2024 (12) TMI 227 - NFRA - Companies Law

Professional Misconduct - Acceptance of audit engagement without valid authorization - Failure to comply with Standards on Auditing (SAS) - Section 132(4) of the Companies Act, 2013 - penalty and sanctions - HELD THAT - It is established that CA Kashinath Chaturvedi did not comply with the stipulations in the Chartered Accountants Act, 1949 regarding the acceptance of the statutory audit engagement and showed gross negligence and lack of due diligence while accepting an invalid appointment as auditor. In addition to accepting a legally invalid appointment, the CA also did not ensure the audit quality. The CA was grossly negligent in performing his professional duties by not adhering to the requirements laid down by the relevant SAs. This has resulted in the issuance of an audit report not backed by valid audit evidence and the absence of quality in the audit work. Specifically, the following failures on the part of CA Kashinath Chaturvedi as contained in the Articles of Charges in the SCN, are established. a) Failure to ascertain from the audited Company whether the requirements of Sections 139 140 of the Act in respect of such appointment had been duly complied with. (As per Section 22 and Clause 9 of Part I of the First Schedule to the CAs Act); b) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, because of the lapses and omissions. (As per Section 22 and Clause 7 of the Part I of Second Schedule to the CAs Act); It is found that CA Kashinath Chaturvedi committed professional misconduct, as defined in the respective clauses of the CAs Act, the meaning of which is conceived under Section 132 (4) of the Companies Act, 2013 as amounting to professional misconduct. 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. There were deficiencies in the Audit and abdication of responsibility on the part of CA Kashinath Chaturvedi right from the acceptance of the Audit without due diligence in ascertaining the validity of the offer, which establishes his gross negligence resulting in professional misconduct. In fact, accepting an audit assignment in contravention of the Law and continuing it in non-conformity with the SAs, constitutes a flagrant violation of the Law. It is also concluded that despite being a qualified professional, CA Kashinath Chaturvedi has not adhered to the Standards on Auditing and provisions of the law. 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, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is ordered to proceed the order with the following sanctions i. Imposition of a monetary penalty of 1 Lakh upon CA Kashinath Chaturvedi; ii. CA Kashinath Chaturvedi 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. Non-compliance with ethical requirements and Standards on Auditing (SAs).
3. Professional misconduct and gross negligence.
4. Penalty and sanctions for professional misconduct.

Issue-wise Detailed Analysis:

1. Acceptance of Audit Engagement without Valid Authorization:

The judgment addresses the issue of CA Kashinath Chaturvedi accepting an audit engagement for five branches of Dewan Housing Finance Corporation Limited (DHFL) without valid authorization. The National Financial Reporting Authority (NFRA) found that the appointment of branch auditors, including Chaturvedi, was not approved at the Annual General Meeting (AGM) of DHFL, violating the Companies Act, 2013. Despite this, Chaturvedi accepted the role as "Branch Statutory Auditor," which was a legally invalid appointment. This acceptance violated the Chartered Accountants Act, 1949, as it lacked the necessary shareholder approval and did not comply with Section 139 of the Companies Act, 2013.

2. Non-compliance with Ethical Requirements and Standards on Auditing (SAs):

NFRA's investigation revealed that both CA Kashinath Chaturvedi and his partner failed to comply with the Standards on Auditing (SAs) during the performance of the branch audit. Specifically, Chaturvedi did not adhere to SA 210, which requires agreeing on the terms of audit engagements, and SA 230, which mandates proper audit documentation. The audit documentation was insufficient, lacking evidence of the nature, timing, and extent of audit procedures performed, as well as the results and conclusions reached. This failure to maintain adequate audit documentation violated the SAs and demonstrated a lack of professional skepticism and judgment.

3. Professional Misconduct and Gross Negligence:

The judgment establishes that CA Kashinath Chaturvedi committed professional misconduct by accepting an invalid appointment and failing to ensure audit quality. He did not exercise due diligence, as required under the Chartered Accountants Act, 1949, and the relevant SAs. His actions were deemed grossly negligent, as he did not verify whether the appointment complied with the necessary legal provisions and ethical standards. The issuance of an audit report without valid audit evidence further demonstrated his professional misconduct.

4. Penalty and Sanctions for Professional Misconduct:

Based on the findings of professional misconduct and gross negligence, NFRA imposed penalties and sanctions on CA Kashinath Chaturvedi. He was fined a monetary penalty of Rupees One lakh and was debarred for one year from being appointed as an auditor or internal auditor or from undertaking any audit related to financial statements or internal audit of any company or body corporate. The order emphasized the importance of adhering to legal and ethical standards and aimed to serve as a deterrent to similar misconduct in the future. The order will become effective 30 days from the date of issue.