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2024 (5) TMI 75 - NFRA - Companies LawProfessional Misconduct by CA - Liability of the Engagement Partner (EP) with Audit Firm - Failure to disclose a material fact known - Failure report a material misstatement known - Failure to exercise due diligence and being grossly negligent in the conduct of professional duties - Failure to obtain sufficient information which is necessary for expression of an opinion - Failure to invite attention to my material departure from the generally accepted procedures of audit applicable - sanctions and penalties - section 132 (4) of Companies Act 2013 - HELD THAT - It is proved that the audit firm failed to implement the quality control policies as required by SAs within the firm. Following are the observations - I. The audit firm 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 audit firm failed to disclose in his report the material non-compliances by the company. II. The audit firm 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 audit firm who was appointed as the statutory auditor failed to disclose in its report the material non-compliances by the company. III. The audit firm 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 audit firm who was appointed as the statutory auditor failed to exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations. IV. The audit firm 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 audit firm who was appointed as the statutory auditor 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 loans classifies as NPAs. V. The audit firm committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act which states that an FP is guilty of professional misconduct when he fails to invite attention to any material departure from the generally accepted procedure of audit applicable in the circumstances . This charge is proved since the audit firm who was appointed es the statutory auditor failed to conduct the audit in accordance with the SAs. It is concluded that the charges of professional misconduct enumerated in the SCN dated 04.12.2023 stand proved based on the evidence in the Audit File the Audit Report issued by the EP on behalf of the audit firm the submissions made by the audit firm the annual report of Vikas WSP Limited for the FY 2019-20 and other materials available on record. Penalties and sanctions - HELD THAT - Section 132(4) (c) of the Companies Act 2013 provides that the National Financial Reporting Authority shall where professional or other misconduct is proved have the power to make order for. A) imposing penalty of (I) not less chart one lakh rupees bat which may extend to Ave times of the fees received. in case of individuals and (II) not less than five lakh rupees but which may extend to ten times of the fees received in case of firms. (B) debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. or (II) performing any valuation as provided under section 247 for a minimums period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority. 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 audit firm has not accepted the charges as pointed out in thy SCN in exercise of powers under Section 152(4)(c) of the Companies Act 2013 it is hereby ordered imposition of a monetary penalty of Rs 5, 00, 000/- upon M/s S. Prakash Aggarwal Co.
Issues Involved:
1. Liability of the Firm 2. Lapses in the Audit 3. Articles of Charges of Professional Misconduct 4. Penalty & Sanctions Summary: 1. Liability of the Firm: The firm, M/s S. Prakash Aggarwal & Co., argued that the Engagement Partner (EP) was already penalized for non-compliance related to the statutory audit of Vikas WSP Limited (VWL) for FY 2019-20, and further action against the firm would constitute double jeopardy. The firm contended that only the EP is accountable for non-compliance with auditing standards, as per SA 220 and SQC 1. The firm also argued that professional misconduct should be ascertained under Section 22 of the CA Act, 1949, which does not hold an audit firm guilty of professional misconduct. Additionally, the firm claimed that non-compliance with auditing standards or Code of Ethics cannot constitute professional misconduct for a firm. The Authority found these arguments flawed, stating that the firm, as the appointed auditor u/s 139 of the Act, is accountable for compliance with auditing standards and quality control procedures. The firm cannot evade responsibility by shifting it to the individual partner. The charges against the firm stand proved. 2. Lapses in the Audit: The firm faced several charges for lapses in the statutory audit of VWL for FY 2019-20, including: - Failure to recognize full interest cost on borrowings classified as NPAs, leading to material misstatement of financial statements. - Deficiencies in audit documentation and evidence, such as lack of audit procedures for evaluating interest cost, incomplete Management Representation Letter (MRL), and absence of documentation for discussions among the Engagement Team (ET). - Failure to meet requirements of SA 230 regarding the nature, timing, and extent of audit procedures. - No documentation of verification of interest certificates and balance confirmations from banks. - Lack of communication with Those Charged With Governance (TCWG) as required by SA 260. - Failure to appoint an Engagement Quality Control Review Partner (EQCR) for the audit engagement, violating SA 220. - No documentation of compliance with independence requirements as stipulated in SA 220. The firm denied all charges, reiterating that the EP was responsible for the audit engagement and quality. However, the Authority found the firm's reply inadequate and held the firm accountable for the lapses. 3. Articles of Charges of Professional Misconduct: The Authority concluded that the audit firm committed professional misconduct as defined by the CA Act, including: - Failure to disclose a material fact in financial statements. - Failure to report a material misstatement. - Gross negligence and lack of due diligence in professional duties. - Failure to obtain sufficient information necessary for expressing an opinion. - Failure to invite attention to material departures from generally accepted audit procedures. The charges of professional misconduct against the firm were proved based on the evidence in the Audit File, Audit Report, and other materials on record. 4. Penalty & Sanctions: The Authority emphasized the importance of audit firms formulating and implementing quality control policies and procedures to ensure compliance with professional standards and regulatory requirements. The firm failed to perform its duties, resulting in substantial deficiencies in the audit work. U/s 132(4) of the Companies Act, 2013, the Authority imposed a monetary penalty of Rs 5,00,000/- (Rupees Five Lakhs only) on M/s S. Prakash Aggarwal & Co. The order will take effect after 30 days from its issue.
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