Holding two chartered accounts (CAs) responsible for professional misconduct and non-maintenance of proper audit documentation for 10 branches of Dewan Housing Finance Corporation Ltd (DHFL), which is embroiled in the Rs34,000 crore scam, the national financial reporting authority (NFRA) slapped a penalty of Rs1 lakh each on them. NFRA also barred both the CAs from taking up any auditing assignment for one year.
In two separate orders, the NFRA bench of Dr Ajay Bhushan Prasad Pandey (chairperson), Smita Jhingran and Praveen Kumar Tiwari (full-time members) noted deficiencies in the audit and abdication of responsibilities on the part of CA Krishna Bihari Chaturvedi and CA Kashinath Chaturvedi.
In
an order, the bench says, "...despite being a qualified professional, CA Krishna Bihari Chaturvedi has not adhered to the standards of auditing (SA) and provisions of the law. We also note his non-cooperation during the proceedings by not replying to the show cause notice (SCN) in time and not accepting the communication sent by post. These facts establish his gross negligence resulting in professional misconduct."
"...there were deficiencies in the audit and abdication of responsibility on the part of CA Kashinath Chaturvedi right from the acceptance of the audit without due diligence in ascertaining the validity of the offer, which establishes his gross negligence resulting in professional misconduct. In fact, accepting an audit assignment in contravention of the law and continuing it in the non-conformity with the SA, constitutes a flagrant violation of the law,"
NFRA says in another order.
NFRA took suo motu notice of the audit quality review (AQR) of the statutory audit of DHFL for FY17-18 conducted by Mumbai-based CA firm Chaturvedi & Shah. During the review, the authority noticed that 33 engagement partners (EPs) or branch auditors had signed independent branch auditor's reports for nearly 250 branches of DHFL.
For FY17-18, Chaturvedi and Shah LLP was appointed DHFL's statutory auditor in the company's annual general meeting (AGM). However, the appointment of branch auditors was never approved during the AGM.
Yet, CA KB Chaturvedi and CA K Chaturvedi accepted the appointment from Chaturvedi & Shah and portrayed themselves as 'branch statutory auditors' in all their communication.
NFRA observed that although the appointment letter for five branches of DHFL was accepted by CA K Chaturvedi, the independent branch auditors' reports were issued under the signature of CA KB Chaturvedi.
CA K Chaturvedi told NFRA that CA KB Chaturvedi conducted the audit. However, CA KB Chaturvedi stated that he only finalised the audit conducted by CA K Chaturvedi.
"However, the audit file does not contain any evidence of who conducted the audit. The evidence is available only regarding who accepted the audit and who issued the audit reports," NFRA says.
The authority then initiated disciplinary proceedings against both the CAs. Based on the nature of their professional misconduct and other factors, NFRA imposed a penalty of Rs1 lakh each on CA K Chaturvedi and CA KB Chaturvedi while barring them for one year from taking any auditing-related assignment.
In his independent auditor report, CA Mehta, the EP, stated that the reports on the accounts of the branch offices of DHFL audited under section 143 (8) of the Act by branch auditors had been properly dealt with by him while preparing the audit report. The audit report also stated that the audited financial statements incorporated the returns for the year ended on the date audited by the branch auditors of the company's branch offices at 250 locations.
However, NFRA says there is no evidence in the audit file to establish the existence of legal appointments of any branch auditor by the AGM and that Chaturvedi and Shah LLP has carried out the audit of the entire company, including all its 250 branches. "In total dereliction of his duty, the EP relied on the illegally appointed branch auditor's reports, which were made in violation of the SAs."
In a separate order, NFRA says, "The EQCR partner (CA Chaturvedi) failed to objectively evaluate and question the EP when the EP failed to meet relevant requirements of the SAs and violated the Act and the code of ethics...The major lapses included false reporting in the independent auditor's report about the audit of branches, failure to report material misstatements in the consolidated financial statements (CFS), failure to examine non-compliance with directions issued by National Housing Bank (NHB), failure to verify internal financial controls, failure to access the risk of material misstatements, failure to evaluate the going concern assumptions and failure to verify the related party transactions."
DHFL became a defaulter in May 2019, and the banks classified it as a non-performing asset (NPA) between October and December 2019 and then declared it as 'fraud' from March 2020 onwards.
The Union Bank of India (UBI), leader of a 17-bank consortium, including the IDBI Bank, had lodged a complaint against the DHFL, Wadhawan siblings and others who allegedly hatched a criminal conspiracy to defraud the banks of a staggering amount of around Rs43,000 crore.
Based on the UBI's complaint, central bureau of investigation (CBI) filed its first information report (FIR) in June 2022 against the Wadhawans, DHFL and others.
CBI had said that the plot by the accused Wadhawan brothers and others induced the consortium of banks, mostly public sector banks (PSBs), to release huge loans totalling Rs42,871.42 crore.
A significant portion of the loans was allegedly siphoned off or misappropriated by falsifying the DHFL's books of accounts, dishonestly defaulting on the repayments to the lenders and causing a wrongful loss of Rs34,615 crore.
