2024 (12) TMI 228 - NFRA - Companies Law

Professional misconduct - Legality of the appointment of branch auditors - Compliance with Standards on Auditing (SAs) - Maintenance of proper audit documentation - penalty and sanctions - Section 132(4) of the Companies Act 2013 - HELD THAT - It is established that CA Krishna Bihari Chaturvedi did not comply with the stipulations in the Chartered Accountants Act, 1949, ICAI Code of Ethics 2009 SAs. The subject matter assignment was accepted and executed as a Statutory Branch Audit. However, CA Krishna Bihari Chaturvedi was grossly negligent in performing his professional duties by not adhering to the requirements laid down by the relevant SAs, despite stating in his audit reports that he had complied with SAs. The following failures on the part of CA Krishna Bihari Chaturvedi as contained in the Articles of Charges in the SCNs are established. a) Failure to comply with the requirements of Clause 2 of Part 1 of Second Schedule to Chartered Accountants Act, 1949 which states a chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he- certifies or submits in his name, or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another chartered accountant in practice , b) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties. c) Failure to obtain sufficient information which is necessary for the expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion. Thus, it is found that CA Krishna Bihari 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 as amounting to professional misconduct. Penalties 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 - despite being a qualified professional, CA Krishna Bihari A Chaturvedi has not adhered to the Standards on Auditing and provisions of the law. Considering the fact that professional misconducts have been proved and 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 proceeded to order the following sanctions i. Imposition of a monetary penalty of 1 Lakh upon CA Krishna Bihari Chaturvedi; ii. CA Krishna Bihari 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. Legality of the appointment of branch auditors.
2. Compliance with Standards on Auditing (SAs).
3. Maintenance of proper audit documentation.
4. Professional misconduct and negligence.
5. Imposition of penalties and sanctions.

Detailed Analysis:

1. Legality of the Appointment of Branch Auditors:

The National Financial Reporting Authority (NFRA) found that the appointment of 33 branch auditors, including CA Krishna Bihari Chaturvedi, was not approved at the Annual General Meeting (AGM) of Dewan Housing Finance Corporation Limited (DHFL) as required by the Companies Act, 2013. Despite this, the audit firm accepted the appointment, and CA Krishna Bihari Chaturvedi issued an "Independent Branch Auditor's Report" portraying himself as the Branch Statutory Auditor. This acceptance of a legally invalid appointment violated the provisions of the Chartered Accountants Act, 1949.

2. Compliance with Standards on Auditing (SAs):

NFRA's investigation revealed non-compliance with various Standards on Auditing (SAs) by CA Krishna Bihari Chaturvedi. The audit documentation did not record the nature, timing, and extent of audit procedures performed, nor the results and conclusions reached. There was no evidence of compliance with SA 220, SA 230, SA 500, SA 700, and other relevant standards. The absence of proper audit documentation pointed towards professional misconduct.

3. Maintenance of Proper Audit Documentation:

The audit file lacked evidence of who performed the audit procedures, the nature and extent of these procedures, and the audit evidence obtained. There was no documentation of the engagement team, the duration of the audit, and the roles and responsibilities of the partners involved. This failure to maintain proper audit documentation was a significant lapse in the audit process.

4. Professional Misconduct and Negligence:

CA Krishna Bihari Chaturvedi was charged with professional misconduct for failing to exercise due diligence and being grossly negligent in his professional duties. He did not obtain sufficient information necessary for expressing an audit opinion, and his actions were found to be in violation of Clause 2 of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949. The NFRA concluded that these actions amounted to professional misconduct under Section 132(4) of the Companies Act, 2013.

5. Imposition of Penalties and Sanctions:

Given the established professional misconduct, NFRA imposed a monetary penalty of Rs. 1 lakh on CA Krishna Bihari Chaturvedi and debarred him 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 any company or body corporate. The sanctions were imposed considering the nature of violations, principles of proportionality, and the need for deterrence and improvement in knowledge gaps.

This order will become effective 30 days from the date of issue, reflecting NFRA's commitment to enforcing compliance with auditing standards and ensuring the quality of financial reporting.