2023 (8) TMI 130 - NFRA - Companies Law

Professional Misconduct - Acceptance of appointment as EQCR without ensuring eligibility criteria - Failure to Perform the role of EQCR Objectively - penalty and sanctions. Acceptance of appointment as EQCR without ensuring eligibility criteria - HELD THAT - The audit firm had the option to engage some other person, but CA Riya Agarwal had the option to refuse such appointment, if she felt that she was not qualified - the charge for acceptance of the role as Engagement Quality Control Reviewer without having prior experience is established. Such lapses have been viewed seriously by international regulators as well. Failure to Perform the role of EQCR Objectively - HELD THAT - The EQCR partner performed the review by routinely ticking a yes/no checklist and signing on some of the WPs prepared by the ET. The work of EQCR partner is not separately identifiable from that of the ET, which raises serious doubts on the performance of her statutory obligations. Accordingly, it is established that the EQCR Partner failed in her assigned role in the Statutory Audit of BCL by virtue of noncompliance with the requirements of SQC 1, SA 220 and SA 230 - Such lapses have been viewed seriously by international regulators as well. Penalty and sanctions - HELD THAT - It is the duty of an EQCR partner to conduct the review of the work of the ET and ensure that the Independent Auditor's Report issued is appropriate, as it provides useful information to the stakeholders and public, based on which they make decisions on their investments or do transactions with the public interest entity - Without a credible Audit, Investors, Creditors and Other Users of Financial Statements would be handicapped. The entire corporate governance system would fail and result in a breakdown in trust and confidence of investors and the public at large if the auditors do not perform their job with professional scepticism and due diligence and adhere to the standards. 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. Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, and also keeping in mind that the EQCR Partner has accepted all the charges and taken responsibility for the lapses pointed out in the SCN, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered the imposition of a monetary penalty of Rs.1 Lakh upon CA Riya Agarwal.

Summary

Issues Involved:
1. Acceptance of appointment as EQCR without ensuring eligibility criteria.
2. Failure to perform the role of EQCR objectively.
3. Professional misconduct by the EQCR partner.

Summary:

Acceptance of appointment as EQCR without ensuring eligibility criteria:
The EQCR partner, CA Riya Agarwal, was charged with accepting the role of Engagement Quality Control Reviewer (EQCR) for the audit of Burnpur Cement Limited (BCL) for FY 2017-18 without ensuring eligibility as per Para 69 of SQC 1, which requires sufficient and appropriate experience. The EQCR partner admitted to lacking prior experience with listed entities and accepted the role due to the non-availability of a qualified person in her small town. The audit firm had the option to engage an external qualified person, but the EQCR partner chose to accept the role despite her inexperience.

Failure to Perform the role of EQCR Objectively:
The EQCR partner was charged with failing to maintain documentation as required by Para 25 of SA 220 and Para 3 of SA 230. Only one working paper, a yes/no checklist, was found, lacking any evaluation of the Engagement Team's (ET) conclusions. The EQCR partner reviewed the audit work in just 5-6 days, near the audit's conclusion, rather than continuously. Important working papers related to Deferred Tax Assets, Going Concern, and audit plan were not reviewed. The EQCR partner also failed to review the audit firm's independence as required by Para 21 of SA 220. The partner admitted to these lapses, attributing them to lack of expertise and oversight.

Professional misconduct by the EQCR partner:
The EQCR partner was found guilty of professional misconduct under Section 132(4) of the Companies Act 2013, read with Section 22 of the Chartered Accountant Act 1949. The charges included failure to exercise due diligence, failure to obtain sufficient information for expressing an opinion, and failure to highlight material departures from generally accepted audit procedures. The EQCR partner's actions were deemed to have compromised the audit quality, leading to the conclusion that she did not perform her statutory obligations adequately.

Penalty and Sanctions:
Considering the proved professional misconduct, the National Financial Reporting Authority (NFRA) imposed a monetary penalty of Rs. 1 Lakh on CA Riya Agarwal. The order will take effect 30 days from its issuance. The EQCR partner's acceptance of the charges and responsibility for the lapses were noted in determining the penalty.