NFRA Imposes Rs 8 Lakh Penalty on Two Auditors for Misconduct in DB Realty Audit

The National Financial Reporting Authority (NFRA) has penalised two auditors with fines totalling Rs 8 lakh and barred them for up to five years due to professional misconduct. This action relates to the audit of DB Realty for the financial year 2015-16. The NFRA's decision followed information from Sebi in October 2022 about inaccuracies in DB Realty Ltd's financial statements, now known as Valor Estate Ltd.

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Penalties and Restrictions

NFRA imposed a Rs 5 lakh fine on Chetan Desai and a Rs 3 lakh fine on Rakesh Rathi. Both were partners at Haribhakti & Co LLP, the statutory auditor for DBRL during FY16. Desai faces a five-year ban, while Rathi is barred for three years from auditing any company or corporate body. This includes roles as an auditor or internal auditor.

Audit Failures

Chetan Desai was found lacking in professional scepticism and judgement during the audit of Rs 3,894.43 crore in guarantees and securities provided by DBRL to related parties. He also failed to conduct proper audit procedures for loans and advances totalling Rs 1,326.92 crore, with Rs 1,079 crore given to related parties with negative net worth.

Desai's involvement was limited to planning, reviewing financial statements, and finalising audit reports. He did not engage in crucial areas like test of controls and substantive testing, failing to direct and supervise the audit engagement effectively.

Rakesh Rathi's Oversight

The NFRA's examination also highlighted Rakesh Rathi's failure to appropriately review significant judgments made by the engagement team. This oversight contributed to the professional misconduct findings against him.

The NFRA's actions underscore the importance of thorough auditing practices and adherence to professional standards. The penalties serve as a reminder of the consequences of neglecting these responsibilities in financial audits.