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2023 (7) TMI 889 - NFRA - Companies LawProfessional Misconduct - Acceptance of audit engagement disregarding Independence requirements - Tampering of Audit File and related lapses-SA 230, Audit Documentation - Lapses in audit relating to fraudulent transactions of Rs 3,769.61 crores with MACEL - Lapses in audit relating to fraudulent understatement of advance to MACEL by Rs 222.50 crores and failure to detect evergreening of loans - Lapses in audit relating to diversion of Rs 130.55 crores to M/s Classic Coffee Curing Works - Lapses in audit relating to capital advance given to Dark Forest Furniture Company Private Limited. (DFFCPL) - Failure to report non compliances 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 250, Consideration of Laws and Regulations in an Audit of Financial Statements - Failure to comply with SA 260, Communication with Those Charged With Governance (TCWG) 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 - Lapses in constitution of Engagement Team (ET) and assigning responsibility among ET members (Additional Lapse on the part of the Audit Firm only). 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 - Independent Auditors of Public Limited Companies serve a critical public function of enabling the users of Audited Financial Statements to take informed economic decisions. Quality audits bolster stakeholder' s confidence in the credibility of financial reporting. In the instant case, the Auditors, chose to preserve their professional relationship with the promoters of the auditee company, instead of discharging their statutory duty to protect public interest by exercising professional skepticism and questioning the promoters' dubious activities and transactions leading to diversion of shareholders and stakeholders' money on a large scale. Had they performed the required audit procedures with due professional skepticism, many of the dubious transactions would have been perhaps detected. But by failing to do so, they foreclosed this possibility causing immense harm to shareholders and stakeholders - when NFRA called for the Audit File for examination, the Auditors adopted delaying tactics and then tampered with the Audit File. This is extremely serious because it obstructs the NFRA's ability to protect public interest. This case underlines the need for all Auditors regardless of seniority to be aware of their individual responsibility to act honestly and with integrity in all areas of their work. These Auditors were required to ensure compliance with Standards on Auditing, Laws and Regulations 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 the Auditors establish their professional misconduct and lack of due diligence. Despite being qualified professionals, the Auditors have not adhered to the Standards and have thus not discharged the duty cast upon them. 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, following sanctions imposed a) Imposition of a monetary penalty of Rs One Crore only upon Mis ASRMP Co. In addition, Mis ASRMP Co. 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. b) Imposition of a monetary penalty of Rs Ten Lakhs only upon CA A. S. Sundaresha. In addition, CA A. S. Sundaresha 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 only upon CA Madhusudan U A. In addition, CA Madhusudan U A 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. d) Imposition of a monetary penalty of Rs Five Lakhs only upon CA Pranaav G. Ambekar. In addition, CA Pranaav G. Ambekar 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. Omission and commission by the audit firm. 4. Points of law raised by the auditors. 5. Articles of charges of professional misconduct by the auditors. 6. Additional articles of charges of professional misconduct by the audit firm. 7. Penalty and sanctions. Summary: 1. Major Lapses in the Audit: - Independence Requirements: The auditors failed to comply with independence requirements, having audit and non-audit relationships with multiple Coffee Day Group entities, creating conflicts of interest. - Tampering with Audit File: The audit file was tampered with to deceive NFRA, including modifications and additions after NFRA requested the file. - Fraudulent Transactions with MACEL: The auditors failed to exercise professional skepticism and did not perform adequate risk assessment procedures regarding fraudulent transactions of Rs 3,769.61 crores with MACEL. - Understatement of Advance to MACEL: The auditors failed to detect the fraudulent understatement of advance to MACEL by Rs 222.50 crores and the evergreening of loans. - Diversion to Classic Coffee Curing Works: The auditors failed to identify the diversion of Rs 130.55 crores to Classic Coffee Curing Works, which was a circular transaction. - Capital Advance to Dark Forest Furniture Company: The auditors failed to exercise due diligence regarding a capital advance of Rs 87.92 crores to Dark Forest Furniture Company, which exceeded the approved limit and lacked proper approval. 2. Other Non-Compliances with Laws and Standards: - Section 134(1) of the Act: The auditors failed to ensure compliance with section 134(1) of the Act, which requires approval and signing of financial statements by the Board. - SA 700: The auditors violated SA 700 by not reporting material misstatements in the financial statements. - SA 250: The auditors failed to report money laundering and diversion of funds as required by SA 250. - SA 260 and SA 265: The auditors failed to communicate with Those Charged With Governance (TCWG) and did not document discussions or significant matters. - SA 300: The auditors failed to develop an effective audit plan, particularly in planning risk assessment procedures. 3. Omission and Commission by the Audit Firm: - Engagement Team Constitution: The audit firm failed to properly constitute the engagement team, assigning multiple engagement partners and external reviewers without clear responsibilities. - Quality Control: The audit firm failed to establish and maintain a quality control system to ensure compliance with professional standards and legal requirements. 4. Points of Law Raised by the Auditors: - NFRA's Authority: The auditors' contention that NFRA lacked authority to issue the SCN was rejected. NFRA's authority is derived from section 132 of the Companies Act. - Investigation Basis: The SCN was based on facts and documents in the audit file, not on suspicion. 5. Articles of Charges of Professional Misconduct by the Auditors: - Clause 5 of Part I of the Second Schedule of the CA Act: The auditors failed to disclose material facts necessary for making financial statements. - Clause 6: The auditors failed to report material misstatements known to them. - Clause 7: The auditors were grossly negligent in the conduct of their professional duties. - Clause 8: The auditors failed to obtain sufficient information necessary for expressing an opinion. - Clause 9: The auditors failed to invite attention to material departures from generally accepted audit procedures. 6. Additional Articles of Charges of Professional Misconduct by the Audit Firm: - Section 132 (4) of the Act: The audit firm failed to exercise due diligence and was grossly negligent in the conduct of professional duties, violating SQC 1. 7. Penalty and Sanctions: - M/s ASRMP & Co.: Monetary penalty of Rs One Crore and debarment for two years. - CA A. S. Sundaresha: Monetary penalty of Rs Ten Lakhs and debarment for five years. - CA Madhusudan U A: Monetary penalty of Rs Five Lakhs and debarment for five years. - CA Pranaav G. Ambekar: Monetary penalty of Rs Five Lakhs and debarment for five years.
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