Two auditors in Reliance Commercial Finance case are fined Rs 2.5 crore by NFRA

The National Financial Reporting Authority (NFRA) has imposed penalties totalling Rs 2.5 crore on two auditors for professional misconduct and auditing lapses related to the Reliance Commercial Finance case for FY 2018-19. Shridhar & Associates received a fine of Rs 2 crore, while Ajay Vastani was fined Rs 50 lakh. Additionally, Vastani has been barred from auditing any financial statements or internal functions of any company for five years.

This action followed a report filed by Price Waterhouse & Co Chartered Accountants LLP (PW) with the corporate affairs ministry, under the Companies Act, 2013. PW resigned as the auditor of RCFL without issuing an audit report for FY 2018-19. Subsequently, Shridhar & Associates was appointed as the statutory auditor by RCFL’s Board in June 2019.

NFRA’s examination of Shridhar & Associates’ audit file revealed that the auditors failed to meet their professional obligations under the Act and Auditing Standards (SA). The auditors endorsed the company’s legal interpretation dismissing any suspicions of fraud, despite the ongoing investigation by the ministry. They also failed to adequately verify the reasonableness of the expected credit loss provision of Rs 537 crore on loans totalling Rs 12,224 crore.

The auditors did not sufficiently investigate the end-use of loans, potential syphoning of funds, management override of controls, or the business rationale behind loan approvals. Despite knowing about the previous auditor’s report of suspected fraud, the auditors’ report misleadingly stated there were no issues, resulting in material misstatements in the financial statements.