In 2019, the Reserve Bank of India (RBI) had imposed a one-year ban on SR Batliboi & Co, an affiliate of global auditing firm EY, after it found lapses in the audit report of a bank.
RBI has now barred audit firm Haribhakti & Co. from taking up any type of audit assignments for entities regulated by RBI.
The bar comes into effect from 1st April 2022 and will continue for a period of two years. This will not impact audit assignments taken up by Haribhakti & Co. in RBI-regulated entities for the financial year 2021-22.
This action has been taken on account of the failure on the part of Haribhakti & Co. to comply with a specific direction issued by the RBI with respect to its statutory audit of a systemically important non-banking financial company.
The action has been taken in connection with audit assignments of SREI Group non-bank lenders.
The RBI superseded the boards of SREI Infrastructure Finance Ltd. and SREI Equipment Finance Ltd. and referred the two companies for insolvency proceedings.
The Kolkata Bench of the National Company Law Tribunal gave its approval to start insolvency proceedings against SREI Infrastructure Finance and its wholly owned subsidiary SREI Equipment Finance.
As per the financial statements issued by Srei Infrastructure Finance Ltd., Haribhakti and Co. were statutory auditors of the company from FY 2015-16 to FY 2019-20.
As per the annual report for FY 2020-21, D. K. Chhajer & Co., Chartered Accountants, were appointed statutory auditors at the annual general meeting held in September 2020.
The RBI invoked powers under Section 45MAA of the RBI Act to take this action. This is the first time that RBI, the regulator, has taken such an action against an audit firm.
This is the first debarment done since the RBI put in place a framework to take action against erring auditors for lapses during audits in 2018.
The RBI in its circular, titled 'Enforcement action framework in respect of statutory auditors for lapses in statutory audit of commercial banks', had warned that any statutory auditor not following RBI instructions will be met with punitive actions such as debarring them from conducting business with banks.
The new framework aims to improve quality and bring a transparency mechanism to examine accountability of statutory auditors in a consistent manner.
Where any auditor fails to comply with any direction given or order made by RBI under section 45MA, RBI, may, if satisfied, remove or debar the auditor from exercising the duties as auditor of any of RBI regulated entities for a maximum period of three years, at a time.
As on March 6, 2021, SREI Infrastructure Finance owed banks loans worth Rs 11000 cr plus and outstanding bonds and NCDs worth Rs 710 cr plus.
SREI Equipment Finance owed bank loans worth Rs 16,900 cr plus and other debt instruments worth Rs 499 cr plus. All these facilities and instruments were rated ‘D’, or default grade, in March.
Among the larger private banks, Axis Bank Ltd, IndusInd Bank Ltd and RBL Bank Ltd, have listed Haribhakti & Co. as statutory auditors, based on information in their annual reports for FY 2020-21.
Apart from these three banks, the chartered accounting audit firm has served as auditor for Shriram Transport Finance Ltd and Centrum Capital.
Conclusion
India has been struggling with a shadow lending crisis since 2018 after IL&FS, a leading infrastructure financier, went bankrupt, sending shock waves across banks and other financiers leading eventually to rescues of at least half a dozen lenders.
In August, market regulator Securities and Exchange Board of India (SEBI) empanelled 16 audit firms, including Haribhakti & Co, to conduct forensic audits of listed companies' financial statements as part of its efforts to curb frauds.
The 16 firms include BDO India, E&Y, Deloitte Touche Tohmatsu India, Chaturvedi & Co, Chokshi & Chokshi LLP, Grant Thornton Bharat LLP, Haribhakti & Co. LLP, KPMG Assurance And Consulting Services LLP, Mukund M Chitale & Co and Protiviti India Member Pvt Ltd, among others.
So, on the one hand, SEBI is empanelling Haribhakti & Co; on the other, RBI has barred the auditing firm from auditing regulated entities.
This also highlights the lack of communication between the two regulators.
RBI's Message to Auditors
The RBI has given a clear message that it will not tolerate any laxity or non-compliance with its regulatory direction.
The auditing firms have to set high standards of quality. The instances of defaults or NPA (non-performing assets) recognition is key to the soundness of any financial institution.
Past failures and lessons
The recent failure of large institutions like infra financing institution IL&FS, and new generation private bank YES Bank have shown that the rotation of the auditing firm is a must.
Both these large institutions had the Big-4 as their auditors. The RBI earlier found YES Bank under-reporting the NPAs in its book. Similarly, there were instances of regulatory lapses in IL&FS, especially inter-company transfers, under-reporting NPAs, etc. In fact, most NPAs were unearthed in the banking sector post the asset quality review (AQR) initiated by the RBI.
Concluded
This case study to be continued
Note - This article was published on LinkedIn on 13th October, 2021
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