NFRA Action Continues: Imposes Hefty ?10 Crore Penalty on Chartered Accountant Firm

In the order dated 19th August, 2024, the National Financial Reporting Authority (NFRA) has sanctioned a Chartered Accountant firm along with Engagement Partner (EP) and Engagement Quality Control Reviewer (EQCR) for failure to detect the diversion of funds. On receipt of information from the Securities and Exchange Board of India (SEBI), the NFRA began its investigation and held that the firm failed to detect the involvement of the company in the diversion of funds worth Rs 3,535 crores. Further, the NFRA held that the EP also failed to comply with various Standards on Auditing (SA) and Standards on Quality Control (SQC). Some other lapses identified by NFRA are described below:

1. Fraudulent diversion of funds through circulation of funds

The NFRA cited that the firm failed to assess and respond to the fraud risk and the risk of material misstatements in the financial statements arising due to diversion of funds through structured circulation of funds among the company owned and controlled by promoter. Thus, NFRA held that the firm failed to identify and report report the resultant fraud to the Central Government (CG) and also failed to report it in the “Independent Auditor’s Reports” and the report under CARO.

2. Evergreening of loans through the promoter’s held company

NFRA evaluated the company’s bank statement and found out that the same amount of funds was received and paid same day among various subsidiaries. NFRA also noted that these transactions were eliminated during consolidation. Further, there were various instances where the cheques issued by the company remained uncleared as on the reporting date. Thus, the NFRA held that the EP failed to exercise professional skepticism and perform appropriate audit procedures to detect and report fraudulent diversion of funds.

Considering the series of departure made by the EP and the EQCR, the NFRA imposed a monetary penalty of Rs 10 crore on the firm, Rs 50 lakhs upon EP and Rs 25 lakhs upon EQCR. In addition to this, the EP is is debarred for a period of 10 years and the EQCR is debarred for a period of 5 years from being appointed as an auditor.

To understand other material lapses made by firm and the NFRA’s order in detail,

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