NFRA Imposes 5 Lakh Penalty and 10-Year Ban on Two Auditors of BHPL over Audit Lapse

Executive Summary

This Order by the National Financial Reporting Authority (NFRA) disposes of the Show Cause Notice (SCN) issued to CA Jignesh Mehta, a member of the Institute of Chartered Accountants of India (ICAI) and the Engagement Partner (EP) for the statutory audit of Dewan Housing Finance Corporation Limited (DHFL) for the Financial Year 2017-18.

The Order concludes that the EP failed to meet relevant requirements of the Standards on Auditing (SA) and violated the Companies Act, 2013 (the Act) in several significant areas of the audit. He is found to be grossly negligent and failed to apply professional skepticism and due diligence sufficiently to challenge management assertions.

Key Findings

• The EP did not legally appoint branch auditors for DHFL's 250 branches, violating the Act and rendering the Independent Auditor's Opinion incomplete and invalid.
• The EP failed to consolidate the financial statements of a wholly owned subsidiary, DHFL Investments Limited, leading to material misstatements in the Consolidated Financial Statements.
• He ignored clear indications of DHFL's potential inability to continue as a going concern, violating SA 570 (Revised).
• The EP failed to properly identify, assess, and document the Risk of Material Misstatement (RoMM), violating SA 315 and SA 240.
• There were deficiencies in internal controls relating to the appraisal and sanction of loans that the EP did not identify.
• He failed to obtain sufficient information to express an opinion on Internal Financial Controls over Financial Reporting (ICFR) and issued a baseless audit report under Section 143(3)(i) of the Act.
• The EP failed to verify Related Party Transactions (RPT) as required by the SAs, violating SA 500 and SA 550.

Consequences

The EP is guilty of professional misconduct and is subject to the following sanctions:

• Monetary penalty of Rs. 5 Lakhs.
• Debarred from being appointed as an auditor for 10 years.

Legal Considerations

• NFRA has the jurisdiction to investigate and adjudicate matters of professional misconduct committed by auditors of companies falling under its domain, even for misconduct committed before its establishment.
• The EP was given ample opportunity to defend himself, including a personal hearing, before the Order was passed.

Conclusion

This Order serves as a strong reminder to auditors of their professional responsibilities and the consequences of failing to meet those responsibilities. It emphasizes the importance of adherence to SAs, the Act, and professional ethics to maintain the integrity of the audit profession and protect the interests of stakeholders.