Deloitte’s Credibility In Question After NFRA Penalty

The National Financial Reporting Authority has imposed a Rs 2-crore fine on Deloitte Haskins & Sells LLP for lapses in auditing Zee Entertainment Enterprises Ltd. during fiscal 2019 and fiscal 2020. The regulatory action includes penalties and bans on two former Deloitte partners, raising concerns about the firm’s credibility among its clients.

The NFRA found that Deloitte failed to meet the requirements of the Companies Act and Standards on Auditing while reviewing Zee Entertainment’s financial statements. The investigation focused on lapses in handling significant related party transactions, which the auditors allegedly did not address adequately.

A B Jani, the engagement partner for the audit, was fined Rs 10 lakh and banned from audit work for five years. Rakesh Sharma, the engagement quality control review partner, was fined Rs 5 lakh and barred from conducting audits for three years. Both individuals are prohibited from undertaking any audits of financial statements or internal functions of companies or corporate bodies during their respective ban periods.

In a statement, Deloitte acknowledged the NFRA order and stated that it is reviewing the findings to determine its next steps. The firm clarified that the penalties involve two retired partners, seeking to distance its current operations from those involved in the case.

Deloitte, one of India’s largest audit firms and part of the Big Four, serves numerous high-profile clients. The penalties imposed by the NFRA, however, could affect the firm’s reputation and lead clients to reassess their association. Companies depend on auditors for accurate financial reporting and regulatory compliance, and allegations of professional lapses may erode trust.

The NFRA order comes amid increasing scrutiny of auditors in India. The regulator has been actively reviewing audit practices to ensure adherence to statutory standards. Firms found lacking face monetary penalties, bans, and reputational damage, as seen in Deloitte’s case.

Deloitte’s ability to address client concerns and comply with regulatory expectations will likely determine its standing in the audit industry. The penalties underscore the importance of compliance and accountability in maintaining trust in audit services.

At present, Deloitte has not disclosed its intended course of action but has indicated that it is assessing the implications of the NFRA findings. The case could serve as a reminder to all audit firms of the critical importance of adhering to professional standards.

Notably, Deloitte's credibility also came under question four years ago, when the NFRA took action against its former chief executive Udayan Sen for his alleged role in connection to the audit of the crisis-hit IL&FS Financial Services Ltd. Sen was, in July 2020, slapped with a Rs 25-lakh penalty and a seven-year ban.