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2022 (9) TMI 1481 - NFRA - Companies LawProfessional Misconduct - Failure to Report Lapses in Accounting of Interest Costs pertaining to Borrowings classified as NPAs - Other Lapses in conduct of Audit - overstatement of profits by the company. Non-compliance with the Standards - HELD THAT - On the issue of non-compliance with the SAs and professional misconduct, the EPs replies are listed at paras 8.2 and 8.8. The reply at Para 8.8 is particularly interesting where he states that the job of an auditor must be judged on the basis of outputs and not on the quality of notings made. He goes on to say that civil servants and judiciary are given appropriate immunity under the law where decisions are made in good faith - The analogy made by the EP in his reply at para 8.8 is misplaced and out of context. The output of his work is the moot point in question. The output required of an auditor of a Public Interest Entity (PIE), is absent and the same has been pointed out in the context of SAs. But the attitude of the EP is to vehemently deny all the charges on the plea of him having taken audit decisions based on discussions which are neither recorded nor evidenced. Non-recognition of interest costs on Borrowings classified as NPAs - HELD THAT - The EP has overlooked this important lapse in the accounts of the company, which has resulted not merely in understating the costs, but also overstating the profits of the company and thereby misstating financial statements of the company, which do not reflect true and fair view of financial statement as required by Section 129 of CA-13. But attitude of the EP is not that of accepting this mistake, but of flatly denying all charges on grounds which show that he has no understanding of the Ind AS or the SAs, which is fundamental for any auditor specially those auditing PIE. Lapses in Audit Documentation - HELD THAT - The EP believes that there was no reason to maintain audit evidence and documentation on material issues and therefore based his opinion merely on discussions with the management. This cavalier and irresponsible attitude is alarming and shows the EP's lack of knowledge of the Standards and Procedures. This approach and attitude of EP militates against the fundamental objectives of SA 230, para 10 of which requires an auditor to document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place. Non-appointment of EQCR - HELD THAT - VWL is a listed entity and thus it was mandatory for the auditor of VWL to engage an EQCR partner for review of the audit work. 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 the Companies Act views proved cases of professional misconduct is evident from the fact that a minimum punishment is laid down by the law. While determining the penalty in this case, several factors have been considered. In light of the proved professional misconduct by CA Som Prakash Aggarwal, the aggravating circumstances of such conduct, the nature of violations and applying the principles of proportionality, the following sanctions under Section 132(4)(c) of the Companies Act, 2013 issued (i) Imposition of a monetary penalty of Rs. 3,00,000 (Three Lakhs only) upon CA Som Prakash Aggarwal. (ii) CA Som Prakash Aggarwal is debarred for three years from being appointed as an auditor or internal auditor or 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. Failure to Report Lapses in Accounting of Interest Costs pertaining to Borrowings classified as NPAs. 2. Other Lapses in Conduct of Audit. 3. Non-compliance with Standards on Auditing (SAs) and Indian Accounting Standards (Ind AS). 4. Non-recognition of Interest Costs on Borrowings classified as NPAs. 5. Insufficiency of Audit Documentation. 6. Non-appointment of Engagement Quality Control Reviewer (EQCR). 7. Professional Misconduct Charges. Detailed Analysis: 1. Failure to Report Lapses in Accounting of Interest Costs pertaining to Borrowings classified as NPAs: The company did not recognize the full amount of Interest Costs in its financial statements for FY 2019-20, leading to an understatement of Interest Costs and Current Liabilities by at least Rs. 16.91 crores. This resulted in an overstatement of profit by 88% of the reported Profit Before Tax (PBT). The Engagement Partner (EP) failed to verify the correct accounting of Interest Costs and did not issue a modified audit opinion regarding the same, relying instead on a Management Representation Letter (MRL) that contained several inconsistencies. The EP did not report the inconsistency in the company's Accounting Policy regarding Interest Costs on NPAs, thus committing professional misconduct. 2. Other Lapses in Conduct of Audit: Several serious lapses were identified in the conduct of the audit by the EP, including: - Absence of audit documentation for non-recognition of Interest Costs on NPAs. - Poor quality of audit documentation. - Absence of direct confirmations from banks. - Lack of crucial audit evidence like loan agreements and correspondences with banks. - No evidence regarding communication with Those Charged with Governance (TCWG). - Non-engagement of an Engagement Quality Control Reviewer (EQCR). These lapses indicate non-compliance with most of the Standards on Auditing (SAs), making the audit work unreliable. 3. Non-compliance with Standards on Auditing (SAs) and Indian Accounting Standards (Ind AS): The EP's understanding of auditing standards as merely supporting documents rather than mandatory requirements was flawed. Section 143(9) of the Companies Act, 2013 mandates compliance with auditing standards. The EP's claim that SAs are principles allowing alternative processes contradicts the legal and statutory requirements, which use "shall" to denote mandatory responsibilities. The EP's analogy comparing his role to that of civil servants and judiciary, who have immunity for decisions made in good faith, was misplaced. The output of the auditor's work was in question, and the EP's attitude of denying charges without proper evidence was unprofessional. 4. Non-recognition of Interest Costs on Borrowings classified as NPAs: The EP relied on a One Time Settlement (OTS) proposal that was not documented in the audit file. The MRL used by the EP was inconsistent and not in line with SAs. The EP misunderstood the definition of Effective Interest Rate (EIR) under Ind AS 109, assuming no future cash outflow on account of interest costs on NPAs based on a proposed OTS. This flawed assumption led to the non-recognition of interest costs, resulting in misstated financial statements that did not reflect a true and fair view as required by Section 129 of the Companies Act, 2013. 5. Insufficiency of Audit Documentation: The EP did not maintain adequate audit documentation, relying instead on verbal discussions with management. This approach violated SA 230, which requires documentation of significant matters discussed with management and those charged with governance. The EP's belief that audit documentation is not necessary to prove the correctness of an auditor's judgment was incorrect and showed a lack of understanding of auditing standards and procedures. 6. Non-appointment of Engagement Quality Control Reviewer (EQCR): The EP denied the requirement of appointing an EQCR, contrary to Para 19(a) of SA 220, which mandates the appointment of an EQCR for audits of listed entities. The EP's failure to engage an EQCR was a significant non-compliance with auditing standards. 7. Professional Misconduct Charges: The EP was found guilty of professional misconduct on several grounds: - Failure to disclose material facts necessary for making financial statements. - Failure to report material misstatements known to him. - Gross negligence in the conduct of professional duties. - Failure to obtain sufficient information necessary for expressing an opinion. - Failure to invite attention to material departures from generally accepted audit procedures. These charges were proved based on the evidence in the audit file, the audit report, the submissions made by the EP, and other materials available on record. Penalty: Under Section 132(4)(c) of the Companies Act, 2013, the following sanctions were imposed: 1. A monetary penalty of Rs. 3,00,000 on the EP. 2. Debarment of the EP for three years from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of any company or body corporate. 3. The EP was advised to undertake training on Standards on Auditing and Ind AS from ICAI or any recognized institution and submit proof of completion within 180 days from the date of the order becoming effective. The order will become effective 30 days from the date of issue.
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