Reliance Capital's Joint Auditor Guilty Of Overlooking Fraud: Regulator

The National Financial Reporting Authority (NFRA) has held the joint auditor of Reliance Capital guilty of professional misconduct for deliberately overlooking the Price Waterhouse (PW) report of suspected fraud regarding loans and investments amounting to approximately Rs 12,571 crore to some group companies in the financial year 2018-2019 by the then Anil Ambani Group company.

NFRA has found multiple lapses by the joint auditor M/s Pathak H.D. & Associates (PHD) and its two auditors Parimal Kumar Jha and Vishal D Shah.

The two chartered accountants have been debarred for 10 years and 5 years respectively from being appointed as an auditor or undertaking any audit work or activities of any company or body corporate.

A Rs 3 crore penalty has been imposed on PHD while Jha has been fined Rs 1 crore and Shah has to pay a penalty of Rs 50 lakh.

The report states: "PHD concluded without any regard to the merits of the transactions that there were no matters attracting section 143(12) of the Companies Act. Despite the evidence of documented irregularities in Reliance Capital the auditor did not question the management. In the absence of tests and evidence, the recoverability of the loans of Rs 6557 crore (net of impairment) disclosed in the financial statements was doubtful and hence the management's assertions of the value and rights of these loans were materially misstated in the financial statements, which PHD failed to report."

Under section 143(12) of Companies Act, 2013 auditor is required to report any fraud identified in the company, the report points out while highlighting the lapse.

The report states that as per the Consolidated Financial Statements for FY 2018-19, Reliance Capital Ltd. (RCL) had loans from Banks of around 12,000 crore and other external borrowings of around Rs 32,000 crores, consisting of debentures, commercial papers and pass-through certificates.

RCL was a Core Investment Company (CIC) investing primarily in its group companies. RCL used the above loans and borrowing to extend loans and investments to other group companies. PW reported suspected fraud regarding loans and investments amounting to approximately Rs 12,571 crore to some group companies.

The report further states that despite the reporting of suspected fraud and the resignation by the other joint auditor (PW), the Auditors did not perform adequate procedures as required by the SAs (standards of auditing).

The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditors in disregard of their responsibilities under the Act and SAs.

The Auditors also demonstrated a lack of professionalism by rationalising the actions of the Company and ignoring the fundamentals of accounting and auditing.

NRFA has concluded that the Auditor was grossly negligent and failed to obtain sufficient appropriate audit evidence to support their opinion, failed to maintain professional skepticism and due diligence, failed to sufficiently and adequately challenge the management assertions and thus failed to identify and report material misstatements in the financial statements of RCL.

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