Economic Fraud
Why Did NFRA Impose a ₹2.5 Crore Fine on Shridhar & Associates and CA Ajay Vastani For Audit of Reliance Commercial Finance?
NFRA has penalized RCFL auditors M/s Shridhar & Associates and CA Ajay Vastani with a ₹2.5 crore fine for professional misconduct. This decision followed an investigation into their audit practices for the financial year 2018-19, revealing significant violations of auditing standards and the Companies Act.
The National Financial Reporting Authority (NFRA) has imposed a significant penalty on the auditors of Reliance Commercial Finance Limited (RCFL). M/s Shridhar & Associates and CA Ajay Vastani have been fined ₹2.5 crore for their audit misconduct related to RCFL’s financial year 2018-19. The Government of India, under Section 132(4) of the Companies Act 2013, initiated an investigation that brought to light several critical issues in their audit practices.
PW had previously resigned without issuing an audit report
RCFL, a Non-Banking Finance Company (NBFC) listed on stock exchanges, engaged M/s Shridhar & Associates as its auditor for the financial year 2018-19, following the resignation of the previous auditor, Price Waterhouse & Co Chartered Accountants LLP (PW). PW had resigned without issuing an audit report, raising concerns about suspected fraud and undisclosed related party transactions.
RCFL reported total assets of ₹213,504 crore and external liabilities exceeding ₹212,623 crore, with a substantial portion being debt. The company incurred a net loss of ₹21,892 crore for the financial year 2018-19. The previous auditor, PW, had flagged suspected fraud in ‘Working Capital Term Loans’ and ‘SME Structures Loans’.
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Upon reviewing RCFL’s audit file, the NFRA observed that M/s Shridhar & Associates and CA Ajay Vastani potentially failed to fulfill their professional duties under the Act and the Standards on Auditing (SA). An SCN was issued to the auditors, demanding an explanation for their actions.
Findings and Violations:
The NFRA’s detailed investigation concluded multiple violations of auditing standards and the Companies Act:
– Failure to communicate with the previous auditor before accepting the engagement.
– Issuance of an inappropriate Emphasis of Matter (EoM) in the audit report.
– Inadequate examination of evidence regarding going concern status and credit loss provisions.
– Failure to report suspected fraud despite being aware of it.
– Lack of adequate audit procedures to address fraud risks and financial misstatements.
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Outcomes of the Investigation
The Order found both the Audit Firm and the Engagement Partner guilty of professional misconduct. Specifically:
– M/s Shridhar & Associates was fined ₹2 crore.
– CA Ajay Vastani was fined ₹50 lakh.
– Additionally, CA Ajay Vastani was debarred from serving as an auditor or undertaking any audit-related roles for five years.