2023 (10) TMI 240 - NFRA - Companies Law

Professional Misconduct - Acceptance of audit engagement without valid authorization and without complying with ethical requirements; and issuing an audit report in violation of the Act - Failure to comply with Standards on Auditing (SAs) - penalties and sanctions - HELD THAT - Given the actions and omissions it is established that CA Aabhas Tiwari 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 EP also did not ensure the audit quality. The EP was grossly negligent in performing his professional duties by not adhering to the requirements laid down by the relevant SAs. This has led to 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 BP Aabhas Tiwari as contained under the Articles of Charges in the SCN are established. a) Failure to exercise due diligence and ascertain from the audited Company whether the requirements of Sections 139 of the Act in respect of such appointment had been duly complied with as explained and proved in part C-1 above. (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 explained and proved in parts C-1 and C-11 above. (As per Section 22 and Clause 7 of Part I of the Second Schedule to the CAs Act); 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 because of the lapses and omissions as explained and proved in part C-11 above. (As per Section 22 and Clause 8 of Part I of the Second Schedule to the CAs Act); and d) Failure to invite attention to material departure from the generally accepted procedures of audit applicable to the circumstances of the audited Company because the EP certified in the report that the audit was done as per SAs mandated under section 143 of the Act and committed the lapses and omissions as explained and proved in part C-11 above. (As per Section 22 and Clause 9 of Part I of the Second Schedule to the CAs Act). 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. Considering the fact that the EP has admitted his mistake regarding the acceptance of the engagement and that professional misconduct has been proved and considering the nature of violations and principles of proportionality and keeping in mind the deterrence signalling value of the sanctions and time required for improvement in knowledge gaps we in the exercise of powers under Section 132(4)(c) of the Companies Act 2013 proceed to order the following sanctions i. Imposition of a monetary penalty of Rs. 100, 000 (One Lakh) upon CA Aabhas Tiwari; ii. CA Aabhas Tiwari is debarred for six months 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 Standards on Auditing (SAs).
3. Professional misconduct charges.
4. Penalty and sanctions.

Summary:

I. Acceptance of Audit Engagement without Valid Authorization:
The National Financial Reporting Authority (NFRA) investigated CA Aabhas Tiwari for his role as the Engagement Partner (EP) in the audit of six branches of Dewan Housing Finance Corporation Limited (DHFL) for the Financial Year 2017-18. NFRA found that the appointment of the 33 branch auditors, including CA Aabhas Tiwari, was not approved at the Annual General Meeting (AGM) of DHFL as required by the Companies Act, 2013. CA Aabhas Tiwari accepted the appointment and issued an "Independent Branch Auditor's Report" despite the lack of valid authorization, thereby violating the Chartered Accountants Act, 1949.

II. Non-Compliance with Standards on Auditing (SAs):
NFRA's investigation revealed that CA Aabhas Tiwari did not comply with the applicable Standards on Auditing (SAs) during the branch audit. Specific violations included:
- SA 210 (Agreeing the Terms of Audit Engagements): The EP failed to document the objective and scope of the audit as required.
- SA 230 (Audit Documentation): The EP's audit documentation did not provide evidence of the nature, timing, and extent of audit procedures performed.
- SA 700 (Forming an Opinion and Reporting on Financial Statements): The EP issued an unmodified opinion without obtaining reasonable assurance that the financial statements were free from material misstatement.
- Other SAs: Violations of SA 300 (Planning an Audit of Financial Statements), SA 315 (Identifying and Assessing the Risks of Material Misstatement), SA 320 (Materiality in Planning and Performing an Audit), SA 450 (Evaluation of Misstatements Identified during the Audit), SA 510 (Initial Audit Engagements - Opening Balances), SA 520 (Analytical Procedures), SA 530 (Audit Sampling), and SA 580 (Written Representations).

III. Professional Misconduct Charges:
The EP was charged with:
- Failure to exercise due diligence and ascertain compliance with Sections 139 of the Act.
- Gross negligence in the conduct of professional duties.
- Failure to obtain sufficient information necessary for the expression of an opinion.
- Failure to invite attention to material departures from generally accepted audit procedures.

IV. Penalty and Sanctions:
Based on the investigation, NFRA imposed the following sanctions on CA Aabhas Tiwari:
- A monetary penalty of Rs. 1,00,000/- (One Lakh).
- Debarment for six months 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.

This order will become effective after 30 days from the date of issue.