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2025 (3) TMI 341 - NFRA - Companies LawProfessional Misconduct - Failure to comply with Companies (Audit and Auditors) Rules 2014 in timely reporting of fraud to the Central Government under Section 143(12) of the Companies Act 2013 in respect of the Corporate Loan Book (CLB) of Rs. 2, 036 crores - Failure to appropriately assess the risk of fraud and risk of management override of controls in RFL - Failure to document sufficient evidence regarding the audit procedures performed in the audit of the loan book of RFL - Failure in verifying the certainty of future taxable income against which the Deferred Tax Assets (DTA) of Rs. 495.63 crores were recognised in the books - failure to obtain sufficient appropriate evidence regarding impairment/diminution of such investment and failure to verify the interest income received on the investments - Failure to give an appropriate audit opinion in light of the cumulative impact of mis-statements which were material and pervasive - Failure to obtain sufficient appropriate audit evidence regarding the appropriateness completeness and accuracy of consolidation adjustments - penalty and sanctions. HELD THAT - The EP has committed professional misconduct as defined in Section 132(4) of the Companies Act read with Section 22 the Chartered Accountants Act 1949 (the CA Act) as amended from time to time as detailed below i. The Auditors committed professional misconduct of failure to report a material misstatement known to them to appear in a financial statement with which they are concerned in a professional capacity. (Refer Clause 6 of Part I of the Second Schedule of the CA Act). ii. The Auditors committed professional misconduct by failing 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. iii. The Auditors committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct of their professional duties. iv. The Auditors committed professional misconduct by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances. 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. 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 to facilitate its users. As detailed in this Order substantial deficiencies in the audit abdication of responsibility and inappropriate conclusions on the part of CA Neeraj Bansal establish his professional misconduct. The lack of documented evidence in the original Audit File severely compromises the credibility of the audit and the reliability of the Financial Statements. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality in exercise of powers under Section 132(4)(c) of the Companies Act 2013 order imposition of a monetary penalty of Rs. 5, 00, 000/- upon CA Neeraj Bansal. In addition CA Neeraj Bansal is also debarred for five (5) 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. Conclusion - The EP committed professional misconduct under Section 132(4) of the Companies Act and the Chartered Accountants Act 1949. The EP failed to report material misstatements obtain sufficient information for opinion expression exercise due diligence and invite attention to material departures from audit procedures. The court imposed a monetary penalty of Rs. 5, 00, 000 and debarred the EP for five years from being appointed as an auditor. Application disposed off.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in the judgment include:
ISSUE-WISE DETAILED ANALYSIS Delay in Reporting Fraud The EP was charged with delaying the filing of the ADT-4 report regarding fraud, as required under Rule 13 of the Companies (Audit and Auditors) Rules, 2014. Despite knowledge of irregularities in RFL's Corporate Loan Book (CLB) portfolio, the EP delayed reporting to the Audit Committee and filing the ADT-4 report. The EP argued that there was insufficient evidence to suspect fraud initially and that professional judgment was applied. However, the Court found the EP's delay unjustified, noting that the EP had knowledge of the issues from the previous auditor's report and the RBI's letter. The Court concluded that the EP was grossly negligent in complying with the reporting requirements. Risk Assessment The EP was charged with inadequate risk assessment procedures, failing to consider the RBI's concerns and the predecessor auditor's qualified opinion. The EP claimed that risk assessment was performed according to the Standards on Auditing, but the Court found contradictions in the documentation and lack of professional skepticism. The Court concluded that the EP failed to comply with SA 315 and SA 330. Audit of Loan Book The EP was charged with non-compliance with SA 200, SA 230, and SA 500 in auditing RFL's loan book, particularly regarding suspected fraud in the CLB portfolio. The EP claimed that enhanced procedures were applied, but the Court found contradictions in the documentation and lack of professional skepticism. The Court concluded that the EP failed to comply with the relevant standards. Recognition of Deferred Tax Assets (DTA) The EP was charged with failing to verify the certainty of future taxable income for recognizing DTA. The EP argued that the audit procedures were sufficient, but the Court found a lack of documented evidence and professional skepticism. The Court concluded that the EP failed to comply with SA 200, SA 230, SA 500, and SA 540. Audit of Investments The EP was charged with failing to verify the business rationale and impairment of investments, specifically in non-convertible debentures of OSPL. The EP argued that the investment was within business activities and that a provision was made, but the Court found a lack of professional skepticism and due diligence. The Court concluded that the EP failed to comply with SA 200, SA 240, and SA 500. Audit Opinion The EP was charged with issuing an inappropriate audit opinion, given the material and pervasive misstatements. The EP argued that the opinion was based on the audit findings, but the Court found that the misstatements warranted an adverse opinion. The Court concluded that the EP violated SA 705. Consolidation of Financial Statements The EP was charged with failing to obtain sufficient evidence regarding the consolidation of RFL's financial statements. The EP submitted additional documents, but the Court found them insufficient to demonstrate compliance with SA 500. The Court concluded that the EP failed to comply with the relevant standards. SIGNIFICANT HOLDINGS The Court found the EP guilty of professional misconduct, citing gross negligence and lack of due diligence in conducting the audit. The Court imposed a monetary penalty of Rs. 5,00,000 and debarred the EP from auditing for five years. The Court emphasized the importance of auditors adhering to standards to maintain public trust and the integrity of financial statements. The judgment underscores the necessity for auditors to exercise professional skepticism, document audit procedures comprehensively, and report fraud promptly. The Court's decision serves as a deterrent to future lapses and reinforces the accountability of auditors in upholding the integrity of the profession.
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