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NFRA acts against Joint Auditor of Reliance Capital
PrintNational Financial Reporting Authority (NFRA), the regulator for auditors and audit firms for listed and large companies, has acted against Pathak HD & Associates - the joint auditor for Reliance Capital, then an Anil Ambani group company - and its two auditors for multiple failures flagged by the other auditor, Price Waterhouse (PW), which resigned and also flagged suspected fraud of Rs 12,571 crore by the company.
Reliance Capital was recently taken over by the Hindujas after several lenders took large haircuts. In Nov 2021, the Reserve Bank of India had superseded the Anil Ambani Group company's board due to governance issues and payment defaults.
In its order, NFRA has found multiple lapses by Pathak HD & Associates (PHD) and its engagement partner Parimal Kumar Jha and engagement quality control review partner Vishal D Shah, with both chartered accountants barred from undertaking audit work for 10 years and five years, respectively. The firm faces a penalty of Rs 3 crore while two CAs have been asked to pay Rs 1 crore and Rs 50 lakh.
The firm and the two partners have been held guilty of not meeting the requirements of statutory auditors, violating the provisions of the Companies Act and the code of ethics, and were found to be "grossly negligent" apart from failing to report "material mis-statements" in the books of Reliance Capital. This was despite the red flags raised by PW, including potentially irrecoverable loans of Rs 12,571 crore being shown as recoverable and violation of lending practices, while handing out loans of Rs 6,557 crore.
In FY2018-19, Reliance Capital - a core investment company which was primarily investing in group companies - had bank loans of around Rs 12,700 crore and other external borrowings of around Rs 32,400 crore. "These group companies, reported by PW, had serious credit impairment. Many of these group companies used the money to invest in or lend to other group companies with similar credit impairment. The business rationale and recoverability of these loans were not explained," NFRA noted, adding that the auditors who were required to agree or disagree with PW did not do so and did not perform audit procedures for nearly two months after the issue was first raised.
The auditors have also been held guilty of conducting inadequate checks to see if PW's observation that out of 13 borrowers, 11 had losses and negative networth, and only went by comfort letters provided by promoter group entities. Similarly, business activities of none of the borrowers were documented to confirm whether the loans sanctioned were utilised for genuine business purposes. Further, there was no examination of the bank statements to rule out the possibility of evergreening of loans, despite the indications of circular transactions noted by PW, NFRA said.
Reliance Capital was recently taken over by the Hindujas after several lenders took large haircuts. In Nov 2021, the Reserve Bank of India had superseded the Anil Ambani Group company's board due to governance issues and payment defaults.
In its order, NFRA has found multiple lapses by Pathak HD & Associates (PHD) and its engagement partner Parimal Kumar Jha and engagement quality control review partner Vishal D Shah, with both chartered accountants barred from undertaking audit work for 10 years and five years, respectively. The firm faces a penalty of Rs 3 crore while two CAs have been asked to pay Rs 1 crore and Rs 50 lakh.
The firm and the two partners have been held guilty of not meeting the requirements of statutory auditors, violating the provisions of the Companies Act and the code of ethics, and were found to be "grossly negligent" apart from failing to report "material mis-statements" in the books of Reliance Capital. This was despite the red flags raised by PW, including potentially irrecoverable loans of Rs 12,571 crore being shown as recoverable and violation of lending practices, while handing out loans of Rs 6,557 crore.
In FY2018-19, Reliance Capital - a core investment company which was primarily investing in group companies - had bank loans of around Rs 12,700 crore and other external borrowings of around Rs 32,400 crore. "These group companies, reported by PW, had serious credit impairment. Many of these group companies used the money to invest in or lend to other group companies with similar credit impairment. The business rationale and recoverability of these loans were not explained," NFRA noted, adding that the auditors who were required to agree or disagree with PW did not do so and did not perform audit procedures for nearly two months after the issue was first raised.
The auditors have also been held guilty of conducting inadequate checks to see if PW's observation that out of 13 borrowers, 11 had losses and negative networth, and only went by comfort letters provided by promoter group entities. Similarly, business activities of none of the borrowers were documented to confirm whether the loans sanctioned were utilised for genuine business purposes. Further, there was no examination of the bank statements to rule out the possibility of evergreening of loans, despite the indications of circular transactions noted by PW, NFRA said.
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