NFRA Sets Penalty on M/s Dhiraj & Dheeraj Firm for Audit Lapses in RHFL

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)

The aforesaid Order disposes of the Show Cause Notice (‘SCN’) on 25.07.2023, issued before 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 legal 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 separated 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. Initially, Mis Price Waterhouse & Co Chartered Accountants LLP (PW) was appointed as the auditor of RHFL for the Financial year 2018-19. The Director General of Corporate Affairs (DGCoA), Ministry of Corporate Affairs (MCA), Government of India, vide its letter on 29.05.2020 reported to the National Financial Reporting Authority (NFRA) that PW had furnished a report to MCA u/s 143(12)1 of the Companies Act, 2013 (the Act) dated 03.06.2019. On 11.06.2029 PW resigned from the audit, without providing an audit report for FY 2018-19. The board of directors of RHFL Mis Dhiraj & Dheeraj were appointed on 29.06.2019 as legal auditors of RHFL to fill the casual vacancy caused by the resignation of PW. The Securities and Exchange Board of India (SEBI) vide its letter on 21.03.2022 reported to the NFRA that Mis Dhiraj & Dheeraj had filed a qualified view for FY 2018-19 without making satisfactory disclosures in the audit report, along with the impact of ‘GeneralPurpose Corporate Loans’ (GPCL) on financial statements.

2) On Audit file analysis for the legal Audit of RHFL conducted via the Audit Firm Dhiraj & Dheeraj, which was called for u/s 132 (4) of the Act, we were of the prima facie opinion that the Auditor had not released their professional duties as per the Act and the Standards on Auditing (SA). Therefore, before the Auditor show cause notice was issued asking them to show the reason why action u/s 132(4) of the Act must not begin against them for professional wrongdoing.

3) According to the financial statements, RHFL’s total assets were Rs 18,100 crore and total external liabilities were approximately n6,300 crore till 31.03.2019. The external liabilities consist of a debt of over n4,800 crore, comprised of debentures, borrowings from banks, commercial papers, etc. It comprises of a total revenue of nearly Rs 2000 crore and declared a net profit of Rs 67 crore for FY 2018-19. PW notified a suspected fraud for the loans of approximately Rs 7900 crore as of 31.03.2019.

4) The auditor fails to perform the audit under the auditing norms even after the resignation of the previous auditor and a reporting of suspected fraud. Due to inadequate provision the material misstatements in the financial statements unexplained valuation of loans and irrational business practices were concurred via the Auditor in disregard of their obligations as per the Act and SAs. The imperfections in the audit consequence in generating the view unreliable as the material misstatements in the financial statement claims remain unreported. A lack of professionalism is been shown by the auditor via rationalizing the actions of the Company, poorly computing the work of the previous auditor, and overlooking the fundamentals of auditing.

5) Post analyzing his submissions along with the written and oral, the same order concludes that the auditor fails to fulfill the pertinent needs of the SAs and breaches the act, and the Code of Ethics in numerous areas of audit. In the audit identified in this Order, the Auditor was grossly negligent, failed to apply professional skepticism and due diligence, and did not contest the management assertions.

Major breaches proved in this Order are stated as

1. The auditor does not practice professional skepticism and perform risk assessment procedures to identify, assess, and respond to the Risk of Material Misstatement (ROMM) as of fraud or error for ( 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.
2. The Auditor did not perform enough appropriate audit procedures for verification of the assessment of the company of (a) the going concern assumption, and (b) adequacy of the Expected Credit Loss (ECL) of Rs 278 crore on loans at amortized costs of Rs 6,259 crore, which contained Rs 7849 crore of General Purpose Corporate Loans to credit impaired entities on which ECL was only Rs 173 crore.
3. Without complying with the pertinent requirements of the Chartered Accountants Act, of 1949, the audit firms accepted the audit engagement. The auditor does not ensure the objective engagement quality review through the EQCR Partner, is unable to comply with the quality standards, fails to compute the current concern basis of accounting, and fails to follow the needs of SA at the time of reporting on the work of management’s experts.
4. The Auditor’s omissions and commissions had rendered the audit report inconsistent. The Audit Firm furnished the qualified report while it was needed to issue a disclaimer or adverse view, had the audit been conducted according to SAs.

6)  U/s 134( 4) of the Companies Act, on the grounds of the investigation and proceedings and post permitting them to show their case, we see the Audit Firm, the EP, and the EQCR Partner guilty of professional misconduct and impose, via such Order, the following fiscal penalties and sanctions:

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

b) Levying 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) Also, EP and EQCR partners are debarred for 5 years and 3 years respectively from being appointed as an auditor or internal auditor or from undertaking any audit concerning financial statements or internal audit of the functions and activities of any company or body corporate.