• The National Financial Reporting Authority (NFRA) has imposed a Rs 2 crore penalty on Deloitte Haskins & Sells LLP and two of its chartered accountants for alleged auditing lapses in Zee Entertainment Enterprises Ltd (ZEEL).
• The auditors were found to be grossly negligent and failed to apply professional scepticism and due diligence.
• Deloitte is currently reviewing the order to determine their next course of action.
• The incident underscores the importance of due diligence and professional scepticism in auditing, and the need for auditors to adequately challenge management's assertions and evaluate the reporting of suspected fraud.

In a significant development, the National Financial Reporting Authority (NFRA) has imposed a hefty penalty of Rs 2 crore on Deloitte Haskins & Sells LLP, a renowned auditing firm, and two of its chartered accountants. The penalty is a result of alleged lapses in the auditing of Zee Entertainment Enterprises Ltd (ZEEL), a leading media and entertainment company in India. The fine pertains to the auditing lapses for the financial years 2018-19 and 2019-20.

The NFRA, acting as the financial watchdog, has also imposed a fine of Rs 10 lakh on AB Jani, the Engagement Partner (EP) for the audit. Jani has been barred from taking up any audit work for the next five years. Rakesh Sharma, the Engagement Quality Control Review (EQCR) Partner, has been fined Rs 5 lakh and debarred for three years.

The NFRA's examination revealed that the auditors were grossly negligent and failed to apply professional scepticism and due diligence. They did not adequately challenge the management's assertions and failed to evaluate the reporting of suspected fraud.

Auditors' Lapses and Deloitte's Response

The auditors, according to the NFRA, had not discharged their professional duties under the Companies Act and the Standards on Auditing (SA). In response to the NFRA order, a spokesperson from Deloitte stated that they have received the order against the firm and two retired partners. The firm is currently reviewing the order to determine their next course of action.

This incident comes in the wake of a tumultuous year for ZEEL. In August 2024, ZEEL and Culver Max Entertainment Pvt. Ltd. (CMEPL), operating as Sony Pictures Networks India (SPNI), along with its group company Bangla Entertainment Pvt. Ltd. (BEPL), arrived at a comprehensive non-cash settlement. This settlement amicably resolved all disputes related to the merger cooperation agreement and the composite scheme of arrangement.

Earlier in the year, Sony Pictures Networks India (SPNI) had terminated a proposed $10 billion merger deal with Zee Entertainment. The termination was a result of alleged violations by Zee Entertainment of the terms of the merger agreement. Sony had sought a $90 million termination fee from Zee Entertainment.

ZEEL-Sony Merger Termination and Settlement

In response, Zee had also sought a termination fee of $90 million from SPNI and its entity BEPL for withdrawing from the $10 billion merger. The termination of the merger deal was a significant event in the Indian media and entertainment industry. ZEEL's Managing Director, Puneet Goenka, confirmed the development with a social media post. He expressed his disappointment over the deal falling through despite his best and honest efforts. ZEEL also hinted at a possibility of legal action in their press release.

The termination of the merger and the subsequent settlement between ZEEL and Sony Pictures Networks India (SPNI) had a noticeable impact on ZEE's shares. ZEE shares jumped as much as 15 per cent to an intra-day high of Rs 154.90 on the day the settlement was announced, before cooling off to Rs 147.70, 10 per cent higher from the previous close.

In conclusion, the NFRA's penalty on Deloitte Haskins & Sells LLP and the auditors over the alleged lapses in ZEEL's audit is a reminder of the importance of due diligence and professional scepticism in auditing. It also underscores the need for auditors to adequately challenge management's assertions and evaluate the reporting of suspected fraud. The incident serves as a lesson for auditing firms and auditors to uphold their professional duties under the Companies Act and the Standards on Auditing (SA).

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