Reliance Capital: Should NFRA Net the Big Fish in the Imbroglio?
In passing the recent order under Section 132 (4) of the Companies Act, 2013 in respect of Pathak HD & Associates, the audit firm, chartered accountant (CA) Parimal Kumar Jha, the engagement partner (EP) and CA Vishal D Shah, the engagement quality control review (EQCR) partner, the national financial reporting authority (NFRA) has added a notable trophy to its almirah displaying its triumph over many professional firms penalised for not carrying out the mandate of the law with regard to the audit of public listed companies!
 
While not seeking to comment on the issue covered in the order referred to above, the purpose of the article is to highlight if the NFRA should have gone deeper into the issue of the poor standard of audit and reporting by the other firms as well that audited Reliance Capital Ltd in the years between 2015-16 and 2018-19.
 
Reliance Capital Ltd has been a major defaulter in servicing the loans taken from the banks and the public; the insolvency proceedings concluded recently resulted in the overall recovery of a pathetic 37.03%.
 
The biggest losers are the public investors who invested in the debentures issued by the company which was very actively marketed by many of the private banks to their high-networth individual (HNI) clients.
 
Many tranches of such debentures were issued over time and, in this regard, there is a significant similarity to the case of Dewan Housing Finance Ltd (DHFL) which went bust a year or two before RCL did!
 
Most of these debentures were structured as market-linked debentures (MLDs) that did not carry a regular interest but was entitled to a market-linked return at the time of redemption. Thus, even the annual return, which should have been earned by the investors, was not so earned in this case.
 
In June 2019, Price Waterhouse & Co LLP (PW), one of the two joint auditors of RCL, resigned, without signing the annual accounts for the year 2018-19, citing concerns about a possible fraud and overstatement in the value of the assets of about Rs12,571 crore.
 
However, PW did issue the limited review reports for the first three quarters in the period 2018-19.
 
The position of the auditors of the company for the different years is as below.
 
 
The board’ report for the year ended 31 March 2019 carried the following explanation regarding the exit of PW and the response of the board to the allegations of fraud made by PW.
 
 
The company adopted Ind AS in the year 2018-19 and recomputed the previous year’s figures for 2017-18 under the same dispensation.
 
The table below brings out the extent of discrepancy in the historical and the restated numbers for 2017-18.
 
 
The company had diverted a significant amount of funds to and through its downstream subsidiaries. Despite the erosion in the value of the investments and loans so provided, the assets continued to be valued at the original cost of acquisition.
 
Under the guise of adopting Ind AS, these sins were brought on record which should have been anyway surfaced by the audit process in the earlier years. It is no small number, but a difference of Rs6,600 crore! PW was the signing auditor in 2017-18 and BSR & Co LLP, which is part of the international network of KPMG, was the auditor in the earlier years.
 
A lay investor would assume that the assets would be accounted based on the realisable value and provisions would be made for losses in each reporting period, including when quarterly results are declared. No common man will appreciate a change in the realisable value of assets depending on the accounting framework adopted.
 
Unless PW and BSR establish, with backup evidence, that such erosion in value arose only in the period when the switch to Ind AS happened, their culpability cannot be wished away.
 
Even after the adoption of Ind AS, in the first reporting period of Q1 of 2018-19, no information was shared by the company on the extent of erosion in the equity value by virtue of the adjustments carried out in the accounts of 2017-18, that constituted the previous year’s figures. 
 
In fact, the audit report issued for Q1 of 2018-19 sometime in September 2018 carried a very mystifying disclaimer that the audit engagement did not cover the checking of the comparative figures for the previous year!
 
This note was repeated in the report for Q2 when the half-year figures were provided. The note is given below for better appreciation.
 
 
To someone not trained in audit, any such exclusion in the audit scope appears completely dystopian!  The audit is a statutory obligation which the auditor, appointed by the shareholders, discharges. There is no privity of contract with the board or the management for reconfiguring the scope or the extent of the work to be carried out.
 
It is stretching one’s credibility too far that an audit report disclaiming the checking of the previous year’s figures can be issued. It appears as a dereliction of duty at its worst!
 
To add insult to injury, the company, while declaring the Q2(H1) results for 30 September 2018, showed an equity value much more than the equity value that was truly to have been shown after the reworked Ind AS figures.
 
The difference is shown below where the September 2018 equity figure was shown higher than the March 2018 figures!
 
  
This was part of what was filed to the stock exchanges. While PW, which signed the Q2 report, may seek an excuse by the exclusion note reproduced earlier, it was very much aware of the blatant misrepresentation of the figures to the public by the company, its audit committee and the board, masking the true picture.
 
If fraud was required to be reported, it should have been done on that day when the company issued the Q2 results with the asset figures unadjusted for the loss in value!
 
The farce continued while reporting the Q3 number as well sometime in February 2019. Since no requirement exists to report balance sheet numbers for Q3, the exclusion note on comparative figures that was given in Q2 was omitted!
 
And all the audit firms concerned over the year have been guilty of not auditing the subsidiaries fully and instead gave a carve-out note. A sample is reproduced.
 
 
Out of the total assets of Rs93,651 crore and revenue of Rs19,898 crore, a lion’s share is carved out as not audited by both the joint auditors!
 
The question is: Did PW, by merely resigning from the audit and reporting fraud as late as in June 2019, act true to its mandate of what it was supposed to provide to the investors, especially the lenders and the debenture-holders?
 
The same question can be asked of BSR on the accounts it signed in the period before the adoption of Ind AS. Did they knowingly or unknowingly certify wrong accounts that overstated the value of assets?
 
While the narration may get unwieldy by bringing more facts on record, the period between 2016 and 2019 saw multiple internal restructuring of various companies with assets being moved around actively to spruce up and window dress the numbers.
 
How smart and alert were these audit firms to understand the sinister underpinnings of these schemes? Did their own tax/ consulting practice advise on these ideas and earn top dollars?
 
RCL was governed by the Reserve Bank of India (RBI) regulations first as an NBFC, and later as CIC. There is nothing on record that RBI looked at any of the happenings in the company.
 
RBI’s failure in this case is similar to DHFL, YES Bank, LVB, IL&FS, PMC bank, etc. A litter of losses to the deposit-holders, debenture-holders and equity investors in all these cases. And not a dime has been recovered out of the funds diverted in all the cases!
 
The Securities and Exchange Board of India (SEBI) had remained completely mute even when half-baked accounting statements, which were blatantly incorrect, were furnished in the first three quarters of 2018-19, with audit disclaimers that were an abomination.
 
What action did the ministry of corporate affairs (MCA) take on the fraud reported by PW and was any action initiated against the directors of the company?
 
The illustrious board of RCL during the years 2016-2019 was as under.
 
 
The debenture trustee have been equally lax in not doing anything till the water rose above the eye level. They are equally culpable of gross negligence to perform their duty to the debenture-holders.
 
The debenture-holders have lost huge sums and still there is no sign of any money coming by the Hinduja gorup in March 2024 through the IBC process.
 
Is IBC the washing machine that cleanses everyone involved of all the sins?
 
Has the NFRA just plucked the low-hanging one in this instance in felling a low-profile audit firm?
 
They have scalped a tail ender! Who will knock off the star one-drop batter?
 
Was there ever a better case for a class action suit against all the perpetrators of the individual and collective sins?
 
(Ranganathan V  is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Comments
pattnaikr463
3 weeks ago
pura hisab kitab thamma denge___janta hai ___hume___audit xqu___*ur faithfully_rabi narayan pattnaik_barbil branch\bbsr&others___audit xQue
pattnaikr463
3 weeks ago
report(audit ____completly wrong____
brqnvrffbp
1 month ago
So long as India authorities allows carve outs by holding company auditors and not apply International Standard of Auditing 600 which requires lead company auditors to take ownership of the entire group audit and not place reliance on another firm's report, these sort of things will keep on happening.
kpushkar
1 month ago
There are some companies , more equal than others!!
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