2023 (12) TMI 320 - AT - Companies Law

Professional misconduct - Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants - Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018 - Violation of Principle of natural justice w.r.t. separate division of NFRA - Role of Statutory Auditors of the Company V/s Statutory Auditors of the Branches of the company - Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors - What is professional misconduct for member of ICAI and legal provisions - True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein - Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal - Excessive V/s adequate imposition of penalties on Appellants, herein - Can automatic stay is triggered on deposit of 10% of penalty and appeal is made before NCLAT. Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants - HELD THAT - After going through provision of Chartered Accountant Act, 1949 and Companies Act, 2013 it becomes clear that disciplinary jurisdiction over the Chartered Accountants remain with both the ICAI and NFRA on concurrent basis. However, on carefully reading it reveals that NFRA has superior and overriding powers in matters relating to professional misconduct of the Chartered Accountants in terms of Section 132 of Companies Act, 2013 - On a pointed query to the Appellants to confirm our understanding, the Learned Counsel for the Appellant confirmed that both the ICAI and NFRA have jurisdiction over Chartered Accountant Act, 1949 - it is observed that for all matters, by default, ICAI has disciplinary jurisdiction over Chartered Accountant. However, it is required to be clearly understood that in term of Companies Act, 2013 and NFRA Rules, 2018 over important and serious matters especially involving large alleged accounting or financial frauds, or matters of public interest, etc., NFRA suo-moto can initiate investigation or take for investigating and ICAI will cease to exercise such disciplinary jurisdiction - NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters as stipulated in Section 132 of Companies Act, 2013. Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018 - HELD THAT - After taking into consideration the background for forming NFRA, the judgment of the Apex Court, proven scams, need to restore shaken confidence of public and investors at large and prevent any adverse impact on Indian economy, it is held that NFRA has clear and required retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants for period prior to formation of NFRA or prior to coming into effect relevant portion of Section 132 of Companies Act, 2013. Violation of Principle of natural justice w.r.t. separate division of NFRA - HELD THAT - Prior to amendment in Rule 2(g) of NFRA Rules 2018, the division was not defined but Ministry of Corporate Affairs vide amendment dated 13.11.2018 on NFRA Rule, 2018 specified as to what constitute division under Rule 2(g). We note that the Respondent used the division as stipulated in the Companies Act, 2013 and NFRA Rules, 2018, hence there has been no violation of principles of natural justice. This fact was also fairly conceded by the Appellant also during final stage of hearing. Role of Statutory Auditors of the Company V/s Statutory Auditors of the Branches of the company - HELD THAT - The role of branch auditor, though limited primarily to the branch, however, is critical for overall audit of the company and the Auditors of the Branch cannot absolve his responsibilities - the fact cannot be overlooked that the allegations of fraud involving Rs. 31,000 Crores by the DHFL including banking fraud of about 3,700 Crores by Directors of DHFL happened and the Auditors clearly failed in their duties. Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors - HELD THAT - According to Section 143 (9) of the Companies Act, 2013 every auditor shall comply with auditing standard. Section 143 (10) of Companies Act, 2013 further empowers Central Government to prescribe the Standards of Auditing (SAs) as recommended by ICAI in consultation and after examination of the recommendation made by NFRA. As per the proviso to Section 143 (10) until any auditing standard are notified, any standard or standards of auditing specified by ICAI shall be deemed to be auditing standard - the Accounting Standards and Auditing Standards have been defined in the Companies Act, 2013 and both sets of standards are to be mandatorily followed by all stakeholders including the companies and the Chartered Accountants. Thus, the Appellants as Auditors were duty bound to follow these standards which they alleged to have been breached in respect of SA 210, SA 230, SA 315, SA 320, SA 330, SA 700 along with few other paragraphs of other SAs and Section 143(8) of the Companies Act, 2013 - the SAs are mandatory and not as advisory or a guidance note to auditors. What is professional misconduct for member of ICAI and legal provisions - HELD THAT - There is no bar on ICAI or NFRA to restrict investigation of professional misconduct covered only under Section 22 of the Chartered Accountants Act, 1949. The powers are far more and wider and any conduct which makes auditor of unbecoming of such profession will make him liable for suitable investigation and if found guilty may face punishment as per law - NFRA derives the power regarding disciplinary action on professional or other misconduct of the members of ICAI under Section 132 (4) (c) of the Companies Act, 2013 - NFRA has far more powers and authority for professional misconduct of members of ICAI in comparison to powers and authority of ICAI itself. True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein - HELD THAT - Standards on Quality Control (SQC) are for ensuring quality by firms that performs audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. SQC requires that the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards, regulatory, legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances. SQC is for enhancing the quality of audit. Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal - HELD THAT - Violation of Code of Ethic will hold the Auditor to be liable for the penalty as stipulated in Section 132 of the Companies Act, 2013 - It is clear from ICAI Code of Ethics, 2009 that it is responsibility of the auditors to ascertain and ensure compliance with the provision of law is applicable and therefore, the Respondent has correctly pointed out that it is incumbent on the part of Auditors to verify the relevant record of the company to ascertain whether the company has complied with the provisions regarding appointment and other relevant issues rather than accepting the statements of the company that they have complied with - It is undisputed fact that the Appellants themselves did not verify if DHFL followed correct procedures for appointment of Branch Auditors before the Appellants accepted the same. The submissions of the Appellants are therefore not convincing. Excessive V/s adequate imposition of penalties on Appellants, herein - HELD THAT - NFRA applied the principle of proportionality and imposed minimal permissible penalty i.e., a monetary fine of Rs. 100,000 and the Appellants have been barred from practicing for a period of one year which is 10% of max. penalty permissible - The need to deter fraud or collusive behaviour and reckless behaviour of the Auditors and repercussions of negligent audits are quite evident - the penalty as imposed by NFRA on all four Appellants were imposed as deterrent, perhaps keeping in mind all facts, including limited role as branch auditors. This cannot be considered excessive after all; it is fact that there has been fraud in DHFL of Rs. 31,000 Crores and Auditors can t pretend to be ignorant of what was happening. Can automatic stay is triggered on deposit of 10% of penalty and appeal is made before NCLAT - HELD THAT - This Appellate Tribunal observes that the averments of the Appellants regarding interpretation of Rule 11 12 of NFRA Rules, 2018 are not correct as this Appellate Tribunal has discussed at length the interpretation of Rule 11 12 of NFRA Rules, 2018 and clarified that mere filing of appeal does not affect the order on debarment with respect to compliance of Rule 12. Final Conclusions - It is of utmost importance that Auditors realise their responsibilities which is necessary not only to the company but also to the public. In view thereof, giving effect to the Impugned Orders which highlights the professional misconduct and other misconduct on the part of the appellant vis- -vis a public listed company become quintessential so as to make public aware and enable them to make informed and sound financial decisions and investments. Any deviation to this will only result is catastrophic effect on economy of the nation and cause immense prejudice and harm to the public, shareholders and various stakeholders such as banks, lenders, and creditors. NFRA, as an independent audit regulator has been entrusted by the Parliament after great debate for protecting public interest including of the creditors by exercising effective oversight over accounting and auditing functions. There are no error in the Impugned Orders of NFRA as challenged - appeal dismissed.

Summary

Issues Involved:
1. Role of NFRA vs. ICAI on disciplinary matters of Chartered Accountants.
2. Retrospective or prospective applicability of provisions under Section 132 of Companies Act, 2013 and NFRA Rules, 2018.
3. Violation of principles of natural justice concerning separate division of NFRA.
4. Role of Statutory Auditors vs. Branch Auditors.
5. Mandatory nature of Standards of Auditing (SAs).
6. Definition and scope of professional misconduct for ICAI members.
7. Analysis of alleged violations of Standards of Auditing by the Appellants.
8. Violation of the Code of Ethics issued by ICAI.
9. Adequacy of penalties imposed on the Appellants.
10. Automatic stay on penalties upon appeal and deposit of 10% of the penalty.

Summary:

Issue No. (I) Role of NFRA vs. ICAI on disciplinary matters of Chartered Accountants:
NFRA has superior and overriding powers over ICAI in matters relating to professional misconduct of Chartered Accountants as stipulated in Section 132 of the Companies Act, 2013. NFRA's jurisdiction includes monitoring compliance with accounting and auditing standards and investigating professional misconduct.

Issue No. (II) Retrospective or prospective applicability of provisions under Section 132 of Companies Act, 2013 and NFRA Rules, 2018:
NFRA has clear and required retrospective jurisdiction over alleged offenses by Chartered Accountants for periods prior to its formation or the coming into effect of relevant portions of Section 132 of the Companies Act, 2013. This is supported by legal precedents that allow retrospective application for procedural laws and changes in forum.

Issue No. (III) Violation of principles of natural justice concerning separate division of NFRA:
NFRA has complied with the principles of natural justice, and the necessary divisions were constituted as per Rule 2(g) of NFRA Rules, 2018. The Appellants' arguments on this issue were found to be without merit.

Issue No. (IV) Role of Statutory Auditors vs. Branch Auditors:
Branch Auditors have specific responsibilities for auditing branch accounts, but their work significantly impacts the overall audit of the company. Both Statutory Auditors and Branch Auditors are required to comply with Standards of Auditing (SAs) and other relevant standards.

Issue No. (V) Mandatory nature of Standards of Auditing (SAs):
Standards of Auditing (SAs) are mandatory and not merely advisory or guidance notes. Section 143(9) of the Companies Act, 2013 requires every auditor to comply with these standards.

Issue No. (VI) Definition and scope of professional misconduct for ICAI members:
Professional misconduct is defined under Section 22 of the Chartered Accountants Act, 1949, and includes acts or omissions listed in the schedules to the Act. NFRA has the authority to investigate and penalize such misconduct.

Issue No. (VII) Analysis of alleged violations of Standards of Auditing by the Appellants:
The Appellants were found guilty of violating several SAs, including SA 200, SA 210, SA 230, SA 300, SA 315, SA 320, SA 330, SA 450, SA 500, SA 520, SA 530, and SA 700. These violations were due to inadequate audit documentation, failure to assess risks, and non-compliance with audit procedures.

Issue No. (VIII) Violation of the Code of Ethics issued by ICAI:
The Appellants failed to ensure compliance with the provisions of Sections 224, 224A, and 225 of the Companies Act, 1956, before accepting their appointment. This was a violation of the ICAI Code of Ethics, which requires auditors to verify compliance with legal requirements.

Issue No. (IX) Adequacy of penalties imposed on the Appellants:
The penalties imposed by NFRA, including a monetary fine of Rs. 1,00,000 and debarment for one year, were found to be proportionate and not excessive. These penalties serve as a deterrent to prevent future misconduct by auditors.

Issue No. (X) Automatic stay on penalties upon appeal and deposit of 10% of the penalty:
The filing of an appeal and deposit of 10% of the penalty does not automatically stay the order of debarment. The stay can only be granted by the Appellate Tribunal upon consideration of the merits of the case.

Final Conclusion:
All four appeals were dismissed, and the penalties imposed by NFRA were upheld. The Appellants were found guilty of professional misconduct and other violations, and the penalties were deemed appropriate and proportionate.