2024 (5) TMI 279 - NFRA - Companies Law

Professional misconduct by CA - Liability of the Engagement partner with audit firm - Acceptance of the Audit Engagement - Significant Matters Reported by the Previous Auditor - Evaluation of the Going Concern Assumption - Verification of Expected Credit Loss (ECL) on Financial Assets - Modification of the Audit Opinion on the Financial Statements - Use of the work of Management s Experts and Auditor s Expert - Engagement Quality Control Review (EQCR) - Compliance with SA 230 SA 230 Audit Documentation - penalty and sanctions - HELD THAT - The Auditor has made a series of departures from the Standards and the Law in conduct of the audit of Reliance Home Finance Limited for FY 2018-19. Based on the discussion it is proved that the Audit Firm issued an audit opinion on the Financial Statements without adequate supporting evidence. Based on the discussion and analysis it is concluded that the EP EQCR Partner and the Audit Firm have committed Professional Misconduct as defined in the Act as below a) The Audit Firm Mis Dhiraj Dheeraj and the EP CA Piyush Patni committed professional misconduct as defined by Section 132(4) of the Companies Act 2013 read with Section 22 and Clause 5 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time 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 and EP failed to disclose in their report the material non-compliances the Company. b) Mis Dhiraj Dheeraj and CA Piyush Patni committed professional misconduct as defined by Section 132 (4) of the Companies Act 2013 read with Section 22 and Clause 6 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time 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 Auditor failed to disclose in their report the material misstatements made by the Company. c) Mis Dhiraj Dheeraj CA Piyush Patni and the EQCR Partner CA Pawan Kumar Gupta committed professional misconduct as defined by Section 132 (4) of the Companies Act 2013 read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 3 8 of 1949) as amended from time to time 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 Auditor conducted the audit of a Public Interest Entity in total disregard of their statutory duties evidenced by multiple critical omissions and violations of the standards. The instances of failure to conduct the audit in accordance with the SAs and applicable regulations and failure to report the material misstatements in the financial statements and non-compliances made by the Company. d) Mis Dhiraj Dheeraj CA Piyush Patni and CA Pawan Kumar Gupta committed professional misconduct as defined by Section 132 (4) of the Companies Act 2013 read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time which states that a CA 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 Auditor failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to their total failure to report the material misstatements and non-compliances made by the Company in the financial statements. e) Mis Dhiraj Dheeraj and CA Piyush Patni committed professional misconduct as defined by Section 132 (4) of the Companies Act 2013 read with Section 22 and Clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time which states that a CA 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 Auditor failed to conduct the audit in accordance with the SAs but falsely reported in their audit report that the audit was conducted as per SAs. f) Mis Dhiraj Dheeraj CA Piyush Patni and CA Pawan Kumar Gupta committed professional misconduct as defined by Section 132 (4) of the Companies Act 2013 read with Section 22 and Clause 8 of Part I of the First Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time which states that a CA is guilty of professional misconduct when he fails to communicate with outgoing auditor . This charge is proved since the Auditor failed to accept the audit in accordance with the law. Thus it is concluded that the charges of professional misconduct in the SCN are established based on the evidence in the Audit File the audit reports on the standalone financial statements for the FY 2018-19 dated 13th August 2019 and the submissions made by the Auditor and the Annual Report of Reliance Home Finance Limited 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. Because professional misconduct has been proved and considering the nature of violations and principles of proportionality in the exercise of powers under Section 132 (4) (c) of the Companies Act 2013 it is ordered as follows a. Imposition of a monetary penalty of Rupees One crore on the Audit Firm Mis Dhiraj Dheeraj. b. Imposition of monetary penalties of Rs 50, 00, 000/- and Rs.10, 00, 000/- respectively on CA Piyush Patni (EP) and CA Pawan Kumar Gupta (EQCR). c. In addition EP and EQCR partners are debarred for five years and three years respectively 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

2. Significant Matters Reported by the Previous Auditor

3. Evaluation of the Going Concern Assumption

4. Verification of Expected Credit Loss (ECL) on Financial Assets

5. Modification of the Audit Opinion on the Financial Statements

6. Use of the work of Management's Expert and Auditor's Expert

7. Engagement Quality Control Review (EQCR)

8. Compliance with SA 230

Summary:

1. Acceptance of Audit Engagement: The Audit Firm accepted the audit engagement on 01.07.2019, before communicating with the previous auditor PW and without waiting for a reasonable time for PW to respond. This violated Clause 8 of Part-I of the First Schedule to the Chartered Accountants Act, 1949, SA 300, and SQC 1. The EQCR Partner also failed to notice these violations, showing a lack of due diligence and objective review required by SA 220.

2. Significant Matters Reported by the Previous Auditor: The Auditor failed to obtain sufficient appropriate audit evidence to support their opinion that there was no fraud, as reported by the previous auditor PW u/s 143(12) of the Companies Act, 2013. The Audit File lacked documentation of PW's letter and ADT 4 form, and there was no proper identification and assessment of the Risk of Material Misstatement due to fraud. This showed gross negligence and lack of professional skepticism.

3. Evaluation of the Going Concern Assumption: The Auditor did not perform sufficient audit procedures to evaluate the going concern assumption of RHFL. Despite significant events and conditions that may cast doubt on the entity's ability to continue as a going concern, the Auditor relied on management's views without independent examination. The disclosures made by the Company were inadequate and inconsistent with the audit report, showing non-compliance with SA 570.

4. Verification of Expected Credit Loss (ECL) on Financial Assets: The Auditor failed to verify the ECL model and did not perform sufficient substantive procedures. The Company's ECL model did not consider qualitative criteria and forward-looking indicators, violating Ind AS 109. The Auditor did not challenge the assumptions and underlying data sources, showing a lack of professional skepticism. The audit procedures stated as performed in the KAM were not evidenced in the Audit File.

5. Modification of the Audit Opinion on the Financial Statements: The Auditor issued a qualified opinion without considering the pervasiveness of GPCL transactions and balances. The absence of sufficient evidence for the recoverability of GPCL impacted multiple elements of the financial statements, making the misstatements pervasive. The Auditor should have issued a disclaimer or adverse opinion as per SA 330 and SA 705 (Revised).

6. Use of the work of Management's Expert and Auditor's Expert: The Auditor failed to comply with SA 500 and SA 620 regarding the use of the work of management's expert and auditor's expert. The Auditor relied on legal opinions without adequate basis and did not document the nature, scope, and objectives of the expert's work. This resulted in a misleading audit report.

7. Engagement Quality Control Review (EQCR): The EQCR Partner failed to objectively evaluate the significant judgments and conclusions of the Engagement Team. The documentation of the EQCR Partner did not evidence compliance with SA 220 and SQC 1. The EQCR Partner's blind agreement with the conclusions of the Engagement Team showed a lack of due diligence.

8. Compliance with SA 230: The Auditor did not comply with paragraph 9 of SA 230, which requires documentation of who performed the audit work, the date such work was completed, who reviewed the audit work performed, and the date and extent of such review. Several key workpapers in the Audit File lacked such details.

Penalties and Sanctions:

a) Imposition of a monetary penalty of Rupees One crore on the Audit Firm Mis Dhiraj & Dheeraj.

b) Imposition of monetary penalties of Rs 50,00,000/- (Rupees Fifty Lakh) and Rs 10,00,000/-(Rupees Ten Lakh) respectively on CA Piyush Patni (EP) and CA Pawan Kumar Gupta (EQCR).

c) EP and EQCR partners are debarred for five years and three years respectively 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.