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Regulator debars audit firm’s partners for lapses in DHFL review

NEW DELHI : The National Financial Reporting Authority (NFRA) has debarred two partners of a Mumbai-based firm for alleged professional misconduct in auditing Devan Housing Finance Corp. Ltd’s FY18 accounts, as part of the watchdog’s efforts to improve audit quality.

The regulator debarred a partner at Chaturvedi & Shah LLP for 10 years, and another for five years. The disciplinary orders apply to the individual partners, not the audit firm.

NFRA said in its order that the auditors had allegedly failed to meet the requirements of the audit standards, violated the law in significant areas, and did not apply professional scepticism and due diligence sufficiently to challenge management assertions. The order was signed off on Tuesday.

Devan Housing Finance is now part of the Piramal Group, after it was acquired as part of a court-monitored debt resolution plan. In January 2021, 94% of the creditors of DHFL had voted in favour of a resolution plan by the Piramal Group and the deal was cleared by different regulators and the National Company Law Tribunal. 

Emails sent to the audit firm, the two partners and Piramal Group on Wednesday seeking comments remained unanswered.

This development comes shortly after the National Company Law Appellate Tribunal (NCLAT) last Friday upheld both NFRA’s jurisdiction on audits done prior to its constitution in 2018 and the disciplinary orders issued by the audit watchdog in the case of four individual branch auditors of DHFL for FY18, who are part of a Calicut-based audit firm, K Varghese & Co.

The branch auditors of DHFL are preparing to move the Supreme Court for relief from NFRA’s disciplinary orders. 

A person informed about the move said the firm had complied with all relevant audit standards applicable to the branch audit, adding that this was verifiable from records submitted with NFRA.

NFRA’s orders do not contain any findings of errors or misstatement in the accounts audited by the branch auditors, this person said on condition of anonymity. 

The “charges are on allegation of procedural lapses. Audit procedures are means of audit. Holding auditors guilty of professional misconduct on the ground of procedural lapses, without any factual finding of errors in the accounts audited, is very demoralizing,” this person said. 

Branch auditors have a limited role in certifying localised transactions in branch offices, this person said, adding that branch auditors do not question NFRA’s retrospective jurisdiction.

NFRA’s disciplinary orders and the legal challenges mounted by the auditors are likely to be eventually settled by the Supreme Court, bringing more clarity on the new regulatory regime for statutory audits. 

NFRA was conceived in the Companies Act of 2013 after the Satyam scandal, but was set up only in October 2018. The regulator aims to step up the quality of not only audits but also of the preparation of financial statements.

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Published: 06 Dec 2023, 08:34 PM IST

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