The National Financial Reporting Authority (NFRA) has imposed a ban as well as total penalties of Rs 4 lakh on four partners of K Varghese & Co, an audit firm, after an investigation into the branch audit of the erstwhile Dewan Housing Finance Corporation (DHFL) found four partners of the firm were guilty of “professional misconduct” and also highlighted other lapses for FY18.
The four separate orders by NFRA relate to four partners of the firm for their role as engagement partner for the statutory audit of various branches of the erstwhile housing finance company. The NFRA has imposed a fine of Rs 1 lakh each on them and has also debarred them for one year from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.
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“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,” it said.
The lapses were revealed after NFRA took suo moto notice of DHFL’s reported financial fraud and carried out an Audit Quality Review (AQR) of the statutory audit of the housing finance company for FY18 by Mumbai-based chartered accountant firm Chaturvedi & Shah (CAS).
During the review, NFRA noticed that 33 engagement partners (EPs) or branch auditors had signed the “Independent Branch Auditors’ Report” for nearly 250 branches. Its investigation revealed that the appointment of none of the 33 branch auditors was approved at the Annual General Meeting of DHFL, as required by the Companies Act.
Further, the auditors portrayed themselves as “branch statutory auditor” in all communications with the company and CAS and had also and issued an “Independent Branch Auditors’ Report”. NFRA, in its order, said that by doing so they violated the provisions of the Chartered Accountants Act, 1949 (CAs Act), which requires ensuring a valid appointment.
Further since CAS had relied upon the “Branch Statutory Audit” performed by the engagement partner, NFRA also investigated the partners’ compliance with the applicable standards on auditing (SAs). It was found that they did not comply with the principles of the SAs and also did not maintain proper audit documentation and displayed flawed understanding and interpretations of the various stipulations in the law and standards in an unprofessional manner.
NFRA is the statutory authority to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with this.
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There were allegations of siphoning of public money of around Rs 31,000 crore and the Enforcement Directorate‘s reported action in April 2020 on an alleged banking fraud of about Rs 3,700 crore by the promoter/directors of DHFL. The company was eventually put under corporate insolvency resolution and was acquired by Piramal Capital and Housing Finance.