Holding an audit firm and a chartered accountant (CA) guilty of professional misconduct, the national financial reporting authority (NFRA) imposed a penalty of Rs2.50 crore on them for showing negligence in the audit of Reliance Commercial Finance Ltd (RCFL) for FY18-19, despite red-flags issued by the other auditor firm. NFRA slapped a penalty of Rs2 crore on Shridhar & Associates, the audit firm and Rs50 lakh on CA Ajay Vastani for the statutory audit of Reliance Commercial Finance. CA Vastani is also barred for five years from taking any audit assignments.
The other auditor, Price Waterhouse & Co LLP (PW), had reported suspected fraud regarding working capital term loans and SME (small and medium enterprise) structured loans amounting to about Rs8,600 crore and suspected undisclosed related-party transactions. In November 2022, RFCL, a subsidiary of Reliance Capital Ltd, was bought by Authum Investment and Infrastructure Ltd for Rs1 crore.
In an
order last week, the NFRA bench of Dr Ajay Bhushan Prasad Pandey (chairperson)], Praveen Kumar Tiwari and Smita Jhingran (full-time members) say, "Given the high degree of public interest in this listed entity, it was the duty of the auditors to conduct the audit with the highest level of professional scepticism and due diligence and report their opinion in an unbiased manner. Despite the resignation of the previous auditor and the reporting of suspected fraud, the auditors failed to conduct the audit as per the standards of auditing (SA). The major lapses started from the acceptance of the initial appointment of Shridhar & Associates as statutory auditors and continued throughout the risk assessment in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the auditors in disregard of their responsibilities under the Companies Act and the SAs."
As of 31 March 2019, RCFL's financial statements show assets of Rs13,504 crore and external liabilities of about Rs12,623 crore. The external liabilities included a debt of more than Rs10,284 crore in the form of debt securities and borrowings from banks and commercial papers.
On 29 May 2020, the director general of corporate affairs (DGCoA) in the Union ministry of corporate affairs (MCA) informed NFRA that PW had filed a report under Section 143(12)1 of the Companies Act. On 11 June 2019, PW, without issuing an audit report for FY18-19, resigned from the audit. On 28 June 2019, Shridhar & Associates was appointed as the statutory auditor to fill the casual vacancy caused by the resignation of PW.
NFRA then sought the audit file, annual reports and other communication by the audit firm. After examination, the authority says these submissions show a prima facie case of professional misconduct on the part of the auditor. It then issued a show-cause notice to Shridhar & Associates and CA Vastani.
NFRA observed that the capital-to-risk asset ratio (CRAR) of RCFL was below the minimum regulatory requirements prescribed by the Reserve Bank of India (RBI). It says, "Breach of the capital adequacy norm has the potential to affect the going concern of RCFL since its continued existence was contingent on meeting the CRAR requirements. The regulatory proceedings consequent to the reporting of the suspected fraud by the previous auditor was another event affecting the going concern. These events were neither disclosed in the notes to the financial statements on the going concern nor assessed by the auditors in perspective."
After perusing the end-use certificate provided by a CA, the authority noted that loans of Rs5,843.43 crore were used for purposes other than RCFL operations. "They also listed certain borrowers, who had ultimately diverted the borrowed funds to financially weak group companies. The auditors (PW) noted that 'funds were utilised by Reliance Communications Ltd (RCom) and Reliance Infrastructure Ltd (RInfra), such amount has been written off or provisions were accelerated'. Such actions of RCFL indicate possible siphoning of the funds from the company, which the auditors failed to challenge and examine as a fraud risk."
NFRA further notes that the working capital term loan of RCFL increased from about Rs2900 crore as of 31 March 218 to Rs8,600 crore as of 28 February 2019. However, it says, Shridhar & Associates failed to assess and document the impact of such material weakness on the related financial statement assertions.
"The deficiencies in the audit resulted in rendering the audit opinion unreliable as the material misstatement in the financial statements assertions remain unreported. The auditors also demonstrated recklessness and unprofessionalism by rationalising the actions of RCFL, inappropriately evaluating the work of the resigned auditor, and ignoring the fundamentals of accounting and auditing. Such actions of the auditors necessitate stricter sanctions and penalties taking into account the letter and spirit of the law," NFRA says.
