2024 (12) TMI 230 - NFRA - Companies Law

Professional Misconduct - Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority Rules 2018 - Failure to plan the audit and understand the nature of the audited entity and its environment as per SA 300 and SA 315 - Failure to verify opening balances required as per SA 510 - Failure to report material misstatement due to non-provisioning of the ECL on trade receivables (Vikas had trade receivables of 171.46 crores in FY 2020-21 which was more than seven times the sales of 23.60 crores) and not charging depreciation on lease hold land and plant machinery - Failure to demonstrate sufficiency and appropriateness of audit work in several critical aspects of the audit of the Financial Statements i.e., determining materiality, failure to report on the entity's ability to continue as a going concern, failure to determine TCWG and communicate with them and failure to assemble the Audit File - Failure to carry out proper audit of Related Party Transactions ('RPTs' hereafter) of Vikas (trade payables to related parties were high as 93.09% of total trade payables and trade receivables from related parties were 68.38% of total trade receivable) - Failure to carry out external confirmation for Trade Receivables or any other alternative audit procedure to verify the audit assertions relating to Trade Receivables - Failure of the audit firm to demonstrate compliance with the requirement of the Standards on Auditing concerning the Engagement Quality Control Reviewer - penalty and sanctions. HELD THAT - The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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. The EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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. The EP committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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. The EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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. The EP committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the Chartered Accountant Act, 1949 which states that a Chartered Accountant 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. It is thus concluded that the charges of professional misconduct against the EP (CA Priyank Mittal) and the audit firm (M/s Singh Ajay Co.) enumerated in the SCN dated 18.01.2024 stand proved based on the analysis of the evidence in the Audit File, the Audit Report issued by auditors, the submissions made by auditors, the annual report of Vikas for the FY 2020-21 and other materials available on record. 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 proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law - The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements. As explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Priyank Mittal establish his professional misconduct. Considering the proven professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered I. Imposition of a monetary penalty of ₹3,00,000/- (Three Lakhs) upon the Audit Firm M/s Singh Ajay Co. II. Imposition of a monetary penalty of 2,00,000/- (Two Lakhs) upon CA Priyank Mittal. III. In addition, CA Priyank Mittal is debarred 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 the functions and activities of any company or body corporate.

Summary

Issues Involved:

1. Failure to plan the audit and understand the nature of the entity and its environment.
2. Failure to verify opening balances.
3. Failure to determine Materiality and Performance Materiality.
4. Failure to report non-provisioning of Expected Credit Loss (ECL).
5. Failure to report on the entity's ability to continue as a Going Concern.
6. Failure to evaluate arm's length pricing for Related Party Transactions.
7. Failure to report non-charging of depreciation on leasehold land and Plant & Machinery.
8. Failure to assemble the Audit File within 60 days of audit completion.
9. Failure to obtain sufficient audit evidence through external confirmations.
10. Failure to determine the appointment of Engagement Quality Control Reviewer (EQCR).
11. Failure to Determine and Communicate with Those Charged With Governance (TCWG).

Detailed Analysis:

1. Failure to Plan the Audit and Understand the Entity and Environment:
The auditors did not document an audit strategy or plan as required by SA 300. They failed to understand the nature of Vikas's business, its environment, and regulatory framework, violating SA 315. The EP admitted the lack of documentation and reliance on verbal discussions, which is insufficient under auditing standards.

2. Failure to Verify Opening Balances:
The auditors did not verify opening balances, a breach of SA 510. Discrepancies were found between closing balances of FY 2019-20 and opening balances of FY 2020-21. The EP's reliance on previous auditors without verification was deemed inadequate.

3. Failure to Determine Materiality and Performance Materiality:
The audit file lacked documentation on determining materiality and performance materiality, violating SA 320. The EP admitted to the absence of such documentation, confirming non-compliance with the standard.

4. Failure to Report Non-Provisioning of Expected Credit Loss:
The auditors did not report the lack of ECL provisioning on trade receivables, despite significant outstanding amounts, violating Ind AS 109. The EP failed to conduct necessary testing or report the non-compliance in the financial statements.

5. Failure to Report on Going Concern:
The company showed signs of financial distress, yet the auditors did not assess or report on its going concern status, violating SA 570. The EP admitted to not documenting the appropriateness of the going concern basis used by management.

6. Failure to Evaluate Related Party Transactions:
Significant related party transactions were not evaluated for arm's length pricing, violating SA 550. The EP failed to document related party relationships and transactions, despite their substantial impact on the financial statements.

7. Failure to Report Non-Charging of Depreciation:
The auditors did not report the non-charging of depreciation on leasehold land and plant & machinery, despite identifying it as a material weakness. This omission violated Ind AS 116 and Ind AS 16, as well as SA 705.

8. Failure to Assemble the Audit File:
The audit file was not assembled within 60 days of audit completion, violating SA 230 and SQC1. The EP admitted to incomplete documentation, citing personal difficulties, but this did not excuse the non-compliance.

9. Failure to Obtain Audit Evidence:
The auditors did not obtain external confirmations for significant balances, violating SA 505. The EP's reliance on management's responsibility for confirmations was insufficient, and no alternative procedures were documented.

10. Failure to Appoint EQCR:
The auditors did not appoint an EQCR for the audit of the listed company, violating SA 220. The EP provided no comment on this omission, which is a significant breach of quality control standards.

11. Failure to Communicate with TCWG:
No documentation was found regarding communication with TCWG, violating SA 260. The EP admitted to the lack of such communication, which is critical for addressing governance issues.

Penalty & Sanctions:

The EP and the audit firm were found guilty of professional misconduct. A monetary penalty of Rs. 2,00,000 was imposed on the EP, and Rs. 3,00,000 on the audit firm. Additionally, the EP is debarred for two years from auditing any company or body corporate. The order becomes effective 30 days after issuance.