NFRA has imposed a significant penalty INR 2.5 crore
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NFRA has imposed a significant penalty INR 2.5 crore
The National Financial Reporting Authority (NFRA) has imposed a significant penalty on M/s Shridhar & Associates and CA Ajay Vastani, totaling ₹2.5 crore, due to various audit violations during their audit of Reliance Commercial Finance Limited (RCFL) for the fiscal year 2018-19. This decision highlights the crucial importance of maintaining high standards in financial audits to ensure transparency and trust in financial markets. This action follows an investigation initiated by the Government of India under Section 132(4) of the Companies Act 2013, which uncovered several critical issues in their audit practices. Below is a summary of the case and its implications:
Background
RCFL reported total assets of ₹213,504 crore and external liabilities exceeding ₹212,623 crore, with a net loss of ₹21,892 crore for FY 2018-19. PwC, the previous auditor, resigned suspecting fraud.
- Reliance Commercial Finance Limited (RCFL) Financial Year 2018-19
- Financials:
- Total Assets: ₹213,504 crore
- External Liabilities: ₹212,623 crore
- Net Loss: ₹21,892 crore
- Previous Auditor: PwC, which resigned due to suspicions of fraud.
Audit Violations: Failure to communicate with the previous auditor
Previous Auditor Price Waterhouse & Co. Resignation:
Price Waterhouse & Co Chartered Accountants LLP (PW), the previous auditor, resigned without issuing an audit report due to concerns over suspected fraud and undisclosed related party transactions. PW flagged potential fraud in ‘Working Capital Term Loans’ and ‘SME Structures Loans’.
Engagement of M/s Shridhar & Associates:
After PW’s resignation, RCFL engaged M/s Shridhar & Associates for the fiscal year 2018-19 audit. However, upon review of the audit file, NFRA identified several deficiencies:
- The auditors did not communicate with the previous auditor (PwC). Issuance of an inappropriate Emphasis of Matter (EoM) in the audit report. Inadequate examination of evidence regarding going concern status and credit loss provisions. The auditors issued an inappropriate EoM in the audit report.
- There was an inadequate examination of evidence concerning the company’s going concern status and credit loss provisions. The auditors failed to report suspected fraud despite being aware of it. . Failure to report suspected fraud despite being aware. Lack of adequate audit procedures to address fraud risks and financial misstatements. There was a lack of adequate audit procedures to address risks of fraud and financial misstatements.
National Financial Reporting Authority’s Decision- Penalty on CA & CA Firm
Read more at: https://studycafe.in/2-5-cr-penalty-on-ca-and-ca-firm-ca-auditor-of-rcfl-debarred-for-5-years-by-nfra-312764.html
M/s Shridhar & Associates: ₹2 crore. Partner CA Ajay Vastani ₹50 lakh. Both auditors are debarred from serving as auditors or undertaking audit-related roles for the next five years.
Importance of High Standards: This penalty underscores the critical role of auditors in safeguarding the integrity of financial reporting and the severe consequences of failing to adhere to established audit standards.
- High standards in financial audits are essential for maintaining transparency and trust in the financial markets.
- Stringent penalties for audit violations serve as a deterrent against unethical practices.
- Upholding rigorous audit standards protects investor interests.
- Audit firms must ensure thoroughness and strict adherence to audit standards to avoid regulatory actions.
This action by the NFRA underscores the critical role of auditors in safeguarding the integrity of financial reporting and the severe consequences of failing to adhere to established audit standards.
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