The National Financial Reporting Authority (NFRA), the country’s sole independent audit regulator, has imposed a penalty of ₹2 crore on Deloitte Haskins & Sells, along with penalties on two chartered accountants for lapses in the audit of Zee Entertainment Enterprises Ltd (ZEEL) during the 2018-19 and 2019-20 financial years.

In its order, now made public, NFRA has also barred A B Jani, Engagement Partner, from taking up any audit work of a corporate for 5 years and imposed a penalty of ₹10 lakh on him for his professional misconduct. 

NFRA has also imposed a penalty of ₹5 lakh on Rakesh Sharma, Engagement Quality Control Review (EQCR) Partner, and debarred him from undertaking any audit work of a corporate for three years. 

NFRA had suo-motu examined the audit file for the statutory audit of ZEEL for FY’2019-20 and FY’2018-19 to assess whether the auditor committed any professional misconduct as defined under Companies Act, 2013.

The audit regulator concluded that the auditors were “grossly negligent, failed to apply professional skepticism and due diligence, did not adequately challenge the management’s assertions, and failed to evaluate reporting of suspected fraud as required under Companies Act”. This fraud was evident from unauthorised guarantees/securities, premature closure of the fixed deposit by YES Bank and unauthorised use of ZEEL’s funds for settling the loan of the promoter group companies, with the knowledge of the Chairman of the group and management of ZEEL, the NFRA order noted. 

The NFRA order concluded that the auditors failed to meet the relevant requirements of the standards of auditing (SAs) and violated the Companies Act with respect to certain significant related party transactions. 

In September 2018, the Chairman of ZEEL, who is also the promoter of Essel Group of Companies, had issued a letter to YES Bank, committing ₹200 crore fixed deposit of ZEEL as a guarantee for the loans given by YES Bank to a promoter group company Essel Green Mobility Ltd.

YES Bank appropriated the FD in July 2019, towards settlement of loan amounts due from seven promoter group companies. Neither the creation and maintenance of FD nor its re-appropriation by the bank was with the approval of the Board or shareholders of the company. The statutory auditors failed to identify and report this misrepresentation, NFRA order said.  

NFRA’s order underscores systemic failings, including lack of due diligence and absence of oversight mechanisms within Deloitte’s quality control framework, said audit profession observers. 

Deloitte’s response 

When contacted, a Deloitte spokesperson said, “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”.

Broader implications

This landmark decision highlights NFRA’s increasing scrutiny over audit practices, particularly in high-profile cases involving public interest. It serves as a warning to auditing firms about the consequences of non-compliance with auditing standards and professional ethics, said corporate observers. 

Market observers believe this action could trigger a re-evaluation of corporate governance practices and auditor accountability across India’s corporate sector. With Deloitte’s credibility under question, stakeholders are likely to demand higher standards of transparency and integrity in financial reporting, they added.