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2023 (8) TMI 14 - NFRA - Companies LawProfessional Misconduct - Incorrect reporting of outstanding liability arising out of Foreign Currency Loan - Incorrect accounting treatment of Assets given on Lease - Not reporting non-compliance with the format of Financial Statements - Other charges showing lack of duc diligence by EP - Violations of Standards on Auditing - penalties and sanctions. Incorrect reporting of outstanding liability arising out of Foreign Currency Loan - HELD THAT - Since the foreign currency loan, which was material as per the balance sheet size, has not been correctly translated at the closing rate and there are no circumstances justifying use of any rate other than the closing rate, the charges that the FP did not report non- compliance by the Company with the requirements of AS 11 stands proven. Incorrect accounting treatment of Assets given on Lease - HELD THAT - The explanation given by the FP cannot be accepted as Assets given on finance lease have to be presented by the Lessor as Receivables as per para 26 of AS 19. However, they have been presented under Tangible Assets in Balance Sheet as on 31.3.2016, following the format given in Schedule III to the Companies Act, 2013. It is misleading and erroneous to present unpaid finance lease receivables as fixed assets because definition, recognition and measurement and disclosure requirements for fixed assets and lease receivables are completely different. Hence, the charge of incorrect accounting of Assets given on lease stands proven. Not reporting non-compliance with the format of Financial Statements - HELD THAT - In respect of Depreciation, the EP explained that it is an age-old practice to give the depreciation schedule as given by the Company and has attached the financial statements of a few companies to substantiate his explanation - The explanation given by the EP cannot be accepted as Schedule III of the Companies Act, 2013 clearly provides that the corresponding amounts for the previous reporting period need to be given for all items in the Financial Statements including notes. Further, a wrong practice does not become Iegitimate just because it is being followed by other companies and not being reported by other auditors. Other charges showing lack of due diligence by EP - HELD THAT - The EP was charged with not reporting the omission of Note no. 2.3(ix), 2.3(x) and 2.3(xi) in the financial statements of the Company. In the Financial Statements for 2015-16, Note no. 2.3(viii) is followed by Note no. 2.3(xii) in both the printed and signed copy of the Financial Statements. In his first response letter dated 28.10.2022, the EP reiterated that the said Notes were available in their signed copy and were inadvertently missed later on. However, in the second response letter dated 05.12.2022, the EP accepted the error and submitted that it was a typographical error - while the charges in paras 30 to para 33 may not be material misstatement but signal lack of due diligence on the part of the EP. Lack of due diligence is a professional misconduct under Clause (7) of Part 1 of Second Schedule of Chartered Accountants Act, 1949. Violations of Standards on Auditing - HELD THAT - As per para 10 of SA 320, when establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. Further, as per para 11 of SA 320, the auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. There is no work paper in the audit file showing that the materiality benchmarked in the previous years audit has been kept the same in the year under review - A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole (Para A2 of SA 320). Even though the fixed percentage and the underlying benchmark is kept the same across the years by the EP, the amount of Materiality and Performance Materiality will depend upon the balance sheet numbers and need to be documented accordingly in the Audit File. There is not a single work paper in the audit file which states the determination of Materiality and Performance Materiality for FY 2015-16. The explanation given by the auditor is not accepted and we conclude that the charge is proven. 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. Independent Auditors of Public Listed Companies serve a critical public function of enabling the users of Audited Financial Statements to take informed decisions. Absent a robust system of Auditing, Investors, Creditors and Other Users of Financial Statements would be handicapped and their work compromised - Thus, the auditor is duty bound to examine and ascertain the integrity of Financial Statements of such entities 10 in larger public interest. This is all the more important for a financial services entity, like Nicco that involve considerable public interest and public funds. The EP, in this case, has not carried out the audit as per the Standards on Auditing and failed to report several non-compliances by the Company with Accounting Standards in preparing its financial statements. All these show a collective lack of due diligence in the audit and gross negligence specifically relating to incorrect valuation of foreign currency loans and failure to report incorrect reporting of assets on Iease. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order imposition of a monetary penalty of Rupees One Lakh upon CA Gautam Guha.
Issues Involved:
1. Incorrect reporting of outstanding liability arising out of Foreign Currency Loan. 2. Incorrect accounting treatment of Assets given on Lease. 3. Not reporting non-compliance with the format of Financial Statements. 4. Other charges showing lack of due diligence by EP. 5. Violations of Standards on Auditing. Summary: 1. Incorrect Reporting of Outstanding Liability Arising Out of Foreign Currency Loan: The Engagement Partner (EP) failed to report the non-compliance with AS 11, which mandates that foreign currency monetary items should be reported using the closing rate. The foreign currency loan of Rs. 11.83 Crore was not translated at the closing rate, a material misstatement given the size of the balance sheet. The EP's justification that the impact was not material and that the closing rate need not apply in exceptional circumstances was rejected due to lack of evidence and analysis in the audit file. 2. Incorrect Accounting Treatment of Assets Given on Lease: The EP did not report the improper accounting of assets given on finance lease. These assets were incorrectly presented under Tangible Assets instead of being recognized as receivables, violating AS 19 and Schedule III of the Companies Act, 2013. The EP's argument that the lease agreements were null and void was not accepted, as it did not justify the incorrect presentation. 3. Not Reporting Non-Compliance with the Format of Financial Statements: The EP failed to report several non-compliances with the format of financial statements as per Schedule III of the Companies Act, 2013. These included non-disclosure of the breakup of trade receivables and incorrect depreciation schedules. The EP's explanations were not accepted as they did not align with the mandatory requirements of Schedule III. 4. Other Charges Showing Lack of Due Diligence by EP: The EP was charged with several lapses indicating a lack of due diligence, including incorrect references to the Companies Act, 1956, mismatches in the investment schedule, certifying two different values of Earning Per Share (EPS), and omission of certain notes in the financial statements. These errors, though not materially misstated, signaled gross negligence and lack of due diligence, constituting professional misconduct under the Chartered Accountants Act, 1949. 5. Violations of Standards on Auditing: The EP failed to determine and document materiality and performance materiality as required under SA 320. The audit file lacked any work papers evidencing the determination of these materialities, proving the charge of non-compliance with the Standards on Auditing. Conclusion: The EP, CA Gautam Guha, was found guilty of professional misconduct due to multiple failures in conducting the statutory audit of Nicco Uco Alliance Credit Limited for FY 2015-16. These included non-compliance with accounting standards, incorrect financial reporting, and lack of due diligence. Consequently, a monetary penalty of Rupees One Lakh (Rs. 1,00,000) was imposed on the EP, effective 30 days from the date of the order.
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