2023 (11) TMI 1173 - NFRA - Companies Law

Professional Misconduct - Chartered Accountant (CA) - Failure to report non-consolidation of subsidiary - Failure to prepare audit documentation - Failure to report issues related to disclosure of Credit Risk Exposure - Failure to plan the audit of Financial Statements - Failure to perform Analytical Procedures - Failure to determine Materiality - Failure to perform risk assessment procedures and response to such risks - Failure to obtain Sufficient Appropriate Audit Evidence (SAAE) - Failure to prepare documentation regarding Auditor s responsibilities relating to fraud in an Audit of Financial Statements - Failure to communicate with Those Charged with Governance (TCWG) - Failure to report non-disclosure of Related Party Loans on gross basis - Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 - Failure to report full particulars of loan to Related Party - Failure to report non-disclosure of Material Information relating to pledge of fixed deposits - Penalty and Sanctions. Failure to report non-consolidation of subsidiary - HELD THAT - In the qualified opinion by the EP, when there was sufficient basis for an adverse opinion, was without due diligence and without obtaining sufficient appropriate audit evidence, and thus the EP failed to comply with Para 8 of SA 705 - the EP too during personal hearing has acknowledged this lapse. Failure to prepare audit documentation - HELD THAT - The Executive Counsel to the Financial Reporting Council (FRC), the UK Audit Regulator, in the matter pertaining to Deloitte LLP and John Charlton in the audit of Mitie Group plc. for the year ended 31 March 2016, imposed a financial sanction of Two Million Pounds, a published statement in the form of severe reprimand against Deloitte and a financial sanction of 65,000 Pounds and a published statement in the form of a severe reprimand against Charlton besides other things, for breach of ISA 230 as they failed to adequately document the audit work papers. Failure to report issues related to disclosure of Credit Risk Exposure - HELD THAT - There is no evidence in the Audit File of the Letter of Credit stated as security for the secured Trade Receivables. There is no evidence of receipts from M/s. Tecnimont after 31.03.2017 and no ageing analysis of the Trade Receivables performed by the EP. In the absence of such evidence, the reply of the EP seems an afterthought and is not acceptable. It is evident that the EP s conclusion about the credit risk being low was not based on sound documented analysis. In light of the above, we find that the EP was negligent in not reporting the non-disclosure of trade receivables in accordance with Para 35M and 35N of Ind AS 107, not obtaining external confirmation as per SA 505 and not exercising due care in the audit of Trade Receivables. Failure to plan the audit of Financial Statements - HELD THAT - Failure to make an appropriate audit plan has been viewed seriously by other regulators as well. For example, PCAOB, the US Regulator, charged L.L. Bradford Company, LLC (the Firm ) for its failure to develop an appropriate audit plan for the audit of Web XU Inc.'s ( WebXU ) and concluded that the the Firm violated PCAOB rules and auditing standards with respect to an audit and a quarterly review of one issuer audit client. Specifically, the Firm in conducting its audit of the financial statements of WebXU for the year ended December 31, 2011, failed to properly assess the risks of material misstatement. As a result, the Firm failed to properly identify significant risks in connection with the 2011 WebXU audit. The Firm also failed to properly establish an overall strategy for the audit and develop an audit plan that included planned risk assessment procedures and planned responses to the risks of material misstatement. Failure to perform Analytical Procedures - HELD THAT - It is evident that the Audit File does not evidence any analytical procedures performed, which proves that the EP failed to design and perform analytical procedures and enquire with the management regarding fluctuations in the figures from previous FY - It is concluded that the EP has violated Para 3(b) and Para 6 of SA 520. Failure to determine Materiality - HELD THAT - The EP s assertion that nothing has been set out to indicate or prove that alleged misstatements have significantly impacted the usability of Financial Statements is false and misleading. Examination of the Audit File revealed that EP did not even determine materiality or performance materiality in the audit of Financial Statements of MIIL - it is emphasised that materiality is one of the most important concepts in the audit of Financial Statements. Where material information is omitted or misstated, the Financial Statements will not be in compliance with the requirements of the SAs and therefore of the Law as Section 143(9) of the Companies Act, 2013 requires the auditors to comply with the SAs - As there is no working paper in the Audit File evidencing determination of materiality by the EP, it is concluded that the EP has failed to adhere to the mandatory requirements of determining Materiality in accordance with SA 320 and falsely stated in his report that he had conducted the audit in accordance with the SAs specified under Section 143(10) of the Act. Failure to perform risk assessment procedures and response to such risks - HELD THAT - It is observed from the Audit File and the reply submitted, that the EP has failed to identify and document the applicable financial reporting framework where he is found wanting with non-identification of Ind AS 101, an Ind AS having most critical impact on the financial statements for the year ending 31.03.2017 under investigation - it is noted that a number of errors in the financial statements and non-compliances of Ind ASs by the Company, which the EP has failed to identify and appropriately modify his audit report. As a result, there are a number of fundamental fatal lapses in the audit work which render the audit of financial statements for FY 2016-17 unreliable. Failure to obtain Sufficient Appropriate Audit Evidence (SAAE) - HELD THAT - There is no evidence at all of work done in this fundamental audit area. In the light of the EP s failure to adhere to the requirements of SAs and failure to report non-compliance of Ind AS and Companies Act, 2013 provisions, it is concluded that the EP has been grossly negligent in his professional duties and has failed to obtain SAAE in critical areas of audit mentioned above, thereby violating SA 200. Failure to prepare documentation regarding Auditor s responsibilities relating to fraud in an Audit of Financial Statements - HELD THAT - There is no evidence in the Audit File that the EP had identified and assessed the risks of material misstatement to comply with the requirements of Para 16 of SA 240 where Auditor is required to perform the procedures as mentioned in Paragraphs 17 to 24 of SA 240, to obtain information for use in identifying the risks of material misstatement due to fraud. Further, the EP failed to evaluate whether the information obtained from other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present and therefore did not comply with Para 24 of SA 240 - it is nowhere documented in the Audit File whether EP had inquired from the company s staff in respect of internal control processes or observed the staff performing the controls. The reply is an afterthought to mislead NFRA and hide his deficiencies in conduct of audit. In the light of above, we conclude that the EP failed to comply with the requirements of Para 16 and 24 of SA 240. Failure to communicate with Those Charged with Governance (TCWG) - HELD THAT - EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG and consequently, failed to comply with the requirements of SA 260 and SA 265. Failure to report non-disclosure of Related Party Loans on gross basis - HELD THAT - combined reading of various prescriptions of Ind AS 24 in Para 18, Para 20, Para 21 and Para 24, shows that they require the entities to disclose Related Party Transactions (RPT) on gross basis, since the overarching objective of Ind AS 24 is to disclose information that is relevant to understand the effect on financial position as well as profit or loss of the entity. For example, outstanding receivables and payables to a related party, though arising from transactions in earlier years would affect the financial position or nature of its assets and liabilities. Further, disclosure of RPTs on a net basis would obscure the extent (volume) of quantitative effect of RPTs on the financial performance and cash flows of the entity, if they have been squared off or netted before the year end - it is found that the EP has erred by failing to exercise due professional care by not reporting such non-disclosure. Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 - HELD THAT - The EP has failed to address the non-disclosure in respect of MSME and explain its impact on the Financial Statements. The EP also failed to state his opinion on the Financial Statements, taking into account the inappropriate disclosure. In view of this, we conclude that the EP failed to report the non-disclosure of the amount of principal and interest outstanding as required under the Micro, Small and Medium Enterprises Development Act, 2006 during the year as per Schedule III of the Companies Act, 2013. Failure to report full particulars of loan to Related Party - HELD THAT - As Related Party Transactions are often prone to misuse, including diversion of funds and therefore a material area of audit and subject to stricter legal scrutiny, the EP was required to be more cautious and exercise professional skepticism in this sensitive area of audit - It is concluded that this is a clear case of afterthought, and the EP has failed in his attempt to cover up for his nonchalant attitude by not performing the duties of a statutory auditor of a PIE. Failure to report non-disclosure of Material Information relating to pledge of fixed deposits - HELD THAT - EP submits that he cannot be held responsible when both external and internal audit evidence gathered reflected that there was no lien on the fixed deposit - In view of the explanation and workpapers submitted by the EP, the charge is dropped. 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 - Considering the fact that professional misconducts have been proved and considering nature of violations and principles of proportionalities, in exercise of powers vested under Section 132(4) (c) of the Companies Act,2013, it is ordered that (a) Imposition of monetary penalty of Rs.5,00,000 (Rupees Five Lakhs Only) upon CA Nilesh Chheda. (b) In addition, CA Nilesh Chheda is debarred for 5 (Five) 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 report non-consolidation of subsidiary.
2. Failure to prepare audit documentation.
3. Failure to report issues related to disclosure of Credit Risk Exposure.
4. Failure to plan the audit of Financial Statements.
5. Failure to perform Analytical Procedures.
6. Failure to determine Materiality.
7. Failure to perform risk assessment procedures and response to such risks.
8. Failure to obtain Sufficient Appropriate Audit Evidence (SAAE).
9. Failure to prepare documentation regarding Auditor's responsibilities relating to fraud in an Audit of Financial Statements.
10. Failure to communicate with Those Charged with Governance (TCWG).
11. Failure to report non-disclosure of Related Party Loans on gross basis.
12. Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006.
13. Failure to report full particulars of loan to Related Party.
14. Failure to report non-disclosure of Material Information relating to pledge of fixed deposits.

Summary:

1. Failure to report non-consolidation of subsidiary:
The Engagement Partner (EP) issued a qualified opinion on the Consolidated Financial Statements (CFS) due to the non-consolidation of a subsidiary, Merino Shelters Private Limited (MSPL). Despite the material and pervasive impact of this non-consolidation, the EP did not issue an adverse opinion as required by SA 705. The EP admitted during the personal hearing that an adverse opinion should have been given.

2. Failure to prepare audit documentation:
The EP was charged with non-compliance with SA 230 for failing to prepare sufficient audit documentation. The audit file contained anomalies and evidence of tampering, including documents referring to periods beyond the audit scope. The EP's documentation was insufficient to enable an experienced auditor to understand the nature, timing, and extent of audit procedures performed.

3. Failure to report issues related to disclosure of Credit Risk Exposure:
The EP failed to report the non-disclosure of required information regarding the credit risk profile of Trade Receivables as per Ind AS 107. There was no evidence in the audit file of obtaining independent external confirmations for Trade Receivables, which constituted a material percentage of total assets, violating SA 505.

4. Failure to plan the audit of Financial Statements:
The EP did not establish an overall audit strategy or document the audit plan as required by SA 300. The audit work papers lacked evidence of planning, and some documents were found to be tampered with or created after the issuance of the Show Cause Notice (SCN).

5. Failure to perform Analytical Procedures:
The EP failed to design and perform analytical procedures as required by SA 520. There was no evidence in the audit file of any analytical procedures performed to explain substantial changes in key financial parameters compared to the previous financial year.

6. Failure to determine Materiality:
The EP did not determine materiality for the Financial Statements as a whole or document the amounts and factors considered in determining materiality, violating SA 320. The audit file lacked evidence of materiality determination.

7. Failure to perform risk assessment procedures and response to such risks:
The EP failed to perform risk assessment procedures and document the identification and assessment of risks of material misstatement (RoMM) as required by SA 315 and SA 330. There was no evidence in the audit file of any risk assessment procedures performed.

8. Failure to obtain Sufficient Appropriate Audit Evidence (SAAE):
The EP did not obtain SAAE in critical areas of audit, including non-consolidation of a material subsidiary, credit risk evaluation of Trade Receivables, and risk assessment procedures, violating SA 200. The EP admitted during the personal hearing that he failed to obtain necessary audit evidence.

9. Failure to prepare documentation regarding Auditor's responsibilities relating to fraud in an Audit of Financial Statements:
The EP failed to comply with SA 240 by not performing procedures to identify the risks of material misstatement due to fraud. There was no evidence in the audit file of inquiries made with the company's staff or evaluation of fraud risk factors.

10. Failure to communicate with Those Charged with Governance (TCWG):
The EP did not communicate with TCWG about the responsibilities as an auditor or maintain documentation of such communication, violating SA 260 and SA 265. The audit file lacked evidence of any communication with TCWG.

11. Failure to report non-disclosure of Related Party Loans on gross basis:
The EP failed to report the non-disclosure of related party loans on a gross basis as required by Ind AS 24, violating SA 550. The EP's understanding of the disclosure requirements was erroneous.

12. Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006:
The EP did not address the non-disclosure of information related to MSMEs in the audit report, violating the requirements of Schedule III of the Companies Act, 2013. The EP failed to assess the materiality of the missing disclosure.

13. Failure to report full particulars of loan to Related Party:
The EP did not report the non-disclosure of the rationale and purpose of loan transactions as required by Section 186(4) of the Companies Act, 2013. The EP's assertion that the company was exempt from disclosure requirements was not supported by evidence.

14. Failure to report non-disclosure of Material Information relating to pledge of fixed deposits:
The charge against the EP for failing to report non-disclosure of material information regarding a lien on fixed deposits was dropped based on the EP's explanation and workpapers.

Penalty and Sanctions:
The EP, CA Nilesh Chheda, was found guilty of professional misconduct and was imposed a monetary penalty of Rs.5,00,000 (Rupees Five Lakhs Only). Additionally, CA Nilesh Chheda is debarred for 5 (Five) years 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.