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2022 (9) TMI 1479 - NFRA - Companies LawProfessional misconduct - Non-compliance with the auditing standards by the Statutory Auditor - material misstatements of various figures and disclosures - False reporting by Auditor in Independent Auditor's Report - Failure to comply with Standards on Auditing - Failure to report non compliances with Accounting Standards and provisions of the Companies Act 2013. False reporting by Auditor in Independent Auditor's Report - HELD THAT - The EP has accepted that the disclosure about SBN was not part of Financial Statements. In fact, once the company has not made a disclosure on SBN, the Auditor was duty bound to question the same and make a mention of the same in the audit report. On the contrary the EP has tried to mislead us by stating that he sent an unsigned disclosure to the company which was ultimately not placed in the Financial Statements. This reply is an attempt to cover up and mislead thereby reflecting a reckless and unprofessional behavior on the part of the EP. Failure to comply with Standards on Auditing (SAs) - HELD THAT - The EP was charged with non-compliance to SA 200, SA 210, SA 220, SA 260, SA 265, SA 300, SA 315, SA 320, SA 330, SA 500, SA 505, SA 520, SA 580, SA 700, SA 710 and SA 720 - on examining the reply of the EP regarding non communication with the company and Systems breakdown in the paragraphs and found them not acceptable. Therefore, the EP has not complied with the aforementioned SAs. Non compliances with Accounting Standards (AS) and Provisions of the Companies Act 2013 - HELD THAT - The EP has made a series of serious departures from the Standards and the Law, in conduct of the audit of TDML for FY 2016-17. Based on discussion, it is proved that EP had issued unmodified opinion on the Financial Statements without any basis. The poor quality of Audit followed by the cover up in terms of Cash Flow Statement that did not exist at the time of Audit, incomplete documentation and attempt to mislead through evasive replies further compounds the professional misconduct on the part of the EP. The charge is proved since the EP failed to conduct the audit in accordance with the SAs but falsely reported in his audit report that the audit was conducted as per SAs - all the charges of professional misconduct in the SCN stand proved based on the evidence in the Audit File, the Audit Report dated 30th May 2017 issued by the EP, the submissions made by the CA, and the Annual Report of TDML for the FY 2016-17. Penalty - HELD THAT - Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law - The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this order, substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of CA Rajiv Bengali establish his professional misconduct. Despite being a qualified professional, CA Rajiv Bengali has not adhered to the Standards and has thus not discharged the duty cast upon him. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order (i) Imposition of a monetary penalty of Rs. Five Lakhs upon CA Rajiv Bengali. (ii) In addition, CA Rajiv Bengali is debarred for Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.
Issues Involved:
1. False reporting by Auditor in Independent Auditor's Report. 2. Failure to comply with Standards on Auditing. 3. Failure to report non-compliance with Accounting Standards and provisions of the Companies Act 2013. Issue-wise Detailed Analysis: A. False reporting by Auditor in Independent Auditor's Report 1. False Reporting on Cash Flow Statement (CFS): - The auditor falsely reported auditing the CFS, which was not present in the financial statements. The EP later submitted a CFS, raising suspicion it was created post-facto to mislead. - The EP's defense that the CFS was inadvertently not attached was found unconvincing due to discrepancies in the manner of preparation and signing. 2. False Reporting on RBI Registration: - The auditor incorrectly reported TDML as registered under section 45IA of the RBI Act, which was not the case. - The EP's claim of a typographical error was dismissed, highlighting a lack of due diligence. 3. False Reporting on Specified Bank Notes (SBN) Disclosure: - The auditor falsely reported that TDML disclosed dealings in SBNs post-demonetization, which was not included in the financial statements. - The EP's justification of an unsigned disclosure sent to the company was deemed an attempt to cover up the oversight. B. Failure to comply with Standards on Auditing (SAs) 1. General Non-compliance with SAs: - The EP falsely stated compliance with SAs despite numerous violations, including failure to retain audit documentation for seven years and inadequate audit evidence. - The EP's excuses of system breakdown and non-communication were rejected as frivolous. 2. Non-compliance with SA 240 (Fraud): - The auditor failed to recognize risks of material misstatements due to fraud, particularly regarding unusual expenses and misstatements in bad debts. - The EP's claim of no circumstances indicating fraud was dismissed given the significant and unusual expenses. 3. Non-compliance with SA 450 (Misstatements): - The EP failed to document corrections of misstatements, particularly regarding bad debts and other expenses. - The EP's defense of system breakdown and non-communication was rejected. 4. Non-compliance with SA 570 (Going Concern): - The auditor failed to obtain evidence supporting the 'Going Concern' assumption despite several adverse indicators. - The EP's explanations were found insufficient and unsupported by audit documentation. 5. Non-compliance with SA 550 (Related Party Transactions): - The EP failed to identify and disclose related party transactions, despite evidence of such transactions in the audit file. - The EP's inability to retrieve emails was deemed an unacceptable excuse. 6. Non-compliance with SA 230 (Audit Documentation): - The EP failed to document audit procedures and evidence, and did not assemble the audit file within the required timeframe. - The EP's explanation of system breakdown was rejected. C. Non-compliance with Accounting Standards (AS) and Provisions of the Companies Act 2013 1. Approval and Signing of Financial Statements: - The EP failed to obtain evidence that financial statements were approved by the Board of Directors and signed as required by the Act. - The EP admitted lapses in trusting the directors' signatures without verification. 2. Deferred Tax Assets (DTA): - The EP failed to evaluate the reasonable certainty of future taxable income to justify DTA recognition. - The EP's defense was unsupported by audit documentation. 3. Non-compliance with Division I of Schedule III: - Several presentation and classification errors in the financial statements were identified, which the EP failed to report. - The EP admitted some lapses but provided evasive replies for others. 4. Significant Accounting Policies (SAP): - The EP failed to report non-compliance with statutory requirements in SAP, including depreciation methods and inventory valuation. - The EP admitted errors but failed to report them in the audit. 5. Managerial Remuneration: - The EP incorrectly reported no managerial remuneration despite evidence of salary payments to a director. - The EP's explanation of inadvertent errors was rejected. 6. Employee Benefits (AS 15): - The EP failed to report non-compliance with AS 15 regarding retirement benefits. - The EP's reliance on verbal explanations was deemed insufficient. Conclusion: The EP was found guilty of multiple counts of professional misconduct, including failure to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and follow generally accepted audit procedures. The EP was penalized with a monetary fine and debarred from auditing for five years.
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