2023 (9) TMI 823 - NFRA - Companies Law

Professional Misconduct - Failure to report non-recognition of Interest Cost on Borrowings classified as Non-Performing Assets (NPAs) - Failure to report effect of Income Tax order in the Financial Statements of the company - Non-assessment of going concern assumption - Non-evaluation/ verification of Property, Plant and Equipment (PPE) - Non-assessment of risk of material misstatement in balances of Trade Receivables - Non-appointment of Engagement Quality Control Reviewer (EQCR) - Non-planning of Audit - penalty and sanctions. Failure to report non-recognition of Interest Cost on Borrowings classified as Non-Performing Assets (NPAs) - HELD THAT - In the Independent Auditor's Report on the financial statements of BCL for the FY 2017-18, the previous auditor had issued a qualified opinion on the basis, among others, of non-recognition of interest cost on the borrowings classified as NPAs. The Auditors, in complete disregard of the previous audit opinion, certified the true and fair view of the accounts, while the BCL continued to adopt the same policy on the basis of which the accounts for FY 2017-18 had been qualified by the previous auditor. The flawed accounting treatment by BCL resulted in understatement of liability and reported loss for the FY 2018-19 by t 15 .66 crores. The Auditors were required to report this material misstatement in their audit report, which they failed to do. Therefore, the charge against the Auditors of failing to report nonrecognition of interest cost on borrowings is established. Failure to report effect of Income Tax order in the Financial Statements of the company - HELD THAT - The Auditors were aware about the ITAO and, therefore, they were required to ensure that its impact was reflected as a provision for the liability or as disclosure of the contingent liability, which they failed to do. Accordingly, the Auditors responsible for the charge pertaining to their failure to report non-recognition of provision for liability or failure to report non-disclosure of contingent liability on account of additional income tax. Non-assessment of going concern assumption - HELD THAT - The Auditors incorporated an Emphasis of Matter on the going concern basis, however, we did not find any working paper in support of inclusion of such EoM. According to SA 706, an EoM can be included by an auditor if he has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. Therefore, it was incumbent on the Auditors to evaluate the matter accordingly, especially in view of the qualified opinion given by the previous auditor and several other factors (as mentioned in Para 29 above), that raised a question mark on the going concern assumption. The Auditors, based on their own independent evaluation, were required to determine if they needed to modify their opinion - the Auditors failed to do this and issued an unmodified opinion - Respondents did not have a reasonable basis for making these statements and issuing their audit report . For misconduct including this and others, PCAOB censured the firm by revoking its registration and imposed a civil monetary penalty of 10000 on the firm. Bravos was barred from being an associated person of a registered public accounting firm. Non-evaluation/ verification of Property, Plant and Equipment (PPE) - HELD THAT - The internal audit report was a part of the audit file and therefore, as per Para 11 of SA 500 23 , any inconsistency in the findings of the internal audit report vis-a-vis the findings of the Auditors had to be resolved and the Auditors had to determine what modifications or additions to audit procedures were necessary to resolve the matter, and had to consider the effect of the matter, if any, on other aspects of the audit. However, we did not find any working paper that conclusively records that physical verification of PPE was carried out by the management and concluding that the internal audit report was not reliable - It is observed that the conditions that prevailed during FY 2018-19 at BCL were of consistent losses, erosion of the net worth and default in the payment of loans taken from financial institutions. Such conditions qualify for the stipulations of Para 12(f) of lnd AS 36 and, therefore, the Auditors were duty bound to evaluate if there was need for impairment of assets; however, no evaluation was carried out by the Auditors in this regard. Therefore, the Auditors responsible for not ensuring the testing of impairment of PPE, and the resultant non-reporting of misstatement in the financial statements, as the PPE accounted for 84% of the total assets. Non-assessment of risk of material misstatement in balances of Trade Receivables - HELD THAT - FY 2018-19 was the first audit year for the Auditors and accordingly, they were required to consider the most recent FS, i.e., of FY 2017-18 and the predecessor auditor's report thereon for information regarding opening balances - In the instant case, since the previous auditor had qualified the debtor balances, the Auditors in FY 2018-19 were required to perform additional audit procedures as required by SA 510 for evaluating the effect of debtors in the current year's FS. The audit file contains no such working - the Auditors failed in assessment of risk of material misstatement in balances of trade receivables. Non-appointment of Engagement Quality Control Reviewer (EQCR) - HELD THAT - The respondent failed to cooperate with a Board investigation by submitting audit documentation to the Division that they knew to contain false declarations . For this misconduct, including others, PCAOB censured the Firm and revoked its registration permanently. Further, Douglas A. Labrozzi, CPA, the Engagement Partner, was barred from associating with any registered public accounting firm. Non-planning of audit - HELD THAT - The Auditors stated that a detailed audit plan was prepared by CA Manjeet Kumar Verma, Managing Partner of the Firm, and implemented by the team; the Audit Plan was reportedly checked by CA Gaurav Vijay and Aayush Kejriwal; that both the audit team members had left the audit firm in July 2020, and some documents were left unreturned by CA Gaurav Vijay at that time. Such documents were enclosed by the auditor along with the reply to the SCN - The Auditors further submitted that all the requirements to check purchase, sales, bank accounts and stock etc. were fully met and there was no negligence in this regard; that they had reviewed the off-take agreement with Ultratech Cement Ltd. and that all the sales were made in accordance with off-take agreement; and that the audit papers were prepared regularly but a copy of the same had not been kept, since there was no requirement to keep and maintain every working paper. It is concluded that all the charges of professional misconduct in the SCN stand proved based on the evidence in the Audit File, the Audit Reports issued by the EP on behalf of the Firm, the submissions made by the Auditors and the Financial Statements of BCL for the FY 2018-19. 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 substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of M/s K. Pandeya Co. (Audit Firm) and CA Manjeet Kumar Verma (EP) establish their professional misconduct. The Auditors chose to place blind reliance on the assertions of the management without applying professional skepticism to the assessment of impact of IT AO, accounting of interest cost on borrowings classified as NP As and assumption of Going Concern basis for the preparation of Financial Statements and failed in discharging their statutory duty to protect public interest by exercising professional skepticism and questioning the management's decisions leading to material misstatement in the Financial Statements. 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 l32(4)(c) of the Companies Act, 2013, it is ordered that i. Monetary penalty of Rupees Five Lakhs upon CA Manjeet Kumar; ii. CA Manjeet Kumar Verma 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 the functions and activities of any company or body corporate.

Summary

Issues Involved:
1. Failure to report non-recognition of interest cost on borrowings classified as Non-Performing Assets (NPAs).
2. Failure to report the effect of the Income Tax order in the financial statements.
3. Non-assessment of going concern assumption.
4. Non-evaluation/verification of Property, Plant, and Equipment (PPE).
5. Non-assessment of risk of material misstatement in balances of trade receivables.
6. Non-appointment of Engagement Quality Control Reviewer (EQCR).
7. Non-planning of audit.

Summary:

C.1 Failure to report non-recognition of Interest Cost on Borrowings classified as Non-Performing Assets (NPAs)
The auditors failed to report non-recognition of interest cost on borrowings classified as NPAs. BCL did not recognize interest cost on loans classified as NPAs, which was against Ind AS 109. The auditors assumed that no interest was charged by the banks, which was incorrect. This resulted in an understatement of interest cost and current liabilities by Rs 15.66 crores and an understatement of the reported loss by 123.6%.

C.2 Failure to report effect of Income Tax order in the Financial Statements of the company
The auditors failed to analyze and report the effect of the Income Tax Assessment Order, which identified additional undisclosed income and imposed additional tax. The auditors did not ensure that BCL made provisions for this liability or disclosed it as a contingent liability, violating Ind AS 37. The auditors falsely declared under CARO 2016 that no income tax dispute was pending.

C.3 Non-assessment of going concern assumption
The auditors did not evaluate the appropriateness of the going concern assumption despite BCL's adverse financial conditions, including significant losses, negative working capital, high debt, and default in debt payments. The auditors included an Emphasis of Matter (EOM) on the going concern basis without proper evaluation, violating SA 570 and SA 706.

C.4 Non-evaluation/verification of Property, Plant, and Equipment (PPE)
The auditors failed to evaluate the impairment of PPE, which constituted 84% of total assets, and did not resolve contradictions between the internal audit report and their findings. The auditors did not document any assessment of the value of PPE or their impairment testing as per Ind AS 36.

C.5 Non-assessment of risk of material misstatement in balances of Trade Receivables
The auditors did not assess the risk of material misstatement in trade receivables, despite indications of significant risk. The auditors did not perform additional audit procedures or obtain external confirmations, violating SA 315, SA 330, and SA 505.

C.6 Non-appointment of Engagement Quality Control Reviewer (EQCR)
The auditors falsely claimed to have appointed an EQCR for the audit of BCL. However, the purported EQCR, CA Shiv Raj, denied being appointed or serving in that capacity. This misrepresentation violated SA 220 and SQC1 and was deemed unprofessional and unethical.

C.7 Non-planning of Audit
The auditors failed to perform necessary procedures to ensure the existence of pre-conditions for an audit and did not comply with the procedures for accepting the audit of BCL. They did not document the composition of the engagement team or their competencies, violating SA 210, SA 220, and SA 315. The audit file was incomplete, and there were indications of tampering with audit documents.

D. Specific Lapses of the Audit Firm
The audit firm failed to fulfill its duties under section 143 of the Companies Act and did not adhere to SQC 1. The firm was responsible for all lapses in the conduct of the audit, including those by the Engagement Partner.

E. Article of Charges of Professional Misconduct by the Auditors
The auditors committed professional misconduct by failing to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and invite attention to material departures from generally accepted audit procedures. These charges were proved based on the evidence in the audit file, audit report, and other materials.

F. Additional Articles of Charges of Professional Misconduct specific to the Audit Firm
The audit firm committed professional misconduct by failing to exercise due diligence and being grossly negligent in the conduct of professional duties, violating SAs and SQC 1.

G. Penalty & Sanctions
The audit firm, M/s K. Pandeya & Co., was fined Rs 25 lakhs, and CA Manjeet Kumar Verma was fined Rs 5 lakhs and debarred for five years from being appointed as an auditor or internal auditor or undertaking any audit of financial statements or internal audit of any company or body corporate. The order will take effect 30 days from its issuance.