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MUMBAI: Price Waterhouse & Co (PwC) has informed the ministry of corporate affairs about certain alleged irregularities in the books of accounts of Reliance Capital (RCap) and Reliance Home Finance The irregularities, which involved alleged diversion of funds and transactions between the two firms and other group companies, came to light while it was auditing the books of the two companies for the first quarter ending June 2019, two persons close to the development said. PwC quit as auditor and informed the ministry of corporate affairs (MCA) about the reasons behind its departure, these persons said. This was conveyed to MCA on June 11 by Vivek Prasad, partner at PwC.People close to the development said the auditor had raised the issues with the company a few months back and discussions had been taking place between the two. Specifically, there appears to have been an issue with certain related-party transactions and the RCap management was willing to give a management letter. “The auditors were insistent that they would like better visibility on certain transactions between group companies,” one of the persons said.A management representation letter is a written assurance given by the management to auditors when disputes arise over certain issues.The company attests to the accuracy of the financial statements and documents submitted and the letter could be based on certain judgement calls, like how to classify a transaction or it could be on specific facts around a transaction.According to the resignation letter written by PwC and submitted to MCA, the auditors have cited Section 143(12) of the Companies Act in support of their move. The section deals with a situation where the auditor seeks some information and he doesn’t get it from the company. “If auditor of a company in course of the performance of his duties as an auditor has a reason to believe that an offence or fraud involving such amounts... is being committed in the company by its officers or employees the auditor shall report the matter to central government,” it reads.“This doesn't conclude anything but the fact is that an information was sought from the company and it wasn’t provided within 45 days. In such a situation, the auditor is mandated to report this to MCA,” a legal expert said, requesting anonymity.The Anil Ambani-helmed RCap informed stock exchanges early on Wednesday morning about PwC’s resignation. RCap attributed the move to the auditor’s claim of not having received satisfactory response to certain “observation and transactions”. Reliance “does not agree with the reasons given by PwC for the resignation. 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”, the statement read.“The reason for the change is the resignation of PwC, one of the auditors. PwC has stated that as part of the ongoing audit for FY 2018-19, it noted certain observations/transactions which in its assessment, if not resolved satisfactorily, might be significant or material to the financial statements, and that it did not receive a satisfactory response to its queries,” Reliance told ET in another statement on Wednesday evening.“PwC has further stated that though it sent a letter dated April 24, 2019 under relevant provisions of the Companies Act, the company disputed the same to be in accordance with the provisions of law, notwithstanding a subsequent letter issued by PwC on May 14, 2019 to reiterate the intent of letter issued on April 24, 2019, and the company did not convene an audit committee meeting within the expected time. The company might also initiate appropriate legal proceedings against the firm.According to PwC, these actions by the company have prevented it from performing its duties as statutory auditors and exercising independent judgement in making a report to the members of the company, and impaired its independence, and hence, it is no longer in a position to complete the audit and instead feels compelled to withdraw from the audit engagement and resign,” the statement said.In a statement to ET, PwC declined comment saying it does not comment on client matters.The person cited above added that the questions were raised around some transactions and PwC wanted to qualify them.Reliance also said that it does not agree with PwC. “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… 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,” it said.This is not the first time that PwC is walking out of an audit contract. A PwC network firm had resigned from Vakrangee in 2017 while a Deloitte network firm resigned as auditor of Manpasand Beverages last year.PwC was also the auditor of Satyam Computer Services when the massive scandal involving cooking of books by founder Ramalinga Raju occurred. Market regulator Securities and Exchange Board of India banned PwC for two years but the appeal is being heard by the Supreme Court.Industry insiders point out that auditors, mainly the big four — Deloitte, PwC, EY and KPMG — are under tremendous pressure due to the investigations in Infrastructure Leasing and Financing Services (IL&FS) and two of its subsidiaries. Investigators have alleged negligence and connivance between auditors and management in their chargesheet filed in the IL&FS Financial Services Ltd case.Most of the audit firms are reassessing risks attached to all their audit assignments and are not willing to sign on anything that could land them in trouble in the future. Three of the big four firms, except PwC, have been under the lens in the IL&FS case.