NFRA penalises Deloitte for alleged lapses in ZEEL audit, debars two partners | Company Business News

Mumbai/New Delhi: The National Financial Reporting Authority (NFRA) has penalised audit firm Deloitte Haskins & Sells LLP, along with two of its senior partners, for alleged professional misconduct in the audit of Zee Entertainment Enterprises Limited (ZEEL) for FY2018-19 and FY2019-20.

The regulator has imposed fines totalling ₹2.15 crore and issued multi-year debarments to the partners involved. A penalty of ₹2 crore was imposed on the audit firm, an order signed by the NFRA on 23 December and published on its website showed.

The audit engagement partner has been ordered to pay a penalty of ₹10 lakh and has been debarred for five years, the order showed. And the audit quality control partner, who has been debarred for three years, has been asked to pay a penalty of ₹5 lakh. Both the partners are now retired from Deloitte.

The authority also directed the firm to revisit the audit reports.

The action stems from Deloitte’s alleged failure to identify and report irregularities related to a ₹200-crore fixed deposit held by ZEEL in Yes Bank. The FD was prematurely closed and utilised by the bank in July 2019 to settle debts of seven promoter-linked entities of ZEEL without board or shareholder approval, NFRA said in its order.

The NFRA is an independent regulator of statutory auditors, set up under the Companies Act. It is led by Ajay Bhushan Pandey, who was previously India’s finance secretary. NFRA also has two other full-time members—Praveen Kumar Tiwari and Smita Jhingran.

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A Deloitte spokesperson said the firm is reviewing the order. “We have received the order issued by the NFRA against the firm and two retired partners. We are currently reviewing the order to determine our next course of action. We remain committed to maintaining the highest standards of audit quality,” the spokesperson told Mint.

Queries emailed to the two audit partners and to ZEEL on Tuesday seeking comments for the story remained unanswered at the time of publishing.

NFRA’s allegations

NFRA has alleged in its order that despite the materiality of the transaction, which required rigorous examination, Deloitte issued unmodified audit opinions for both financial years. The regulator said the auditors allegedly did not obtain sufficient and appropriate audit evidence to support their unmodified opinion and to conclude that this matter was not a suspected fraud. NFRA held that the audit conclusion was “baseless and erroneous”.

NFRA’s order highlights several alleged lapses by the auditor. The firm was found to have allegedly ignored red flags, including unauthorised guarantees and use of ZEEL’s funds for promoter group liabilities.

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“Auditors did not exercise professional skepticism and were grossly negligent in the audit of the matter related to FD closure,” NFRA said, adding that they failed to verify Yes Bank’s explanation for the FD closure or challenge management assertions.

NFRA also found Deloitte guilty of overlooking discrepancies in communications between Yes Bank, ZEEL, and promoter entities.

The background

The issue revolves around a 2018 letter from ZEEL’s then chairman, Subhash Chandra, assuring Yes Bank that ZEEL’s FD would back loans for Essel Group entities. The FD was later used without ZEEL’s approval, raising serious governance concerns.

A legal expert who spoke on condition of anonymity said that the NFRA order is based on the processes and procedures adopted by the auditors in respect of their function and activities, and will have no bearing on ZEEL.

Additionally, the allegation pertaining to the fixed deposit of the company mentioned by NFRA has already been addressed by the Securities Appellate Tribunal (SAT) in its order dated 30 October last year, dismissing the allegations against CEO Punit Goenka, Mint reported last October.

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In August last year, market regulator Sebi (Securities and Exchange Board of India) had prohibited Goenka, Chandra’s son, from holding key directorship in the company in connection with the alleged fund diversion case. Subsequently, in October the same year, the SAT had set aside Sebi’s order, Mint reported on 30 October.

Incidentally, Sebi has not appealed against the SAT order in any higher court thereafter.

Later, ZEEL formed an independent investigation committee and, basis its report, proposed to settle the matter with Sebi. The company is currently pursuing the same with the authority, it is learned.