The National Financial Reporting Authority (NFRA), responsible for overseeing auditors of listed and large companies, has made significant moves against Pathak HD & Associates (PHD), the joint auditor for Reliance Capital, formerly owned by the Anil Ambani group. This action follows revelations of multiple failures highlighted by the resigning auditor, Price Waterhouse (PW), which raised concerns about suspected fraud amounting to Rs 12,571 crore by the company.
Reliance Capital recently saw a change in ownership, with the Hindujas taking over after significant concessions from lenders. This transition comes after the Reserve Bank of India’s decision in November 2021 to replace the board of the Anil Ambani Group company due to governance issues and payment defaults.
NFRA’s order has identified numerous lapses by Pathak HD & Associates and its key personnel, Parimal Kumar Jha and Vishal D Shah. Both chartered accountants have been barred from conducting audit work for 10 years and five years, respectively. The firm faces a penalty of Rs 3 crore, with the two auditors directed to pay fines of Rs 1 crore and Rs 50 lakh, respectively.
The findings reveal that Pathak HD & Associates and its partners failed to meet statutory auditor obligations, violated provisions of the Companies Act, and breached ethical codes. They were found to be “grossly negligent” and neglected to report “material mis-statements” in Reliance Capital’s financial records, despite warnings from Price Waterhouse about potential fraud and irregularities in loan practices.
In the fiscal year 2018-19, Reliance Capital, a core investment company mainly investing in group entities, had substantial bank loans and external borrowings. NFRA highlighted serious credit impairment among these group companies, with funds often being circulated among entities facing similar credit challenges without adequate explanation or assurance of recoverability.
NFRA criticized Pathak HD & Associates for disregarding fraud concerns based on incomplete examinations and legal interpretations, conducted only after pressure from the audit committee. The auditors failed to address PW’s observations and neglected to verify the legitimacy of loans disbursed, relying solely on assurances from promoter group entities rather than conducting thorough checks.
Insufficient scrutiny of bank statements to detect potential irregularities in loan transactions was also noted by NFRA, despite indications of circular transactions highlighted by PW. This lack of due diligence raises concerns about the auditors’ oversight and diligence in fulfilling their responsibilities.
