The National Financial Reporting Authority (NFRA) has taken stringent action against Deloitte Haskins & Sells LLP and two chartered accountants for significant lapses in the statutory audit of Zee Entertainment Enterprises Ltd (ZEEL) for the financial years 2018-19 and 2019-20. Here’s an in-depth look at the issue and its implications.
Key Findings and Allegations
- NFRA highlighted Irregularities in Fixed Deposit Management
- A ₹200 crore fixed deposit held by ZEEL in Yes Bank was prematurely closed in July 2019 and utilized to settle debts of seven promoter-linked companies without board or shareholder approval.
- NFRA highlighted that Deloitte failed to identify and report these irregularities, including unauthorized guarantees and fund misappropriation.
- Professional Misconduct by Auditors
- Deloitte’s engagement partner, CA A B Jani, and quality control partner, CA Rakesh Sharma, were accused of gross negligence, lack of professional skepticism, and failure to comply with audit standards.
- The auditors failed to adequately investigate red flags, such as unauthorized transactions between ZEEL and related entities and discrepancies in communications with Yes Bank.
- Violations of the Companies Act
- NFRA determined that the auditors were guilty under provisions of the Companies Act, 2013, which require auditors to disclose material facts necessary for a clear understanding of financial statements.
Penalties Imposed
- Deloitte Haskins & Sells LLP
- Penalized ₹2 crore for lapses in the audit process.
- CA A B Jani
- Fined ₹10 lakh and barred from audit-related work for five years.
- CA Rakesh Sharma
- Fined ₹5 lakh and banned from audit-related work for three years.
NFRA’s Stance and Recommendations
NFRA emphasized the need for rigorous scrutiny and high standards in audits of public interest entities. The authority has mandated:
- Revisiting the audit reports for ZEEL.
- Continuous monitoring of remedial measures implemented by audit firms, including Deloitte and BSR & Co.
NFRA also noted deficiencies in the independence monitoring and audit documentation processes of other firms like BSR & Co. and Lodha & Co.
Deloitte’s Response
Deloitte has acknowledged receiving the NFRA order and stated, “We are currently reviewing the order to determine our next course of action. We remain committed to maintaining the highest standards of audit quality.”
Implications for Corporate Governance
This case highlights serious governance concerns, particularly the role of promoters in diverting company funds without appropriate approvals. It underscores the critical need for:
- Strengthened internal controls within organizations.
- Enhanced vigilance by auditors to detect and report fraud or irregularities.
The penalties imposed by NFRA serve as a stark reminder of the responsibilities and ethical standards expected of auditors in safeguarding public interest. As Deloitte and the implicated individuals review their positions, this case sets a precedent for accountability and transparency in financial audits.
