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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 ..... sented 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. Not reporting non-compliance with the format of Financial Statements - HELD THAT:- In respect of Depreciation, the EP explained that it is an age-old practice to give the depreciation schedule as given by the Company and has attached the financial statements of a few companies to substantiate his explanation - The explanation given by the EP cannot be accepted as Schedule III of the Companies Act, 2013 clearly provides that the corresponding amounts for the previous reporting period need to be given for all items in the Financial Statements including notes. Further, a wrong practice does not become Iegitimate just because it is being followed by other companies and not being reported by other auditors. Other charges showing lack of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 - Thus, the auditor is duty bound to examine and ascertain the integrity of Financial Statements of such entities 10 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. All these show a collective lack of due diligence in the audit and gross negligence specifically relating to incorrect valuation of foreign currency loans and failure to report incorrect reporting of assets on Iease. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy liability of n 1.83 Crore at the closing rates as on the dates of financial statements viz., 31.03.2015 and 31.03.2016, which was in non-compliance to AS 11; showing assets given on finance lease of Rs.81 Crore even though the lease agreements had become null and void and the assets had turned into NPA 1 , not showing several items as per the format given in Schedule III to the Companies Act, 2013; making references to the Companies Act, 1956, in place of Companies Act, 2013 which was the applicable law; showing two different values of Earning Per Share (EPS) in the same financial statements; and other omissions in the notes to the financial statements. These omissions and commissions have not been duly reported by EP in the Independent Auditor's Report. The EP has not even determined the materiality and performance materiality for the Statutory Audit. 6. This Order establishes that the EP failed to report the Company s non-compliance with Accounting Standards as well as with the format of Financial Statements prescribed by the Companies Act, 2013 and that he did not comply ,with Standards on Auditing ('SA' hereafter) relevant to the audit of the Company. 7. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Companies Act, 2013 and the Accounting Standards ( AS , hereafter) notified under the Companies (Accounting Standards) Rules, 2006. 12. M/s G. Basu Co. having Firm Registration No. 301174E were the Statutory Auditors for Nicco for the FY 2015-16 and CA Gautam Guha was the Engagement Partner on behalf of the Audit Firm. To examine the case, the EP was requested on 08.12.2021, to submit the Audit File and SQC1 2 Policy of the Audit Firm. In response, the EP furnished the audit file along with SQC1 Policy followed by the Audit Firm vide email dated 30.12.2021. Subsequently, vide letter dated 18.02.2022, the non-compliances observed by the FRRB of ICAI in the financial statements of the company were sent to EP for clarification/ explanation on each of the issues, which were responded to by the EP on 14.03.2022. 13. After examination of the Audit File and other materials available on record, a prima facie case of professional misconduct on the part of EP was found and accordingly a Show Cause Notice under Section 132(4)(c) of the Companies Act, 2013 and Rule 11 of the National Financial Reporting Authority Rules, 2018 (NFRA Rules 2018, hereafter) was issued to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. These loans were more than the size of the balance sheet in FY 2015-16 (Rs.8.29 Crores 4 ) and in FY 2014-15 (Rs 9.24 Crores 5 ) and were hence, material. 18. In response, EP had stated that the impact of the non-consideration of foreign currency loans was not material and hence did not require disclosure/qualification as per his professional judgement. He has stated that In exercise of the professional judgment with particular reference to the auditee, the undersigned has benchmarked materiality for over/under statement of liabilities or assets or income/expense slippage at 1% of total value of assets and 1% of total expenses respectively in statement of profit and loss . He also stated that the measurement of foreign currency loans at the closing date would have increased the liability of the company, which would have misled the stakeholders as the Company was already in negotiations with the lender for a one-time settlement. 19. In his reply dated 05.12.2022, the EP stated that the forex loan had become non- performing; that the lender IFC, Washington had filed a suit which was pending and an out of court settlement for a much lower amount was under process and the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of currency exchange rate, estimated by EP to be Rs.70 lakh (approx.), was 8.5% of the total assets (Rs.8.29 Crores) of the Company, which was above the acceptable materiality threshold of 1-2% of total assets of a loss- making company. It would also have increased the loss of the company by over 7% from Rs.9.58 Crore to Rs.10.28 Crore, which is significant. 21. Since the foreign currency loan, which was material as per the balance sheet size, has not been correctly translated at the closing rate and there are no circumstances justifying use of any rate other than the closing rate, the charges that the FP did not report non- compliance by the Company with the requirements of AS 11 stands proven. C.2 Incorrect accounting treatment of Assets given on Lease 22. The EP was charged with not reporting the improper accounting of assets given on finance lease. In Note 2.8 on Tangible Assets in the Financial Statements for FY 2015-16, the company wrongly presented the Assets of Rs.21.81 Crores given on Finance Lease under the Schedule of Tangible Assets of 5.69 Crores. This was identified as non-compliance of Para 26 of AS 19 6 , which states that the lessor should recognize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s charged with not reporting the same: (a) non-disclosure of breakup of Trade Receivables of = 2.95 Crore into outstanding amount of more than 6 months and less than 6 months, as required by Note 6P of General Instructions for preparation of Balance Sheet given in Part 1 of the Division I, Schedule III to the Companies Act, 2013. (b) not reporting that the depreciation schedule does not mention the adjustments/additions/deductions in the Gross Block and depreciation for the previous year 2014-15, which was not in compliance with the requirements of Schedule III to the Companies Act, 2013. 26. The EP stated that the entire trade receivables were outstanding for more than 6 months, being brought forward balances from previous years and that the omission of separate disclosure for amounts outstanding for more than 6 months does not mislead the users. 27. The explanation given by EP in respect of trade receivables cannot be accepted because there is no such disclosure in the financial statements. It is possible for the amounts of trade receivables for FY 2014-15 and FY 2015-16 to be same, but with different composition. Therefore, the Company should have followed the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit file submitted earlier by the EP. This is in non-compliance with SA 450 . The EP has accepted the error and clarified that it was a typographical omission, and the correct EPS is 2 (-)1.16. Even though the auditor has accepted the mistake, he has not exercised due diligence in not noticing such glaring typographical error. 33. The EP was charged with not reporting the omission of Note no. 2.3(ix), 2.3(x) and 2.3(xi) in the financial statements of the Company. In the Financial Statements for 2015-16, Note no. 2.3(viii) is followed by Note no. 2.3(xii) in both the printed and signed copy of the Financial Statements. In his first response letter dated 28.10.2022, the EP reiterated that the said Notes were available in their signed copy and were inadvertently missed later on. However, in the second response letter dated 05.12.2022, the EP accepted the error and submitted that it was a typographical error. 34, We observe that while the charges in paras 30 to para 33 may not be material misstatement but signal lack of due diligence on the part of the EP. Lack of due diligence is a professional misconduct under Clause (7) of Part 1 of Second Schedule of Chartered Accountants A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Articles of Charges in the SCN stand established: (a) Failure to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity as CA Gautam Guha failed to disclose in his report the material non-compliances the company made regarding wrong accounting of foreign currency loans and assets given on Finance Lease. (As per Section 22 and Clause 5 of Part I of the Second Schedule to the CAs Act), (b) Failure to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity as CA Gautam Guha failed to disclose in his report the material misstatements made by the Company regarding wrong accounting of foreign currency loans and assets given on Finance Lease. (As per Section 22 und Clause 6 of Part | of the Second Schedule to the CAs Act), (c) 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 part C above. (As per Section 22 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort several non-compliances by the Company with Accounting Standards in preparing its financial statements. 41. All these show a collective lack of due diligence in the audit and gross negligence specifically relating to incorrect valuation of foreign currency loans and failure to report incorrect reporting of assets on Iease. 42. Considering the fact that professional misconducts have been proved and considering the nature of violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order imposition of a monetary penalty of Rupees One Lakh (Rs.1,00,000) upon CA Gautam Guha. 43. This Order will become effective after 30 days from the date of its issue. ------------------------------------ Foot Notes 1 Non-Performing Assets 2 Refer Para 7 and 8 of Standards on Quality Control Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements 3 AS 11, The Effects of Changes in Foreign Exchange Rates. Para 11(a) of AS 11 provides that foreign currency monetary items should be reported using the closing rate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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