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Reliance Capital, Home Finance: PWC Resignation Letters Point To Suspicion Of Fraud

PWC resigns as auditor of Reliance Capital and Reliance Home Finance. Read the full resignation letters here...

A person holds papers and files. (Photographer: Jasper Juinen/Bloomberg)
A person holds papers and files. (Photographer: Jasper Juinen/Bloomberg)

Before resigning, one of the statutory auditors to Anil Ambani-led group’s financial services companies had written to the managements under a legal provision that pertains to fraud.

Price Waterhouse & Co, appointed as auditor in 2017 at Reliance Capital Ltd. and Reliance Home Finance Ltd., resigned three years before both terms ended. In similarly worded letters filed with the Ministry of Corporate Affairs, the audit firm stated:

  • As part of the ongoing audit for financial year 2018-19 it noted “certain observations/transactions which in our assessment might, if not resolved satisfactorily, be significant, material and substantive to the financial statements”.
  • -It did not receive satisfactory responses and hence sent letters under provisions of Section 143 (12) of the Companies Act, 2013, read with Rule 13(2)(a) to the managements and audit committees

Section 143 (12) of the Companies Act, 2013 is a provision under which the auditor, if it has reason to believe that a fraud is being or has been committed in the company, must report it to the company’s board and subsequently to the government.

...if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:
Section 143 (12) of the Companies Act

Rule 13(2)(a) cited by the auditor in its resignation letters refers to suspected fraud of Rs 1 crore and above, and lays down the procedure in which the auditor must inform the board.

(2) The auditor shall report the matter to the Central Government as under:- (a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
Reporting of Frauds by Auditor and Other Matters - Rule 13 (2)(a)

The auditor’s resignation letters say the two companies disputed the legality of letters and did not call an audit committee meeting as required by the provisions invoked by the auditor.

The companies threatened the auditor with legal proceedings including civil and criminal proceedings.

“Such actions create an intimidation threat for us and prevent us from performing our duties as statutory auditors...” said the auditor in the two resignation statements filed with the Ministry of Corporate Affairs.

Gautam Nayak, chartered accountant and partner at CNK & Associates, confirmed that the section invoked by the auditor in its letters pertains to fraud. “The section implies that the statutory auditor has to report any internal fraud that has happened in the company to the government and/or the audit committee depending upon the size of fraud,” he said.

Reliance Companies Deny Auditor’s Claims

Earlier in the day, both Reliance Capital and Reliance Home Finance informed the stock exchanges of their auditor’s resignation. At the time, the disclosure did not state the specific sections of company law that the auditor had invoked.

When BloombergQuint approached the two Anil Ambani Group companies for comment on auditor’s use of Section 143 and its suspicion of fraud, a spokesperson for the two companies emailed us a statement saying “reasons given by PWC for their resignation do not include any suspicion of fraud as alleged by you.”

The emailed statement reiterated the companies’ position in the exchange filings.

“The Company does not agree with the reasons given by PWC for the resignation. The Company has duly responded to the various queries and letters of PWC and has also duly and validly convened a meeting of the Audit Committee on June 12, 2019 to further respond to the letter dated May 14, 2019 from PWC. The Company expected PWC to have participated in the meeting of the Audit Committee and not resigned on the eve thereof. The Company has also duly furnished all requisite and satisfactory details as required by PWC, especially including certification and confirmations of the transactions in question on multiple occasions by PWC themselves. As regards legal proceedings, the Company had clearly stated that the same would be initiated only if so legally advised, that too if required to protect the interests of all stakeholders, and it is hard to see how PWC has taken exception to this approach.”

PWC said “it does not comment on client matters”.

Reliance Capital, Home Finance: PWC Resignation Letters Point To Suspicion Of Fraud

What’s Next?

Reliance Capital said in its exchange filing that PWC’s resignation has been accepted by its board and that the other auditor, M/s. Pathak H.D. & Associates, whose term is valid until conclusion of the annual general meeting for the year ended March 31, 2021, has confirmed that it will continue as the sole statutory auditor.

Meanwhile, the Reliance Home Finance audit committee and board are meeting on June 13 and will decide on the new statutory auditor, said the company in its statement to the exchanges.

Given that PWC has invoked a fraud-related provision in company law in its resignation letters, it is now incumbent upon the audit firm to share its report with the government and it would be up to the government to determine further inquiry into the matter. This is as per the procedure laid down in the company law.