2023 (8) TMI 260 - NFRA - Companies Law

Professional Misconduct - Acceptance of audit engagement without valid authorization and without complying with ethical requirements; and issuing an audit report in violation of the Act - Failure to comply with Standards on Auditing (SAs) - Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements - Non-Compliance with SA 230 Audit Documentation - Non-Compliance with SA 700, Forming an Opinion and Reporting on Financial Statements - Non-Compliance with other SAs. Acceptance of audit engagement without valid authorization and without complying with ethical requirements; and issuing an audit report in violation of the Act - HELD THAT - It is found that the absence of due diligence and display of gross negligence by the EP run afoul of the provisions of the Chartered Accountants Act, 1949 and resulted in professional misconduct as conceived under Section 22, Clause 9 of Schedule I of the Chartered Accountants Act, 1949. The acceptance of an invalid appointment letter for the Statutory Audit of the branches, the conduct of the audit based on an invalid appointment, presenting convoluted logic and baseless reading of the law to justify the actions show the absence of professional skepticism and gross negligence on the EP's part. Therefore, the charges stands proven. Failure to comply with Standards on Auditing (SAs) - HELD THAT - Since these branch audit reports are clearly referred to by Company's Statutory Auditor (CAS) in its report to the members of the Company, we examine here the extent of compliance with the applicable SAs by the Branch Auditor notwithstanding the violation of ethical standards, the Chartered Accountants Act, 1949 and of the Companies Act in accepting an invalid appointment of the Branch Auditor. The principles and procedures laid down in the SAs including professional skepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence-gathering procedures and reporting are all applicable in the branch audit as well, being an audit of historical financial information. Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements - HELD THAT - The EP accepted the appointment letter issued by DHFL and issued the audit report without complying with the requirements of SA 210. Between 2015-16 and 2016-17, there was a significant change in the circumstances relating to the branch audit. In 2015-16 the AGM decided to have a separate branch auditor and company's auditor, while in subsequent years there was only one auditor (CAS) to audit the Company and all its branches - EP's negligence of the provisions of SA 210 resulted not only in accepting an illegal appointment and non-compliance with SA 210 but also in the absence of professional skepticism and professional judgment in understanding the objective and scope of the audit, thereby violating SA 200 also. Non-Compliance with SA 230 Audit Documentation - HELD THAT - Even the additional documentation submitted to NFRA was deficient in terms of the nature, timing and extent of the audit procedures performed, who prepared and reviewed the audit working papers (WPs) and the timing of the audit procedures. For example, the majority of the additional documents submitted (purportedly from the EP's previous year's audit file), only have the sign and stamp of the Audit Firm. It carries no indication of any audit procedure being performed in respect of the financial year in question i.e. 2017-18. Similarly, the working papers on verification of cash balances, submitted with additional documentation, did not contain the details such as (a) whether it pertained to a surprise verification, (b) whether the verified cash tallied with the recorded cash, ( c) whether any evaluation was done regarding the controls over cash, (d) who were the responsible persons who verified the cash, (e) who reviewed the WP and what was the time of verification and (f) any cross-references to the related WPs where such details are available. The EP did not follow the requirements of SA 230 and that the audit documentation does not give evidence of the nature, timing and extent of audit procedures performed, results of those audit procedures and conclusions reached during the. Hence the charges in para 24 above regarding non-compliance with SA 230 stand proven. Non-Compliance with SA 700, Forming an Opinion and Reporting on Financial Statements - HELD THAT - SA 700 is applicable in this audit and as per the SA 700, the EP is required to evaluate the effect of the misstatements and decide to appropriately modify the opinion. Determination of materiality is therefore important in an audit - in the absence of materiality levels documented in the audit file, there is no justification for the final noting of EP that unadjusted misstatements, including disclosure misstatements, are immaterial, based on the materiality level . In the absence of documented conclusions, insufficient audit documentation, determination of materiality and assessment of the risk of misstatements and the test of controls we observe that the audit opinion issued by the EP does not comply with SA 700. 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 law lays down a minimum punishment for such misconduct. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality and keeping in mind the deterrence, proportionality, signalling value of the sanctions and time required for improvement in knowledge gaps we, in the exercise of powers under Section 132(4)(c) of the Companies Act, 2013, proceed to order the following sanctions i. Imposition of a monetary penalty of Rs.100,000 (One Lakh) upon CA Harish Kumar T K; ii. CA Harish Kumar T K is debarred for one year 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.

Summary

Issues Involved:

1. Acceptance of audit engagement without valid authorization.
2. Failure to comply with Standards on Auditing (SAs).
3. Professional misconduct by the Engagement Partner (EP).
4. Penalty and sanctions.

Summary:

1. Acceptance of Audit Engagement Without Valid Authorization:

The EP, CA Harish Kumar T K, accepted the audit engagement for three branches of Dewan Housing Finance Corporation Limited (DHFL) without ensuring the appointment was approved at the Annual General Meeting (AGM) of DHFL, violating the Companies Act, 2013. The EP did not verify if the appointment complied with Section 139 of the Act, and the appointment letter was issued by an "Authorized Signatory" without board and shareholder approval. The EP's defense that Section 139 does not apply to branch auditors was dismissed as baseless. The EP's actions showed a lack of due diligence and gross negligence, violating the Chartered Accountants Act, 1949.

2. Failure to Comply with Standards on Auditing (SAs):

The EP failed to comply with multiple SAs, including:

- SA 210 (Agreeing the Terms of Audit Engagements): The EP did not document the objective and scope of the audit as required.
- SA 230 (Audit Documentation): The EP's audit documentation lacked evidence of the nature, timing, and extent of audit procedures performed. The EP's attempt to rectify deficiencies post facto was not accepted.
- SA 700 (Forming an Opinion and Reporting on Financial Statements): The EP did not document how deficiencies in loan files were resolved or how misstatements were evaluated in forming the audit opinion.
- Other SAs (SA 300, SA 315, SA 320, SA 330, SA 450, SA 500, SA 520, SA 530): The EP failed in areas such as risk assessment, materiality determination, audit sampling, and obtaining sufficient appropriate audit evidence.

3. Professional Misconduct by the Engagement Partner (EP):

The EP was found guilty of professional misconduct under the Chartered Accountants Act, 1949, and the Companies Act, 2013, for:

- Failing to ensure the validity of the appointment as per Section 139 of the Act.
- Gross negligence and lack of due diligence in conducting the audit.
- Not obtaining sufficient information necessary for expressing an opinion.
- Not highlighting material departures from generally accepted audit procedures.

4. Penalty and Sanctions:

Considering the professional misconduct and the need for deterrence, the following sanctions were imposed:

- A monetary penalty of Rs. 100,000 (One Lakh) on CA Harish Kumar T K.
- Debarment for one year 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.

The order will become effective 30 days from the date of issue. Further training on Standards on Auditing (SAs) was recommended for the EP to improve proficiency in audit services.