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2024 (3) TMI 27 - NFRA - Companies LawProfessional Misconduct - Chartered Accountant (CA) - Significant failures to adhere to Standards on Auditing (SAs), gross negligence, and lack of professional skepticism - Non-recognition of interest cost on Bank Borrowings classified as NPAs - False reporting under CARO - Failure in performing of required audit procedures - Inappropriate Opinion on the Financial Statement for the FYs 2014-15 to 2016-17 - Non-implementation of Quality Control Measures at the Engagement Level - Non-submission of Audit File for the FY 2014-15 - penalty and sanctions. HELD THAT - The EP has made departures from the Standards and the Law, in his conduct of the audit of Bilcare Limited for the FYs 2014-15, 2015-16 and 2016-17. In light of the foregoing discussion, findings on each article of charge listed out in the SCN, are stated below (a) The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity . This charge is proved as the EP failed to disclose in his report the material non-compliances by the company as explained in Para 16-22 above. (b) The EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity . This charge is proved as the EP failed to disclose in his report the material non-compliances by the company as explained in Para 16-22 above. (c) The EP committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . This charge is proved as the EP failed to exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations, as explained in Para 16-44 above. (d) The EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he fails to obtain sufficient information which is necessary for expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion . This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations and failed to analyse and report the appropriateness of accounting policy for recognition of interest cost on NPA loans in the financial statements as explained in Para 16-44 above. (e) The EP committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances . This charge is proved since the EP failed to conduct the audit in accordance with the SAs as explained in Para 16-44 above. Therefore, it is concluded that the charges of professional misconduct enumerated in the SCN dated 14.07.2023 stand proved based on the evidence in the Audit File, the Audit Report issued by EP, the submissions made by EP, the annual report of Bilcare for the FYs and other materials available on record. Penalty and sanctions - HELD THAT - It is the duty of an auditor to conduct the audit with professional skepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity - Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law. Considering the proven professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, we in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order I. Imposition of a monetary penalty of Rs 3,00,000/- upon CA Ratan Laxminarayan Rathi; II. In addition, CA Ratan Laxminarayan Rathi is debarred for 2 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.
Issues Involved:
1. Non-recognition of interest cost on Bank Borrowings classified as NPAs. 2. Perfunctory Audit of Revenue. 3. Non-evaluation of Related Parties Transactions. 4. Issuance of Inappropriate Opinion on Financial Statements. 5. Non-implementation of Quality Control Measures at the Engagement Level. 6. Non-submission of Audit File for FY 2014-15. Summary: Non-recognition of interest cost on Bank Borrowings classified as NPAs: The EP failed to evaluate the appropriateness of accounting policy adopted by the company for not recognizing full interest cost on borrowings classified as NPA by the Banks. The company recognized interest cost on such borrowings at an average rate of 10%, whereas original interest rates ranged from 10.75% to 18%. This resulted in under-statement of losses ranging from Rs. 56.5 crores to Rs. 114.32 crores, approximately 30% to 173% of the reported losses. The EP's reliance on management's representation and disclosure of contingent liabilities was not in compliance with AS/Ind AS frameworks. The EP's reporting of the matter as an Emphasis of Matter (EoM) was not in compliance with SA 705 and 706. Perfunctory Audit of Revenue: The EP failed to obtain sufficient appropriate audit evidence for the verification of revenue, as required by SAs 200, 240, and 315. Despite the company's revenue ranging from Rs. 255 crores to Rs. 331 crores, there was no audit documentation in support of the EP's performance of necessary audit procedures. The EP's long association with the company and reliance on management's honesty and integrity did not relieve him of the duty of exercising professional skepticism. Non-evaluation of Related Parties Transactions: The EP falsely reported under CARO that the company had not granted any loans to related parties, despite documented evidence of such transactions. The EP also failed to perform necessary audit procedures to verify related party transactions, including confirming approvals and ensuring transactions were on an arm's length basis. The EP's reliance on the Directors' report and Secretarial audit report was not sufficient appropriate audit evidence. Issuance of Inappropriate Opinion on Financial Statements: The EP issued unmodified opinions on the financial statements for FYs 2014-15 to 2016-17 despite material misstatements due to partial recognition/non-recognition of interest cost on borrowings classified as NPA. The inclusion of an EoM paragraph in the audit report for FY 2016-17 was in contravention of SA 706. The EP's reliance on management representations without applying professional skepticism showed a negligent attitude. Non-implementation of Quality Control Measures at the Engagement Level: The EP failed to determine the appointment of an Engagement Quality Control Reviewer (EQCR) as required by SA 220. The EP's contention that provisions of EQCR are discretionary for smaller firms was not acceptable, as the appointment of EQCR is mandatory for the audit of listed entities. Non-submission of Audit File for FY 2014-15: The EP did not submit the audit file for FY 2014-15, as the mandatory retention period of seven years had lapsed. The issue of non-submission is not being pursued further. Penalty & Sanctions: The EP was found guilty of professional misconduct under various clauses of Part I of the Second Schedule of the CA Act. The NFRA imposed a monetary penalty of Rs 3,00,000/- and debarred the EP for two 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 take effect after 30 days from its issue.
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