2023 (7) TMI 1244 - NFRA - Companies Law

Professional Misconduct - Failure in understanding the nature of business of MACEL resulting in lapses in audit relating to fraudulent diversion of funds - Lapses in audit relating to accounting of related party borrowings and bank borrowings resulting in misstatements by Rs 2,363.34 crore due to fraud - Lapses in audit relating to misstatement of Rs 909.99 crores in Cash Flow Statement - Lapses in evaluation of corporate guarantee and creation of charge on the assets of the company (Rs 130 crores) - Lapses in making audit conclusions and forming audit opinion - other non-compliances. HELD THAT - The Audit Firm was charged with various omissions and commissions observed in the audit, as discussed in the preceding paragraphs, for its role as the statutory auditor appointed under section 139 of the Act. The Audit Firm was also charged with failure to comply with para 2 of SA 220 and para 3 of SQC 1, which stipulate that Quality Control Systems, Policies and Procedures are the responsibility of the Audit Firm. The Audit Firm was also charged with failure to establish and maintain a system of quality control to provide it with reasonable assurance that a) The firm and its personnel comply with professional standards and regulatory and legal requirements; and b) The reports issued by the firm or engagement partners are appropriate in the circumstances. On examining pointwise reply it is found that all charges are proved except the charge relating to constitution of the Audit Committee. Therefore, CA Lavitha Shetty, Proprietor of the Audit Firm is also responsible for non-compliance with provisions relating to Quality Control Systems, Policies and Procedures of SA 220 and SQC 1. Articles of Charges of Professional Misconduct by the Statutory Auditor - HELD THAT - The Auditor has made a series of serious departures from the Standards and the Law, in conduct of the audit of MACEL for FY 2018-19 - it is proved that the Auditor had issued unmodified audit opinion on the Financial Statements without reporting diversion of funds, evergreening of loans and committed other serious lapses during performance of audit. Based on the discussion and analysis, it is concluded that the Auditor has committed Professional Misconduct as defined in Section 132 (4) of the Companies Act, read with section 22 the Chartered Accountants Act 1949 (the CA act), as amended from time to time. Penalty and sanctions - 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 Auditor was 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 her professional misconduct and lack of due diligence. Despite being a qualified professional, the Auditor has not adhered to the Standards and have thus not discharged the duty cast upon her. Considering the proved professional misconduct, the nature of violations and principles of proportionality, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered that Imposition of a monetary penalty of Rs Five Lakhs only upon CA Lavitha Shetty. In addition, CA Lavitha Shetty 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 . Application disposed off.

Issues Involved:
1. Failure in audit relating to fraudulent diversion of funds.
2. Lapses in audit relating to accounting of related party borrowings and bank borrowings.
3. Lapses in audit of inappropriate recognition of finance cost.
4. Lapses in audit relating to misstatement in Cash Flow Statement.
5. Lapses in evaluation of corporate guarantee and creation of charge on the assets of the company.
6. Lapses in making audit conclusions and forming audit opinion.
7. Other Non-compliances with Laws and Standards.
8. Omissions and commissions by the Audit Firm.
9. Articles of Charges of Professional Misconduct by the Statutory Auditor.
10. Penalty & Sanctions.

Summary:

1. Failure in audit relating to fraudulent diversion of funds:
The Auditor failed to meet the Standards on Auditing requirements, demonstrating a serious lack of competence. The EP did not exercise professional judgment & skepticism during the audit of fraudulent borrowing and diversion of funds amounting to Rs 4,076.46 crores and Rs 3,858.52 crores respectively. The EP also failed to evaluate the recoverability of loans worth Rs 3,235.16 crores given to promoters and related parties. The EP falsely reported that MACEL had an effective system of Internal Financial Control despite the absence of the same.

2. Lapses in audit relating to accounting of related party borrowings and bank borrowings:
The Auditor failed to identify and assess the Risk of Material Misstatements due to fraud, resulting in a misstatement of Rs 2,363.34 crores. MACEL issued cheques worth Rs 2,038.54 crores without adequate bank balance, leading to fraudulent conversion of related party borrowings into bank borrowings. The Auditor did not perform sufficient audit procedures to detect this.

3. Lapses in audit of inappropriate recognition of finance cost:
The Auditor failed to perform risk assessment and analytical procedures regarding the recognition of finance cost of Rs 55.38 crores, which was not used for business activities of MACEL. This resulted in a material misstatement in the Profit and Loss Statement. The Auditor did not classify this finance cost as an extraordinary item, violating AS 5 and Schedule III of the Act.

4. Lapses in audit relating to misstatement in Cash Flow Statement:
The Auditor failed to report a material misstatement of Rs 909.99 crores in the Cash Flow Statement. MACEL incorrectly classified short-term borrowings and loans/advances as Cash Flow from Operating Activities instead of Financing and Investing Activities, violating AS 3.

5. Lapses in evaluation of corporate guarantee and creation of charge on the assets of the company:
The Auditor failed to evaluate the appropriateness of contingent liabilities of Rs 130 crores created due to corporate guarantees and charges on assets for loans taken by promoters and their related entities. This was not disclosed in the Financial Statements, violating AS 18.

6. Lapses in making audit conclusions and forming audit opinion:
The Auditor did not consider material misstatements of Rs 11,393.69 crores while forming the audit opinion, violating SA 700 and SA 320. The Auditor failed to determine materiality and did not report the pervasive misstatements and evergreening of loans.

7. Other Non-compliances with Laws and Standards:
The Auditor was charged with various lapses, including failure to understand the control environment, non-compliance with NBFC registration requirements, and failure to ensure compliance with section 134(1) of the Act. The Auditor also failed to comply with SA 570, SA 505, SA 230, and SA 580.

8. Omissions and commissions by the Audit Firm:
The Audit Firm failed to comply with Quality Control Systems, Policies, and Procedures as required by SA 220 and SQC 1. The proprietary nature of the firm does not absolve it from these responsibilities.

9. Articles of Charges of Professional Misconduct by the Statutory Auditor:
The Auditor committed professional misconduct as defined in clauses 5, 6, 7, 8, and 9 of Part I of the Second Schedule of the CA Act. The Auditor failed to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and invite attention to material departures from accepted audit procedures.

10. Penalty & Sanctions:
The Auditor is imposed with a monetary penalty of Rs Five Lakhs and 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 any company or body corporate. This order will become effective after 30 days from the date of issue.

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