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2023 (5) TMI 1321 - NFRA - Companies LawProfessional misconduct by CA - Continuation of Audit engagement disregarding Independence requirements - Failure to understand nature or business of Giri Vidhyuth (India) Limited (GVIL) - Lapses in audit relating to fraudulent diversion of funds worth Rs. 520 crores, understatement of related party loan by Rs. 350 crores and evergreening of loans - Lapses in evaluation of going concern assumption - Lapses In audit relating to Statement of Cash Flows - Failure to ensure compliance with section 134(1) of the Act - Failure to comply with SA 700-Forming an Opinion and Reporting on Financial Statements - Failure to comply with SA 230-Audit Documentations, SA 260, Communication with Those Charged With Governance SA 265-Communicating deficiencies in Internal Control to Those Charged With Governance and Management - Failure to comply with SA 300-Planning an audit of Financial Statements - Failure to comply with SA 720-The Auditor's Responsibilities Relating to Other Information - sanctions and penalties. HELD THAT - The Auditors have committed Professional Misconduct as defined under Section 132(4) of the Companies Act 2013 in terms of section 22 of the Chartered Accountants Act 1949 (CA Act) as amended from time to time, and as detailed below a) The Auditors committed professional misconduct as defined by clause 5 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity , b) The Auditors committed professional misconduct as defined by clause 6 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity . c) The Auditors committed professional misconduct as defined by clause 7 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . d) The Auditors committed professional misconduct as defined by clause 8 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion . e) The Auditors committed professional misconduct as defined by clause 9 of Part 1 of the Second Schedule of the CA Act, which stales that an auditor is guilty of professional misconduct when he fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances . In addition to above, the Audit Firm has committed Professional Misconduct as defined Section 132(4) of the Act as failure to exercise due diligence and being grossly negligent in the conduct of professional duties, as the Audit Firm failed to exercise due diligence and was grossly negligent in the conduct of professional duties, thus, violated SQC 1. Thus, all the charges of professional misconduct in the SCN (Except charges relating to noncompliance with SA 320, which has been dropped) stand proved based on the evidence in the Audit File, the Audit Report dated 21.11.2020 issued on behalf of the Firm, the submissions made by the Auditor and the Financial Statements of GVIL for the FY 2019-20. Penalties and sanctions - HELD THAT - Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered a) Imposition of a monetary penalty of Rs. One Crore upon M/s. Sundaresha Associates. In addition, M/s. Sundaresha Associates is debarred for a period of Two 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. This debarment period will start after completion of two years debarment period imposed in case of Tanglin Development Limited for FY 2018-19 vide NFRA order dated 26.04.2023. b) Imposition of a monetary penalty of Rs. Five Lakhs upon CA C. Ramesh-In addition, CA C. Ramesh is debarred for a period of 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. c) Imposition of a monetary penalty of Rs. Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande is debarred for a period of 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. Major lapses in the Audit 2. Other non-compliances with Laws and Standards 3. Points of Law raised by the Auditors 4. Findings on Articles of Charges of Professional Misconduct by the Auditors 5. Findings on Additional Articles of Charges of Professional Misconduct by the Audit Firm only 6. Penalty & Sanctions Summary of Judgment: 1. Major lapses in the Audit: - Independence Requirements: The Auditors failed to comply with independence requirements as their professional fees from the Coffee Day Group exceeded 40% of their total fees, violating the Code of Ethics, SQC 1, SA 200, and SA 220. The interrelationship between the audit firms and their dependence on the Coffee Day Group compromised their independence. - Understanding GVIL's Nature: The Auditors failed to exercise professional skepticism and judgment in understanding GVIL's nature, operations, and financial maneuvers, violating SA 315 and SA 200. GVIL was used as a shell company for financial maneuvers, which the Auditors failed to comprehend. - Fraudulent Diversion of Funds: The Auditors failed to detect and report fraudulent diversion of Rs. 520 crores, understatement of related party loans by Rs. 350 crores, and evergreening of loans. They did not perform sufficient audit procedures to identify these material misstatements, violating SA 240, SA 315, SA 330, and section 143(12) of the Companies Act. - Going Concern Assumption: The Auditors failed to evaluate the management's assessment of GVIL's ability to continue as a going concern, violating SA 570. GVIL had a negative net worth and no operations, indicating it was not a going concern. - Statement of Cash Flows: The Auditors failed to report a material misstatement of Rs. 325 crores in the Statement of Cash Flows, resulting in non-compliance with Ind AS 7. 2. Other non-compliances with Laws and Standards: - Section 134(1) of the Act: The Auditors failed to ensure that the Financial Statements were approved and signed by the Board of Directors as required by section 134(1) of the Act. - SA 700: The Auditors did not consider material misstatements while forming audit conclusions, violating SA 700. - SA 230, SA 260, SA 265: The Auditors failed to document audit procedures, communicate with Those Charged with Governance (TCWG), and assemble the Audit File within the stipulated period, violating SA 230, SA 260, and SA 265. - SA 300: The Auditors did not establish an overall audit strategy and develop an audit plan, violating SA 300. - SA 720: The Auditors failed to read and verify the Annual Report of GVIL, violating SA 720. 3. Points of Law raised by the Auditors: - NFRA's Authority: The Auditors contested NFRA's authority to monitor and enforce compliance with standards, which was dismissed as NFRA derives its authority from section 132 of the Companies Act. - Investigation Requirement: The Auditors argued that an investigation was a prerequisite for proving misconduct, which was dismissed as the SCN was issued after examining the Audit File and other materials. - Actions Against GVIL: The Auditors argued that no action against GVIL or its Key Management Personnel negated the SCN, which was dismissed as NFRA's action is independent of other authorities. 4. Findings on Articles of Charges of Professional Misconduct by the Auditors: - Professional Misconduct: The Auditors were found guilty of professional misconduct under clauses 5, 6, 7, 8, and 9 of Part 1 of the Second Schedule of the CA Act, including failure to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and invite attention to material departures from audit procedures. 5. Findings on Additional Articles of Charges of Professional Misconduct by the Audit Firm only: - Engagement Team Constitution: The Audit Firm violated SQC 1 by splitting the responsibility of an Engagement Partner between two partners, leading to a lack of clarity and responsibility in the audit engagement. 6. Penalty & Sanctions: - Monetary Penalties and Debarment: The following penalties and sanctions were imposed: - M/s. Sundaresha & Associates: Monetary penalty of Rs. One Crore and debarment for two years from being appointed as an auditor or internal auditor. - CA C. Ramesh: Monetary penalty of Rs. Five Lakhs and debarment for five years. - CA Chaitanya G. Deshpande: Monetary penalty of Rs. Five Lakhs and debarment for five years. The order will become effective after 30 days from the date of issue.
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