The National Financial Reporting Authority (NFRA) has imposed a penalty of Rs 2 crore on Deloitte Haskins & Sells LLP for lapses in its audit of Zee Entertainment Enterprises Ltd (ZEEL) during the financial years 2018-19 and 2019-20. Additionally, two chartered accountants (CAs) involved in the audit have been penalized and barred from practicing for multiple years.
Penalties Imposed on Auditors
- CA AB Jani, the Engagement Partner (EP), has been fined Rs 10 lakh and barred for five years from serving as an auditor or internal auditor for any company.
- CA Rakesh Sharma, the Engagement Quality Control Review (EQCR) Partner, has been fined Rs 5 lakh and banned for three years.
Why Did NFRA Penalize Deloitte?
The NFRA's investigation focused on Deloitte's failure to identify and report irregularities surrounding a Rs 200 crore fixed deposit held by ZEEL in Yes Bank.
In 2018, ZEEL's Chairman, also the promoter of Essel Group, issued a letter to Yes Bank committing a Rs 200 crore fixed deposit of ZEEL as a guarantee for loans extended to Essel Green Mobility Ltd., a promoter group company. Yes Bank later appropriated this fixed deposit in 2019 to settle outstanding loans of seven promoter group companies.
The NFRA found that:
- The fixed deposit creation and its subsequent appropriation by the bank were carried out without the approval of ZEEL's board or shareholders.
- Deloitte's auditors failed to apply professional scepticism, adequately challenge management's assertions, and report suspected fraud.
"The statutory auditors were grossly negligent in their duties and failed to identify and report this misrepresentation," stated the NFRA.
Guilty of Professional Misconduct
After issuing a show-cause notice and reviewing the responses from Deloitte and the two CAs, NFRA concluded that they were guilty of professional misconduct.
Deloitte's Response
In response to the penalty, a Deloitte spokesperson said, "We are currently reviewing the order to determine our next course of action."
Implications for Audit Practices
This ruling underscores NFRA's commitment to enforcing high standards of professional conduct in auditing. It serves as a warning to audit firms and professionals to exercise diligence, apply professional scepticism, and ensure compliance with ethical and regulatory standards.
Conclusion
The action against Deloitte and its auditors marks another milestone in NFRA's effort to ensure accountability and integrity in financial reporting, especially in high-stakes cases involving large corporates like ZEEL. Audit firms are expected to critically assess management representations and report any irregularities to uphold public trust in financial systems.
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