NFRA Order Against CA Kashinath Chaturvedi: DHFL Branch Audit Misconduct
The role of auditors in financial reporting has always been under the spotlight, but in cases involving significant financial irregularities, the scrutiny intensifies. One such case involves CA Kashinath Chaturvedi, whose involvement in the branch audit of Dewan Housing Finance Limited (DHFL) resulted in disciplinary action by the National Financial Reporting Authority (NFRA). This blog explores the NFRA Order 2024, focusing on the key findings, lapses in auditing standards, and the penalties imposed on CA Kashinath Chaturvedi for Professional Misconduct in Auditing.
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Overview of NFRA Order 2024 & the DHFL Financial Fraud Audit Case
DHFL, a leading housing finance company, was listed on both NSE and BSE, operating through a vast network of branches. However, the company became embroiled in a DHFL Financial Fraud Audit that prompted NFRA to conduct an Audit Quality Review (AQR) of DHFL’s statutory audit for the financial year 2017-18. The statutory audit was carried out by Chaturvedi & Shah (CAS), a Mumbai-based Chartered Accountant firm. The review revealed that 33 auditors, including CA Kashinath Chaturvedi, had signed the “Independent Branch Auditors’ Reports” for nearly 250 branches.
NFRA’s investigation particularly scrutinized CA Kashinath Chaturvedi’s role as a branch auditor for five branches of DHFL. Despite the significant responsibilities associated with this role, the investigation uncovered several lapses in Professional Misconduct in Auditing and compliance with auditing standards, prompting NFRA to initiate disciplinary action.
Major Findings of Professional Misconduct in Auditing
The investigation revealed two primary areas of Professional Misconduct in Auditing by CA Kashinath Chaturvedi:
- Acceptance of Audit Engagement Without Valid Authorization:
One of the most critical findings of the investigation was that CA Kashinath Chaturvedi had accepted the role of “Branch Statutory Auditor” without valid approval by DHFL’s shareholders, as required by the Companies Act, 2013. This legally invalid appointment not only violated the Companies Act but also breached the ethical standards laid out in the Chartered Accountants Act, 1949. Despite the lack of a proper appointment, Chaturvedi continued to perform the audit and issued audit reports without questioning the legality of his appointment. - Failure to Comply with Standards on Auditing (SAs):
NFRA found that the audits performed by CA Kashinath Chaturvedi did not adhere to the Standards on Auditing (SAs) applicable in India. Specifically, there were issues related to audit planning, documentation, and evidence collection. The audit files submitted by Chaturvedi lacked critical documentation required by SA 230 (“Audit Documentation”), which mandates auditors to maintain records of audit procedures, results, and conclusions. The absence of proper audit documentation pointed to a lack of professional competence and due care in performing the audit.
Also read: NFRA issues order in the matter of MAN Industries (India) Limited against CA Nilesh Chheda
Lapses in Ethical and Auditing Standards
1) Acceptance of Invalid Appointment:
NFRA order 2024 highlighted that CA Kashinath Chaturvedi failed to verify whether his appointment as a statutory auditor for the branches complied with Section 139 of the Companies Act. Instead, he accepted an appointment letter from an “Authorized Signatory” without approval from the board or shareholders. By doing so, he violated the ethical principles laid out in the Code of Ethics, 2009, which emphasizes professional competence, integrity, and due care. This lack of due diligence resulted in a legally invalid appointment and subsequent issuance of audit reports under misleading pretenses.
2) Non-Compliance with SA 210:
SA 210 requires auditors to agree on the terms of the audit engagement with management or those charged with governance (TCWG). The terms must be documented in an engagement letter, outlining the audit’s scope, objectives, and the auditor’s and management’s responsibilities. NFRA found that Chaturvedi had failed to document these essential elements, which reflected a lack of professional skepticism and judgment.
3) Inadequate Audit Documentation:
Under SA 230, auditors are required to maintain sufficient and appropriate documentation to provide a record of the audit’s basis and evidence of compliance with applicable standards. NFRA observed that the audit files submitted by CA Kashinath Chaturvedi lacked documentation for one of the five branches of DHFL he audited. Furthermore, there was no evidence in the audit files of procedures performed or conclusions reached during the audits. These gaps in documentation violated auditing standards and raised concerns about the reliability of the audit reports.
NFRA’s Disciplinary Action
Following the investigation, NFRA initiated disciplinary proceedings against both CA Kashinath Chaturvedi and CA Krishna Bihari Chaturvedi (the partner who signed the audit reports). On June 21, 2024, NFRA issued Order No. 016/2024, which confirmed professional misconduct by both auditors. The penalties imposed on CA Kashinath Chaturvedi included:
- A monetary fine of INR 1,00,000 (Rupees One Lakh).
- A one-year debarment from being appointed as an auditor or internal auditor for any company or corporate body. This debarment also prohibits Chaturvedi from undertaking any audit of financial statements or internal audit functions for any corporate entity during this period.
Implications for the Auditing Profession
The case of CA Kashinath Chaturvedi underscores the importance of ethical conduct and compliance with auditing standards in the profession. Auditors play a vital role in ensuring the accuracy and reliability of financial reporting, and any deviation from established standards can have far-reaching consequences. The penalties imposed on Chaturvedi serve as a warning to other auditors about the potential repercussions of professional negligence.
The National Financial Reporting Authority (NFRA), as a regulatory body, continues to emphasize the need for adherence to legal and ethical standards in auditing. The authority’s investigation into the DHFL Financial Fraud Audit highlights the increasing scrutiny that auditors face, particularly in cases involving large-scale financial irregularities.
Conclusion
The NFRA Order 2024 against CA Kashinath Chaturvedi for his role in the DHFL branch audit is a clear example of the importance of ethical integrity and strict compliance with auditing standards. The lapses in professional conduct, as detailed by NFRA, have resulted in significant penalties and underscore the need for auditors to maintain transparency, accuracy, and diligence in their work. For the auditing profession, this case serves as a crucial reminder of the consequences of Professional Misconduct in Auditing and the role that regulatory authorities like NFRA play in safeguarding financial integrity.
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