepticism and due diligence, and did not adequately challenge the management assertions.

Major violations proved in this Order are as follows

a) The Auditor did not exercise professional skepticism and perform risk assessment procedures to identify, assess and respond to the Risk of Material Misstatement (ROMM) due to fraud or error in respect of ( a) RHFL 's loan disbursal (General Purpose Corporate Loans) to financially weak companies without appropriate business rationale, (b) Funds so disbursed being diverted/siphoned off to other group entities.

b) The Auditor did not perform sufficient appropriate audit procedures in respect of verification of the company's assessment of (a) the going concern assumption, and (b) adequacy of the Expected Credit Loss (ECL) of Rs 278 crore on loans at amortised costs of Rs 6,259 crore, which included Rs 7849 crore of General Purpose Corporate Loans to credit impaired entities on which ECL was only Rs 173 crore.

c) The Audit Firm accepted the audit engagement without complying with the relevant requirements of the Chartered Accountants Act, 1949. Apart from the above, the Auditor did not ensure an objective engagement quality review by the EQCR Partner, failed to adhere to quality standards, failed to evaluate the going concern basis of accounting, and failed to comply with the requirements of SA while reporting on the work of management's experts.

d) The omissions and commissions of the Auditor had rendered the audit report unreliable. The Audit Firm issued a qualified report while it was required to issue a disclaimer or adverse opinion, had the audit been conducted as per SAs.

6) Based on the investigation and proceedings u/s 134( 4) of the Companies Act, and after allowing them to present their case, we find the Audit Firm, the EP and the EQCR Partner guilty of professional misconduct and impose, through this Order, the following monetary penalties and sanctions:

a) Imposition of a monetary penalty of Rupees One crore on the Audit Firm M/s Dhiraj & Dheeraj.

b) Imposition of monetary penalties of Rs 50,00,000/- (Rupees Fifty Lakh) and Rs 10,00,000/- (Rupees Ten Lakh) respectively on CA Piyush Patni (EP) and CA Pawan Kumar Gupta (EQCR).

c) In addition, EP and EQCR partners are debarred for five years and three years respectively from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

To view the complete order, find the enclosed file