NFRA fines Deloitte and disqualifies two partners over alleged ZEEL audit lapses

Mumbai/New Delhi: The National Financial Reporting Authority (NFRA) has sanctioned audit firm Deloitte Haskins & Sells LLP and its two senior partners for alleged professionalism in the audit of Zee Entertainment Enterprises Limited (ZEEL) for the financial year 2018-19 Misconduct and the 2019-20 fiscal year.

Total fines imposed by regulators $215 crore and issued a multi-year injunction to the concerned partners. The fine is $The audit firm was fined Rs 2 crore, according to an order signed by the NFRA on December 23 and published on its website.

The audit engagement partner has been ordered to pay the following fines: $The order stated that the amount was Rs 10 lakh and he had been disqualified for five years. Audit quality control partner has been disqualified for three years and ordered to pay a fine $500,000. Both partners are now retired from Deloitte.

The authorities also directed the company to re-examine the audit report.

The action stems from Deloitte’s alleged failure to identify and report breaches related to an engagement. $ZEEL holds Rs 200 crore in fixed deposits with Yes Bank. The FD was prematurely closed in July 2019 without board or shareholder approval and was used by the bank to settle debts of ZEEL’s seven promoter-related entities, NFRA said in its order.

The NFRA is the independent regulator of statutory auditors established under the Companies Act. The committee is headed by Ajay Bhushan Pandey, former finance minister of India. NFRA has two other full-time members: Praveen Kumar Tiwari and Smita Jhingran.

ALSO READ | After ZEE merger failure, Gaurav Banerjee sets bold aim to rebuild Sony

A Deloitte spokesman said the firm was reviewing the order. “We have received an order from the NFRA against the firm and two retiring partners. We are currently reviewing the order to determine our next steps. We remain committed to maintaining the highest audit quality standards,” the spokesperson told Mint.

Inquiries seeking comment sent via email to the two audit partners and ZEEL on Tuesday remained unanswered by press time.

NFRA charges

The NFRA claimed in its order that Deloitte issued unmodified audit opinions in both financial years despite the transaction’s materiality requiring rigorous scrutiny. The regulator said the auditor allegedly did not obtain sufficient appropriate audit evidence to support its unmodified opinion and conclude that the matter did not involve fraud. NFRA found the audit findings to be “unfounded and wrong”.

The NFRA order highlights several alleged lapses by the auditors. The company was found to have ignored red flags, including unauthorized guarantees and the use of ZEEL’s funds to assume liability of the promoter group.

ALSO READ | Sebi complains to SAT, Chandra is not cooperating with Zee funds misappropriation investigation

“The auditors failed to exhibit professional skepticism and committed gross negligence in the audit of matters related to the closure of FD,” the NFRA said, adding that they failed to verify Yes Bank’s explanation of the closure of FD or question the management’s assertions.

NFRA also found that Deloitte ignored differences in communications between Yes Bank, ZEEL and the promoter entities.

background

The issue revolves around a 2018 letter from ZEEL’s then chairman Subhash Chandra, which assured Yes Bank that ZEEL’s FD would provide loan support to Essel Group entities. Later, FD was used without ZEEL’s approval, causing serious governance issues.

A legal expert, who did not wish to be named, said the NFRA order was based on the processes and procedures adopted by the auditors in relation to their functions and activities and would not have any impact on ZEEL.

Further, the allegations mentioned by NFRA regarding the company’s fixed deposits were resolved by the Securities Appellate Tribunal (SAT) in its order on October 30 last year, dismissing the allegations against CEO Punit Goenka, Mint Reported in October last year.

and read | NFRA committee revise all auditing standards despite ICAI dissent on some standards; likely to be effective from FY2026

In August last year, market regulator Sebi (Securities and Exchange Board of India) banned Chandra’s son Goenka from holding key directorships in the company over an alleged fund diversion case. Subsequently, in October of the same year, the State Administration of Taxation revoked Sebi’s order, Mint reported on October 30.

Incidentally, Sebi has not appealed the SAT order to any higher court since then.

Subsequently, ZEEL formed an independent inquiry committee and based on its report, proposed to resolve the matter with Sebi. It is reported that the company is currently seeking the same solution with relevant departments.