Deloitte ignored red flags raised by lender in Zee Entertainment audit case: NFRA

Deloitte is under regulatory scanner for ignoring red flags in its audit of Zee Entertainment, with the National Financial Reporting Authority (NFRA) highlighting serious lapses. On December 23, National Financial Reporting Authority (NFRA) imposed a Rs 2 crore fine on Deloitte, barred partner A.B. Jani from audits for five years, and restricted another partner, Rakesh Sharma, for three years. This order adds to regulatory issues, which Deloitte has faced.

Deloitte is expected to challenge the NFRA order, potentially leading to prolonged litigation, possibly reaching the Supreme Court. NFRA’s orders can be contested at the National Company Law Appellate Tribunal (NCLAT) or in High Courts.

Controversy over Yes Bank FD
The case dates to March 2020 when Yes Bank, one of the many lenders of the ZEE group sent an email to Deloitte, raising concerns over alleged governance failures in the company and which it described as a “colossal failure of the finance audit as a control function.”

The crux of the issue is around a Rs 200 crore fixed deposit (FD) given by Zee as a guarantee to Yes Bank for loans to Essel Green Mobility, a group entity. NFRA found that neither the creation nor the redemption of this FD had board or shareholder approval. Despite this, Deloitte did not raise any red flags or conduct further investigations as mandated by the Companies Act.

The Rs 200-crore fixed deposit (FD) maintained by Zee with Yes Bank was due for maturity on September 10,2019. However, Yes Bank prematurely closed the FD on July 24,2019 and the lender used the amount to settle the loans due from seven related parties of Zee, including Essel Green Mobility.

This led to a conflict between Zee and Yes Bank since neither the Zee board nor its shareholders had given any approval for closure of the FD. Zee questioned how Yes Bank could unilaterally wind-up the FD without board approval of Zee. However, Yes Bank was acting based on letter of comforts(LOCs) given by Zee promoter Subhash Chandra.

Three months later, on September 18,2019 the seven related parties together transferred the Rs 200 crore back to Zee saying Yes Bank had ‘erroneously’ transferred the money to them. Zee and Yes Bank decided to settle the issue without any further escalation.

NFRA found that neither the creation nor the redemption of this FD had board or shareholder approval as mandated by law. Despite this, Deloitte did not raise any red flags or conduct further investigations as mandated by the Companies Act

The NFRA order further highlights key lapses by Deloitte. The regulator noted that Deloitte neither responded to specific governance and financial red flags raised by Yes Bank in its email to the auditor nor it took any steps to address them.

Additionally, Deloitte seemingly sided with Zee’s internal management the reasons for which are not completely clear.

Notably When Zee conducted an internal investigation into the episode on October 17,2019, the probe was led by Rakesh Chaturvedi, Zee’s head of internal audit. This investigation excluded promoters and group entities and concluded that no wrongdoing had occurred. Deloitte accepted these findings without further questioning or independent checks, breaching all audit norms.

Since the whole issue involves significant financial and governance implications on the company, the board is required to share all the details of the case with the auditors. However, NFRA probe showed the company shared selective information with the auditor and Deloitte did not further probe what the report terms as missing links.

An email sent to Deloitte remained unanswered at the time of publishing the story.

Letters of Comfort
For instance, on September 30, 2019, Zee asked Yes Bank why the FD had been closed without consent of Zee. This email was part of the audit file shared with Deloitte. However, in response to this email, Yes Bank cited a letter of comfort from Zee promoter Subhash Chandra in 2018 and accused Zee of feigning ignorance. This reply from Yes Bank was not shared by Zee with the auditors. NFRA opined Deloitte did not attempt to verify if Yes Bank had responded to the email from Zee.

NFRA’s findings also point to Deloitte’s lack of “ professional skepticism”, a fundamental requirement in auditing as per convention. Despite multiple warning signs, Deloitte failed to question discrepancies or probe deeper into Zee’s transactions. NFRA highlighted that Deloitte was aware Subhash Chandra had been issuing letters of comfort to banks, even though he was neither a full-time director nor an authorized signatory at Zee. Deloitte had flagged the existence of these letters in previous audits but did not follow up further.

As a result of these findings, NFRA imposed a Rs 2 crore fine on Deloitte, barred partner A.B. Jani from audits for five years, and restricted another partner, Rakesh Sharma, for three years. This order adds to Deloitte’s growing list of regulatory troubles in India. The firm had already faced action over its audit of IL&FS, which remains under investigation by multiple agencies, including the Enforcement Directorate (ED) and Serious Fraud Investigation Office (SFIO). Legal experts believe the latest NFRA action will increase scrutiny on Deloitte, with market regulator SEBI already probing Zee Entertainment. SEBI had issued an interim order against Zee promoters last year. Moneycontrol