Calling their conduct "grossly negligent", the National Financial Reporting Authority has imposed penalties on audit firm Pathak H.D. & Associates, and barred two of its partners from conducting audits.
The firm, as the statutory auditor, and the partners who carried out the audit, did not do adequate due diligence, and failed to report material mis-statements in Reliance Capital's financial statements, the NFRA has said in its order.
The regulator examined RCap's financial for FY 2018-19. At the time, the company was being jointly audited by Price Waterhouse & Co LLP and Pathak HD & Associates. However, PW resigned from the audit without issuing a report, stating suspicions of fraud at Reliance Capital.
Despite this, PHD, in its audit report did not raise any red flags. It, as per NFRA's order rationalised the actions of the company and ignored the fundamentals of accounting and auditing. It failed to carry out an actual valuation of investments, the rationale for sanctioning loans and investments to potential non-creditworthy entities and the adequacy of provisions, the regulator said in its order.
"These matters included potentially irrecoverable loans and investments amounting to approximately Rs 12,571 crore to group companies portrayed as recoverable. However, PHD failed to carry out any independent procedures on these matters and discharge the responsibilities of a joint auditor in this regard," the NFRA order said
Pointing to this professional misconduct, the NFRA has imposed a penalty of Rs 3 crore on Pathak H.D. & Associates. Chartered Accountants - Parimal Kumar Jha and Vishal D Shah - who audited the books of RCap have been directed to pay Rs 1 crore and Rs 50 lakh, respectively. Additionally, both of them have been banned from auditing roles for 10 years and 5 years, respectively.
These penalties will take effect 30 days after the issuance of this order.
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