Holding chartered accountant (CA) Neeraj Bansal guilty of professional misconduct in the audit of Religare Finvest Ltd (RFL) for FY17-18, the national financial reporting authority (NFRA) has imposed a penalty of Rs5 lakh on the CA. CA Bansal, who was the engagement partner (EP), is also barred for five years from being appointed as an auditor or from undertaking any audit in respect of the financial statements of any company.
In
an order last week, the NFRA bench of Dr Ajay Bhushan Prasad Pandey (chairperson), Dr Praveen Kumar Tiwari and Smita Jhingran (full-time members) says, "In this case, the auditor failed to perform the necessary audit procedures and either did not report or delayed reporting the serious violations committed by the company, despite being legally required to do so. This failure exposed shareholders and stakeholders to significant risks. Under the circumstances, we proceed to order the following sanctions keeping in mind the deterrence, proportionality, and the signalling value of sanctions to uphold the integrity of the profession and to deter future lapses of a similar nature."
Market regulator Securities and Exchange Board of India (SEBI), on 19 June 2020, informed NFRA that SEBI's investigation indicated irregularities in the loan transactions of RFL, a subsidiary of Religare Enterprirse Ltd (REL). NFRA then took up suo motu examination for possible violations of SAs by the EP in the statutory audit of Delhi-based RFL.
CA Bansal was the EP for the statutory audit of RFL for FY17-18. NFRA says he failed to comply with Companies (Audit and Auditor) Rules in the timely reporting of fraud to the Union government under Section 143(2) of the Companies Act, in respect of RFL's corporate loan book (CLB) of Rs2,023 crore.
CA Bansal also failed to appropriately assess the risks of fraud and management override of control in RFL, ignoring that the Reserve Bank of India (RBI) had raised serious concerns regarding the CLB portfolio of the company, and RFL itself to RBI about a fraud related to Strategic Capital Pvt Ltd (SCCPL).
He also failed to document sufficient evidence regarding the audit procedures in the audit of RFL's loan book and did not verify the certainty of future taxable income against which the deferred tax assets (DTA) of Rs492.63 crore were recognised in the books.
Further, NFRA says, the EP failed to question the business rationale of the investments by RFL of Rs200 crore in non-convertible debentures (NCDs) of OSPL Infradel Pvt Ltd (OSPL) which had a net worth of only Rs1.23 lakh. During FY16-17, OSPL borrowed Rs200 crore from RFL via NCDs and invested Rs204 crore in Bharat Road Networks Ltd (BRNL). "Therefore, OSPL acted as a conduit for transfer of fund from RFL to BRNL."
"The EP also failed to obtain sufficient appropriate evidence regarding impairment or diminution of such investment and failed to verify the interest income received on the investments. CA Bansal failed to give an appropriate audit opinion in light of the cumulative impact of mis-statements which were material and pervasive. He also failed to obtain sufficient appropriate audit evidence regarding the appropriateness, completeness and accuracy of consolidation adjustments and reclassifications relating to the accounts of RFL's subsidiary- Religare Housing Development Finance Corporation (RHDFC)," NFRA says.
According to the audit authority, CA Bansal, the EP in the present case, was required to ensure compliance with standards of auditing (SAs) to achieve the necessary audit quality and lend credibility to financial statements to facilitate its users. "As detailed in this order, substantial deficiencies in the audit, abdication of responsibility and inappropriate conclusions on the part of CA Bansal establish his professional misconduct. The lack of documented evidence in the original audit file severely compromises the credibility of the audit and the reliability of the financial statements. Moreover, the submission of supplementary work papers, without substantiated audit procedures, appears to be an attempt to cover up significant audit deficiencies."
Despite being a qualified professional, NFRA says CA Bansal has not adhered to the SAs and has thus not discharged the duty cast upon him. "This conduct not only violates the SAs but also signifies a disregard for the principles of transparency and accountability in the audit profession. Had the auditor exercised due diligence, care, and attention in performing his duties, and had he raised appropriate red flags in a timely manner through his audit report, many of the serious lapses such as fund diversion, which led to irreparable losses for shareholders and creditors could potentially have been prevented."
"While assessing the auditor's work, we have been fully mindful that a statutory auditor is not a forensic auditor and does not have the benefit of hindsight. However, auditing standards mandate that the auditor conduct the procedures which enable him to highlight issues that could serve as early warnings for shareholders and other stakeholders. This enables timely corrective actions to mitigate potential losses for shareholders and other stakeholders," the bench says.
While imposing a penalty of Rs5 lakh, NFRA barred CA Bansal for five years from being appointed as an auditor or from undertaking any audit in respect of the financial statements of any company.
