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2025 (1) TMI 19
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....ely referred to as 'the Auditors' hereafter). This Order is divided into the following sections: A. Executive Summary B. Introduction and Background C. Major Lapses and Violations D. Findings on the Articles of Charges of Professional Misconduct E. Penalties and Sanctions A. EXECUTIVE SUMMARY 1) ZEEL is a media and entertainment company listed on the Bombay Stock Exchange and the National Stock Exchange. M/s Deloitte Haskins & Sells LLP was the auditor of ZEEL for FY 2018-19 and 2019-20 appointed under Section 139 of the Act. 2) As per the consolidated financial statements for 2019-20, ZEEL had Revenue from Operations of 8,129.9 crore, Total Current Assets of Rs.10,097.3 crore and a Profit After Tax of 524.6 crore. 3) We suo motu examined the Audit File for the statutory audit of Zee Entertainment Enterprises Limited (ZEEL) for FY 2019-20 and FY 2018-19 to assess whether the auditor committed any professional misconduct as defined under Section 132 (4) of the Companies Act, 2013 ('the Act' hereafter). 4) Based on the examination of the Audit Files, and responses of the Audit Firm to our queries and other re....
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....n respect of financial statements or internal audit of the functions and activities of any company or body corporate. c. Imposition of a monetary penalty of Rupees Five Lakhs on CA Rakesh Sharma. In addition, EQCR Partner CA Rakesh Sharma is debarred for 3 years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. B. INTRODUCTION AND BACKGROUND 7) NFRA is a statutory authority set up under Section 132 of the Act to monitor the implementation of the auditing and accounting standards and oversee the quality of service of the profession associated with ensuring compliance with such standards. The Statutory Auditor, appointed by the members of the company under section 139 of the Act is bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing (SA) and the Code of Ethics, the violation of which constitutes professional misconduct. NFRA has the powers of a civil court and is empowered under Section 132(4) of the Act to investigate the prescribed classes of companies....
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....ry for the expression of an opinion, or its exceptions are sufficiently material to negate the expressions of an opinion. 11) The Auditors were provided one extension of time for submitting their response to the SCN. The Firm, the EP, and the EQCR Partner sent their reply to the SCN through speed post which was received by us on 30.10.2024. 12) The SCN also provided an opportunity for a personal hearing to the EP, EQCR Partner and the Audit Firm which was availed by them on 20.11.2024 with their legal counsel Advocate Prachi A. Dhanani. A written statement in continuation to the matters discussed during the in-person hearing has been submitted by the EP on 27.11.2024. 13) In response to the SCN and in-person hearing held on 20.11.2024, the Audit Firm raised certain legal challenges to the SCN alleging that there were no divisions in NFRA, that writ petitions in certain other cases of 2017-18 audits pending before Hon'ble Delhi High Court, that SCN cannot be issued against the audit firm, that non-compliances are not a result of the audit firm's quality control failure, that the constitutional validity of Section 132, alleged absence of prescribed procedure, restric....
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....on, however, we find that the Auditors did not obtain sufficient and appropriate audit evidence to support their unmodified opinion and to conclude that this matter was not a suspected fraud reportable under Section 143(12). The Auditors failed to verify several critical evidence as explained in paragraphs 18 to 51 of this Order. These omissions/commissions cumulatively make the audit conclusion baseless and erroneous. The facts and evidence leading to the above findings are explained in the subsequent paragraphs. Background facts as appearing from the documents available in the Audit File 18) Yes Bank prematurely closed an FD of Rs. 200 crore of ZEEL on 24th July 2019. This FD had been renewed on 13th June 2019. After premature encashment and appropriation against the loan due from seven related parties of ZEEL, the Bank credited interest Interest on FD from 13th June 2019 to 23rd July 2019 of Rs. 1.3 crore to ZEEL's bank account on the same day. On 18th September 2019, about two months later, ZEEL received letters from its related parties Seven related parties which had the loans outstanding to Yes Bank stating that Yes Bank had transferred the FD amount to their respec....
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....te as the related parties and the Bank have confirmed the aforesaid adjustment. Further, the internal investigation did not find any evidence of the signatories of the account authorizing the adjustment made by Yes Bank. Tests performed by DHS (as stated in w/p 23757.01) also did not find evidence of a charge/lien created on this FD in favour of Yes Bank". b) "...these facts create a suspicion that a fraud may have occurred here. However, whether the fraud has been perpetrated by Yes Bank unilaterally or by the officers/directors of the Company cannot be concluded as DHS has no evidence to conclude that the actions of Yes Bank were authorized by officers/directors of the Company. Consequently, DHS does not have reasons to believe that a fraud has been committed by the officers/directors of the Company". 22) The sequence of events is listed in the following table for better understanding. Date Event 4th September 2018 Issue of a letter by the Chairman of ZEEL to Yes Bank stating as follows "This is with regards to the Rs 200 Crore loan outstanding in Essel Green Mobility Ltd from Yes Bank Ltd. We will ensure that a fixed deposit of at least Rs.200 Crore is av....
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....letter from the Company. 17th October 2019 The Audit Committee directs an internal enquiry into the FD matter. 17th October 2019 The Auditors issued a qualified Limited Review report, due to the "non-availability of relevant information" regarding the closure of this FD, for the quarter ending 30th Sep 2019. The "relevant information" is referred to as "bank confirmation/communication from the bank etc.". 21st January 2020 The Auditors issued a qualified Limited Review report, regarding the closure of this FD, for the quarter ending December 2019. The "relevant information" was not specifically mentioned, instead, it is stated that "non-availability of relevant information (including lien on the fixed deposit)/ agreement with the bank for set-off of the amounts" 22nd July 2020 ZEEL and Yes Bank signed a joint statement stating that the matter was resolved between the Bank and the Company, and both the parties had mutually agreed to the adjustment of amounts received from the related parties with the FD amount receivable from Yes Bank. The declaration is silent about the reason for premature closure. 24th July 2020 The Audit Committee approved the inter....
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....losed based on the letter dated 4th September 2018 issued by the Chairman of ZEEL, who is also the Chairman of Essel Group Companies. We observe that this letter issued by the Chairman directly refers to the FD in question. The absence of any reference to this letter of the Chairman and the Reply from Yes Bank in any of the communications between the Auditors and ZEEL creates doubts that these letters are kept out of records to cover up the role of the Chairman, who is also the father of the MD/CEO of ZEEL. This letter from Yes Bank also shows that the leadership team of ZEEL, which included the MD and Chairman, were well aware of the matter, as is evident from the contents of the Yes Bank letter that "the matter was duly discussed with the leadership team of Essel Group Companies. Thus, we are surprised and shocked to read the contents of your letter dated September 30, 2019, Hence, you along with Essel Group Companies should stop feigning ignorance about the appropriation of the said fixed deposit by the Bank" However, the Company pleaded ignorance and in the Audit Committee meeting held on 17th October 2019 (i.e., after the receipt of the letter from Yes Bank), which was attende....
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.... to as "bank confirmation/communication from the bank etc.". However, in the qualification for December 2019, the "relevant information" was not specifically mentioned, instead it is stated that "non-availability of relevant information (including lien on the fixed deposit)/ agreement with the bank for set- off of the amounts". The agreement with the bank for set-off is a post-facto development after the FD closure and has no relevance to the subject matter transactions of FD closure by Yes Bank in July 2019. Therefore, the critical evidence in the matter is communications to be received from Yes Bank regarding the reasons for the closure, which was absent at the time of the September limited review reporting (a fact known to the Auditors). The EP stated during the in-person hearing that 'since the management is waiting for a reply, we qualified the September limited review report'. This awaited communication was in fact received before the December limited review reporting (on 11th October 2019), but the Auditors state they were not provided with this information. Hence going by the Auditor's contentions, there were no changes in the situation that prevailed in the Dec....
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....s'. Had the Auditors exercised due professional skepticism and due diligence during the audit the role of the Chairman in the premature closure of FD and its subsequent use by the related parties would have come to light. 30) The Audit Firm, on being asked why Dr Subhash Chandra was excluded from the internal investigation conducted by the Company and from the scope of enquiries for the Auditors' assessment of fraud under Section 143 (12) of the Act, has responded that-. "It is relevant to note that, Mr. Subash Chandra was a non-Executive Chairman, and not an authorized signatory of Yes Bank [authorised signatory for transactions with Yes Bank]. He neither participated in the day-to-day operations of the Company nor was he involved in performing any of the functions of the Company. He was not part of the controls environment of the Company. He only participated in the meetings of the Board of Directors of the Company. Therefore, what was relevant from an investigation standpoint was only to purely legally evaluate whether the LOC issued by Mr. Subash Chandra in his individual capacity, would bind the Company and such legal evaluation was performed as stated above". We do....
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....dit evidence in responding to assessed risks of material misstatement. This includes bank balances and other information relevant to banking relationships. However, the Auditors did not enquire with Yes Bank directly about the basis for the premature liquidation of FD of Rs. 200 crore, which the Bank had already communicated to ZEEL in October 2019 in writing and well before that in discussions with the top management. 32) Corroborating the above findings, we observe that the Auditors ignored several other red flags, which would have alerted them to be professionally skeptical in this matter. These omissions and commissions are explained in paragraphs 36 to 51 of this Order. 33) Thus, we conclude that the Auditors did not exercise professional skepticism and were grossly negligent in the audit of the matter related to FD closure. The Audit report dated 24th July 2020 was baseless, erroneous and, hence, unreliable. There was no justification for the Auditors' conclusions that section 143(12) reporting was not triggered in this matter. 34) We also note that as per Rule 8 of NFRA Rules 2018, for the purpose of monitoring and enforcing compliance with auditing standards un....
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.... accounts is one of the controls WP 12300.01 Perform fraud inquiries - Consolidated inquiries - Listed entities.docx ZEEL has instituted to identify and respond to fraud risk. The interest of 1.3 crore on premature FD was credited to ZEEL's current account on 24th July 2019. Had there been monthly bank reconciliation, the credit entry of Rs 1.3 crores would have been noticed and the premature closure would have been detected in July itself. But as per the Audit Documentation, the matter came to light only in September, that too, not arising out of bank reconciliation. The Audit Firm has stated in reply to our query that "bank reconciliation was not performed by the Management and the control was not performed in case of Yes Bank for the month of July and August 2019". We observe that the Auditors did not examine why a control that operated effectively in all the months suddenly stopped working for these two months. There is no examination of this inconsistent evidence and why this was not a deliberate act or a management override of control. The ET was aware of this control deficiency, therefore, the absence of examination of fraud risk factors shows a lack of due diligence and....
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....tors the role of promoters was not checked by the Auditors. For an auditor, the communications such as emails, are part of audit evidence and ruling it out as "emotions" etc. shows the absence of professional skepticism and lack of due diligence. iii. Promoters not covered in audit examination despite the active involvement of promoters and top management of ZEEL 41) The Legal Opinion dated 15th October 2019 also refers to explanations sought from promoters. It states that "The promoters confirmed the Bank appears to have debited the FD Amount and transferred it to the current account of the promoter group companies........As per explanations provided by the promoters, the FD amount had been debited by the Bank towards loan liabilities of [*] promoter companies.....which the listed company [ZEEL] would be entitled to adjust in the event the promoters were not able to resolve the issue with the Bank". These statements in the legal opinion evidence that the promoters were actively involved in the matter and parallel actions were going on between promoters and Yes Bank. However, the promoters are covered in none of the audit procedures. 42) The promoters are also excluded fro....
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....uests to related parties seeking confirmation of any letter of support/awareness/comfort/ given by group companies on behalf of the Company to the Banks. None of these procedures included Dr Subhash Chandra, despite the Audit Firm being aware that he had a history of issuing at least two LOCs and hence more LOCs might exist. None of the Auditor's procedures and the internal investigation examined whether the Promoter had issued any other letters like the one mentioned above. Thus, there was an absence of due diligence and display of gross negligence by the Auditors in this regard. v. Investor call hinting at the role of promoters 46) The management had also discussed this matter in an investor call WP 23757.01 Yes Bank FD Memo - additional Procedures.docx dated 17th October 2019. To a Question "Was there any document or impression given to the bank that these are charges which are created?" It was responded that "Not by the company, so I definitely can't say that something was given". This reply does not rule out the involvement of promoters or other related parties. The Auditors failed to further enquire about this with professional skepticism despite taking note of ....
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....ngagement team, as auditors, had no evidence to conclude that Yes Bank's actions were authorized by the officers/directors. Accordingly, the engagement team concluded that there were not sufficient grounds to believe that fraud was committed by the officers or directors of the Company." 50) We do not accept the above contentions since the conclusion of the ET is without adequate audit procedures and evidence and the key factors omitted by the ET make this conclusion invalid and unreliable. vii. Inadequate audit procedures and insufficient audit evidence 51) The Auditors' conclusion that "DHS does not have reasons to believe that a fraud has been committed by the officers/directors of the Company" is based on certain reasons noted in the Audit File Refer WP 23757 Memo on Yes Bank FD and 23757.01 Yes Bank FD Memo - additional Procedures.docx. We prima facie observe that these reasons are not supported by adequate audit procedures and evidence. The following table explains the deficiencies/absence of due diligence in each of these conclusions. Auditors' Basis of Conclusion as Noted in the Audit File Our Observations "DHS concludes that the scope of the....
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....ixed deposit." The letter did not mention the reasons and basis for the premature closure of FD. Yes Bank in another communication to the Auditors (dated 5th May and 18th March 2020) raised concerns about the conduct of MD/CEO and the Promoter. It stated that "it is important to note that the conduct of MD&CEO/founder chairman of ZEEL/Essel Group Companies poses serious corporate governance issues, lack of Board governance and proper oversight; colossal failure of the finance audit function as a control function; lack of fiscal discipline; undue concentration of power/authority with the promoters etc., which Deloitte may like to appropriately address". The Auditors did not do any follow-up on this information that raised a red flag on the integrity and objectivity of the management and promoters. The Auditor's examination of suspected fraud does not consider such information from the lender (Yes Bank), which was a credible and important source of input for the auditor. The Auditors state that "the 5 May 2020 letter from Yes Bank had nothing to do with the FDs of Rs. 200 crores lodged by the Company with Yes Bank". We observe that if this is the case, then the letter canno....
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....3 of SA 260 (Revised), Paras 13, A13 to A15 of SA 705 (Revised). The seven related parties wrote to ZEEL on 18^th September 2019. They also started remitting the money back to ZEEL from 26th September 2019 onwards. Still, the first communication from ZEEL to Yes Bank on 30th September 2019 did not mention any of these matters. It pleaded total ignorance of the matter and asked explanation from Yes Bank as if ZEEL was totally unaware of the matter. "The Company has written to Yes Bank requesting on September 30, 2019 asking Yes Bank why was the fixed deposit amount not credited to ZEEL's bank account on the date of maturity of the FD and as informed by management, they have had discussions with Yes Bank in Q3 and Q4 to obtain confirmation that the FD was apportioned against dues to promoter/Essel group Companies and on what basis the apportionment was done by Yes Bank." "The internal investigation did not find any evidence of the signatories of the account authorizing the adjustment made by Yes Bank. Refer w/p 23757.01 for details of DHS's testing on this investigation." The internal investigation does not constitute sufficient appropriate audit evidenc....
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....elieve that a fraud has been committed by the officers/directors of the Company." The Auditors did not perform audit procedures with due professional skepticism to obtain evidence. As explained in this Order, the conclusions are based on insufficient evidence and do not consider several red flags evident in the process. Violation of the Act and SAs 52) Based on the above and as explained earlier, the Auditor's conclusion arises from partial and selective information. The critical factors such as the role of the promoters, the basis for appropriation of FD and transactions between ZEEL and the group companies are kept out of the purview of examination. Several red flags were ignored, such as the email from ZEEL regarding apprehension that Yes Bank may appropriate the FD, information provided by the lender regarding the absence of good governance factors, explanations obtained by the Legal Expert from the promoters, history of issuing LOCs by the Promoters, presence of MD/CEO in the crucial Audit Committee meeting in which decision for internal investigation is made, where MD/CEO is under investigation, keeping the promoters out of the purview of inve....
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....o examine and report all this in the audit report for FY 2019-20 and to the Central Government under Section 143 (12) of the Act. 54) Based on all the above, the charges in Paragraph 16 are proved. 55) In addition, the Auditors were also charged with failure to comply with the following requirements of the Standards of Auditing (SAS)/the Act, due to the above-mentioned lapses. a) Paragraphs 6 and 11 of SA 500 and Paragraph 17 of SA 200, i.e., failure to design and perform audit procedures that are appropriate in the circumstances to obtain sufficient appropriate audit evidence and to deal with inconsistent evidence from different sources. b) Para 3 of SA 330 The Auditor's Responses to Assessed Risks, i.e. failure to obtain sufficient appropriate audit evidence about the assessed risks of material misstatement, through designing and implementing appropriate responses to those risks. c) Para 19 read with Para A48 of SA 330 i.e., the Auditor's Responses to Assessed Risks and failure to perform external confirmation procedures regarding the reason for closure of FD. d) Para 18 of SA 240 The Auditor's Responsibilities Relating to Fra....
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....cised by the engagement team. 57) As already explained in the above paragraphs, none of these procedures identified the actual reason for the closure of the FD, which is the key evidence required to conclude the matter. The procedures also omitted several significant red flags regarding suspected fraud and concealment of facts. The replies of the Auditors such as "the Company came to know about the closure from its related parties"...... no financial loss....the internal committee investigated, verified emails of the authorised signatories, verified register of charges, verified minutes of the corporate management committee and found no authorisation from the company regarding lien or premature closure...." etc show unjustified reliance on management's submissions, despite contradictory evidence. 58) The Auditors further state that in the absence of any authorisations or approvals from the Company, "the act of Yes Bank appropriating the assets of the Company against dues of the promoter companies without the Company's authority remains a mystery...". "it is abstruse and beyond our knowledge as to how a bank, regulated by the RBI, could claim/appropriate the assets of ....
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....s was in contravention of the requirement of SA, which requires that if an auditor communicates with a subset of TCWG like the audit committee, then the auditor must also determine who else in TCWG it must communicate with. This clearly indicates that the audit committee is not synonymous with TCWG. 62) Based on the above, the Auditors were also charged with failure to comply with the following requirements of the Standards of Auditing (SAs). a) Para 11 of SA 260 (Revised) Communication with Those Charged with Governance, i.e. failure to determine the appropriate person(s) within the entity's governance structure with whom to communicate. b) Para 12 of SA 260 (Revised) Communication with Those Charged with Governance, i.e. failure to determine whether the auditor also needs to communicate with the governing body if the auditor communicates with a subgroup of TCWG, for example, an audit committee. 63) The Auditors submitted that the Audit Committee is the TCWG and they complied with all the requirements of SA 260. We observe that this reply is not supported by evidence in the Audit File where there is no discussion of why the audit committee was considere....
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....rall quality of an audit engagement. SA 220 provides that: "2. Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and regulatory and legal requirements; and (b) The reports issued by the firm or engagement partners are appropriate in the circumstances. This SA is premised on the basis that the firm is subject to SQC 1." Standard on Quality Control (SQC) 1 delineates the responsibilities of the Firm regarding audit quality. Audit quality is the foundation of any statutory audit. Further, SAs, such as SA 200, SA 220, SA 230, SA 260 (Revised), SA 610(Revised), SA 620 and SA 700(Revised) refer to SQC1 when it comes to specific aspects of audit such as documentation, communication with those charged with governance, engagement of Auditor's expert, evaluating the adequacy of internal audit function of the Company, and general quality aspects. and SAs, which are subordinate legislations, lay down the following in clear terms: a. Respo....
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....ing standards related to the audit of financial statements of Medicis Pharmaceutical Corporation and subsidiaries, imposed civil money penalties of $2,000,000 to the firm Ernst & Young LLP, $50,000 to Jeffrey S. Anderson, the Partner with final responsibility of the subject matter audit engagement, $25,000 to Robert H. Thibault, the independent review partner, and $25,000 to Ronald Butler, the second partner, supervised by Anderson. The partners were also barred from being associated with a registered public accounting firm. In another case, the PCAOB In the Matter of KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani, PCAOB Release No. 105-2022-033 December 6, 2022. imposed civil money penalties of $1,000,000 on KPMG India and $75,000 on its partner Lakhani for lapses in audit documentation by the partner, who was an ET member. PCAOB also suspended Lakhani from being an associated person of a registered public accounting firm for a period of one year. D. Findings on the Articles of Charges of Professional Misconduct 72) Given the Auditors' above actions and omissions, we have reasons to believe that the Auditors did not exercise due diligence in ensuring....
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....mmissions, and violations of the Act and standards, which are subordinate legislation and failure to appropriately report under Section 143(12) of the Act. The instances of failure to conduct the audit in accordance with the Act and SAs, failure to examine contradictory evidence, and failure to report non-compliance made by the Company, the absence of due diligence, and professional skepticism are explained in Paragraphs 16 to 70 of this Order, and c) M/s Deloitte Haskins & Sells LLP and CA A.B. Jani and CA Rakesh Sharma committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that an auditor is guilty of professional misconduct when he "fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion". This charge is proved as the Auditors failed to show adequate evidence in the Audit File to support their audit opinion on the true and fair nature of the financia....