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TMI Blog2023 (8) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... les of Charges of Professional Misconduct E. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. Pursuant to the information received from the Ministry of Corporate Affairs, regarding irregularities observed, in the financial statements of Nicco for FY 2015-16, by the Financial Reporting Review Board ('FRRB', hereafter) of the ICAI, NFRA initiated investigation into the role of the Statutory Auditors. During FY 2015-16, the Company was listed on Bombay Stock Exchange ('BSE', hereafter). M/s G. Basu & Co. were the statutory auditors of Nicco and CA Gautam Guha was the EP for the statutory audit during FY 2015-16. 4. Based on the investigation into the issues raised in the FRRB report and a preliminary examination of the financial statements of Nicco and the Audit File submitted by the EP, it was observed that there was a prima facie case of professional misconduct and hence a Show Cause Notice was issued to the RP. 5. Our findings after considering the charges listed in the SCN and the replies of the EP, thereon, establish several failures of the EP in conduct of his statutory audit of Nicco. These relate to several deficiencies in the accounts of Nicco such as non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereunder, the Standards on Auditing (SA) including the Standards on Quality Control (SQC) and the Code of Ethics, violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Section 132(4)(c) of the Companies Act, 2013. 10. On receipt of information vide letter dated 05.11.2019 from Ministry of Corporate Affairs describing irregularities observed by the Financial Reporting Review Board of the Institute of Chartered Accountants of India in the Financial Statements of Nicco for FY 2015-16, the matter was taken up by NFRA for investigation into the role of the Statutory Auditor under Section 132(4) of the Companies Act, 2013. 11. During FY 2015-16, the equity shares of the company were listed on BSE Limited. As per Director's Report for FY 2015-16, during the year under review, the Company could not carry on any fund-based business, i.e., Leasing and Hire Purchase, due to cancellation of Certificate of Registration by Reserve Bank of India. However, efforts were made for recoveries from 'NPA/ written off parties.' The company was required to prepare its financial statements for FY 2015-16 in accordance with Schedule III and other applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2022. 15. The SCN also gave the EP an opportunity to be heard in person in accordance with Rule 11(5) of NFRA Rules 2018, but the EP did not avail of the opportunity. 16. Taking cognizance of all materials on record, including the written submissions made by the EP before and after issue of the SCN, this Order identifies the lapses in the Statutory Audit of Nicco for FY 2015-16. The main lapses on the part of the EP arc incorrect reporting of outstanding liability arising out of Foreign Currency Loan, incorrect accounting treatment of Assets given on Lease, not reporting the non-compliances with the format of Financial Statements and violations of Standards on Auditing. These charges are discussed in Part 'C' of the Order. C. LAPSES IN THE AUDIT C.1 Incorrect reporting of outstanding liability arising out of Foreign Currency Loan 17. The EP was charged with not reporting the non-compliance by the Company with requirements of AS 113 that foreign currency monetary items should be reported using the closing rate of exchange at the year end. The foreign currency loan of Rs.711.83 Crore outstanding as on 31.03.2015 and 31.03.2016 were valued at the same rate. These loans were mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptional circumstances justifying non-application of the closing rate as per para 11 (a) of AS 11. While it may be true that suits had been filed by the creditors (IFC, Washington) for recovery, it docs not imply that the company should not make appropriate disclosure of its liabilities and not translate the foreign currency liability at the closing rate as on the balance sheet date till the liability was reduced either through settlement or by a court order. The arguments advanced by the EP are therefore an afterthought as the Audit File has no evidence of his analysis of this position and that any decision for a reduction in liability had been taken. (c) The EP has stated that the accounting impact is below the benchmark considered for materiality. However, in the audit file submitted by the EP, there is no work paper evidencing the determination and application of materiality. (d) The outstanding foreign currency loan of the Company as on 31.03.2015 and 31.03.2016 is Rs.11.83 Crores, which is more than the total assets of the Company which stand at Rs.8.29 Crores in the balance sheet in FY 2015-16. (e) The impact of non-consideration of currency exchange rate, estimated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scope for doing the same." Further, in his reply dated 28.10.2022 and 05.12.2022 to NFRA, the EP has stated that all the lease agreements were null and void. The explanation given by the FP cannot be accepted as Assets given on finance lease have to be presented by the Lessor as Receivables as per para 26 of AS 19. However, they have been presented under Tangible Assets in Balance Sheet as on 31.3.2016, following the format given in Schedule III to the Companies Act, 2013. It is misleading and erroneous to present unpaid finance lease receivables as fixed assets because definition, recognition and measurement and disclosure requirements for fixed assets and lease receivables are completely different. Hence, the charge of incorrect accounting of Assets given on lease stands proven C.3 Not reporting non-compliance with the format of Financial Statements 25. The Company was required under Section 129(1) of the Companies Act, 20137 to prepare Financial Statements in the format provided in Division I of Schedule III to the Companies Act, 2013. The SCN identified the following non-compliances with the format and the EP was charged with not reporting the same: (a) non-disclosure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial statements of the Company even though the Companies Act, 1956 had been repealed by then and Companies Act, 2013 was applicable in this case. The EP has accepted the error and stated that it was an inadvertent typographical omission. 31. The EP was charged with not reporting the mismatch in the investment schedule in the financial statements of the Company. There is an error of Rs 12 Lakhs (approx.) as the total of quoted investments (Rs.6.50 Crore) and unquoted investments (Rs 4.03 Crore) does not match with the total of individual items of investments. The EP has clarified that the misstatement appeared due to a typographical/printing error and that there is no misstatement in the signed financial statements. 32. The EP was charged with certifying two different values of Earning Per Share (Basic & Diluted) in the same financial statements. In the Statement of Profit and Loss, the Earning (loss) Per Share (Basic & Diluted) is shown to be = (-)2.39, while in Note no. 2.30, the figure is given as 2(-)1.16. There is no evidence for the calculation of the correct figure for EPS in the Audit file submitted earlier by the EP. This is in non-compliance with SA 450°. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss the years by the EP, the amount of Materiality and Performance Materiality will depend upon the balance sheet numbers and need to be documented accordingly in the Audit File. There is not a single work paper in the audit file which states the determination of Materiality and Performance Materiality for FY 2015-16. The explanation given by the auditor is not accepted and we conclude that the charge is proven. D. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT 38. Given the above-mentioned actions and omissions, it is established that CA Gautam Guha did not comply with the stipulations in the CAs Act and showed gross negligence and lack of due diligence in the audit of M/s Nicco Uco Alliance Credit Limited. CA Gautam Guha has not ensured audit quality and was grossly negligent in 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 CA Gautam Guha as contained under the Articles of Charges in the SCN stand established: (a) Failure to disclose a material fact known to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law. Independent Auditors of Public Listed Companies serve a critical public function of enabling the users of Audited Financial Statements to take informed decisions. Absent a robust system of Auditing, Investors, Creditors and Other Users of Financial Statements would be handicapped and their work compromised. The best of systems fails if the professionals implementing the system do not perform their job. This could lead to a serious failure of the financial system which could ultimately result in a breakdown in trust and confidence of investors and the public at large. 40. Thus, the auditor is duty bound to examine and ascertain the integrity of Financial Statements of such entities10 in larger public interest. This is all the more important for a financial services entity, like Nicco that involve considerable public interest and public funds. The EP, in this case, has not carried out the audit as per the Standards on Auditing and failed to report several non-compliances by the Company with Accounting Standards in preparing its financial statements. 41. All th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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