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nfra: NFRA imposes fine, bans auditors for 1 yr for misconduct in audit of DHFL branches

The National Financial Reporting Authority (NFRA) has imposed a fine and a one-year ban on four auditors for alleged professional misconduct in connection with the audit of branches of Dewan Housing Finance Corp Ltd (DHFL) in 2017-18. DHFL (now known as Piramal Capital and Housing Finance Ltd) is a listed entity, owned and controlled by Piramal Group.

In four separate orders, NFRA levied a fine of Rs 1 lakh each on auditors — Mathew Samuel, Sam Varghese, Harish Kumar T K and M Baskaran. The auditors are partners of audit firm K Varghese & Co.

Besides, all of them were restrained for a period of one year from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate during the ban period, the order said.

“The investigation by NFRA revealed prima facie evidence that the branch auditors had violated both the Companies Act, 2013 and the Chartered Accountants Act, 1949 by accepting the appointment that lacked a valid approval and had also violated the SAs while carrying out the branch audit,” NFRA said.

Following allegations of misappropriation of approximately Rs 31,000 crore of public funds, the Enforcement Directorate reported an operation in April 2020 against alleged bank fraud of about Rs 3,700 crore by the promoters/directors of DHFL.

Thereafter, NFRA had suo-motu initiated an Audit Quality Review (AQR) conducted by Chaturvedi & Shah (CAS) firm to probe into the role of the Statutory Auditors of DHFL for the FY 2017-18.

During the review, NFRA noticed that 33 Engagement Partners (EPs) or branch auditors had signed the “Independent Branch Auditors’ Report” for nearly 250 branches of DHFL. Further, NFRA investigated K Varghese & Co (the Audit Firm), which was the “Statutory Branch Auditor” of 17 branches of DHFL for FY 2017-18, with Mathew Samuel, Sam Varghese, Harish Kumar T K and M Baskaran, as its partners in the firm for the audit of several branches of the housing finance company.

As per the order, NFRA’s investigation revealed that the appointment of none of the 33 branch auditors was approved at the Annual General Meeting (AGM) of DHFL, as required by the Companies Act.

According to NFRA, the auditors also portrayed themselves as the “branch statutory auditor” in all communications with the DHFL and CAS, and issued an “Independent Branch Auditors’ Report”.

By doing so the auditors not only accepted a legally invalid appointment but also flouted the provisions of the Chartered Accountants Act (CAs Act), which requires ensuring a valid appointment as per the norms.

The regulator also investigated the auditors’ compliance with the applicable Standards on Auditing (SAs) in the performance of the branch audit of DHFL.

It was revealed that the auditors had not complied laws under Standards on Auditing, and had not maintained proper audit documentation and displayed flawed understanding and interpretations of the various stipulations in the law and standards in an unprofessional manner that established their professional misconduct in the matter, NFRA said.

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