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TMI Blog2023 (8) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... Introduction & Background C. Lapses in the conduct of audit D. Article of Charges of Professional Misconduct by the EP E. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) against CA Shekhar Sharad, the Engagement Partner, for professional misconduct in statutory audit of BCL for FY 2017-18, pursuant to information received from Registrar of Companies ('ROC' hereafter), West Bengal vide letter dated 24.11.2020. M/s Shekhar Sharad & Co., the Statutory Auditor of BCL for FY 2017-18, had resigned within one month after the issuing a Qualified Independent Auditor's Report dated 28.05.2018. 4. BCL1 is a company dealing in the business of Cement Manufacturing and was listed on National Stock Exchange ('NSE' hereafter) and therefore falls under NFRA domain2 BCL was required to prepare its Financial Statements ('FS' hereafter) for the FY 2017-18 in accordance with Indian Accounting Standards ('Ind As' hereafter), as notified by Ministry of Corporate Affairs. 5. As is set out in this Order, the EP did not comply with some of the Standards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed u/s 132 (4) (c) of the Act. 10. A letter dated 24.11.2020 was received from Registrar of Companies (ROC), West Bengal regarding M/s Shekhar Sharad & Co., Statutory Auditor of BCL for FY 2017-18, had, after issuing the 'Qualified' Audit Opinion in its Independent Auditor's Report dated 28.05.2018, resigned within one month on the ground (as stated by him) that it was not possible for him to continue as Statutory Auditor due to reasons like ill health of his wife and shortage of qualified staff. NFRA took up the matter suo moto under Section 132 (4) and vide letter dated 21.12.2021, asked M/s Shekhar Sharad & Co., and the EP, to submit the Audit File along with other information within 30 days' time. The EP submitted the Audit File for FY 2017-18 on 23.02.2022. 11. The examination by NFRA showed that the EP had issued Qualified opinion on the matters mentioned below: a) Inability to comment on the correctness of Trade Receivables and its provisions and write-offs; b) Non-recognition of Interest Cost on the bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eporting of the same in the Independent Auditor's Report and Inconsistency in Audit Documentation, which have been discussed in Part 'C' of this Order. Part C C.1 Improper Assessment of Going Concern Basis 14. The EP was charged5 with improper assessment of the appropriateness of the use of Going Concern basis of accounting by BCL. For the FY 2017-18, BCL prepared the financial statements on going concern bas is, despite presence of following factors raising serious questions on its going concern status: a) BCL reported loss Rs 44.49 crores for the year ended 31.03.2018 and accumulated loss of Rs 102.97 crores, which resulted in erosion of its net worth to Rs (-)0.416 crores. b) BCL had a negative working capital i.e.(-) Rs 238.85 crores. c) BCL was highly debt ridden i.e., its Total Debt was 80.32% of its Total Assets. d) BCL was defaulting in payment of debts amounting Rs 233.09 crores. 15. The SCN noted that as per Para 6 of SA 5706 , the EP was required to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of the use of going concern assumption by the management in the preparation of the financial statements fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the projection of next 12 months was checked, but the documents regarding the same were not kept in the audit file. The auditor has also stated that his assessment of the going basis possibly lacked additional quantitative details and documentary support but he had concluded that: "due to closure of Asansol plant, clinker division and huge financial liabilities as well as erosion of net worth and negative NWC, going principle is doubtful". The EP added that he had gone through the bank correspondence file regarding OTS, but documents were not retained in the audit file due to its voluminous nature. The EP also stated that he had obtained unsigned copy of the MRL, and relied on the management assurance that signed MRL shall be submitted by the management to the EP and accordingly he signed audit report on 28.05.2018 after receiving signed copy of the MRL. 17. We observe that: a) Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. According to para 21 of SA 570, if in the auditor's judgment the management's use of the going con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of Matter (EOM) para in the audit report. Such treatment is not in conformity with not only the applicable provisions of SA 570, as explained in the foregoing discussion, but also with SA 7067 , according to which the Emphasis of Matter paragraph is used to draw the users' attention to a matter presented or disclosed in the financial statements provided the auditor would not be required to modify the opinion as a result of the matter (para 8 of SA 706). It is evident that the EP's use of the Emphasis of Matter to include the Going Concern basis, without determining if he needed to modify his opinion on this account, was in clear violation of SA 706. In light of the above, we conclude that the EP failed to comply with SA 230, SA 570, SA 705 and SA 706 in applying the prescribed audit procedures to evaluate BCL's assumption of the use of going concern basis for the preparation of its Financial Statements. C.2 lmproper reporting of Going Concern in Independent Auditor's Report 18. The EP was charged8 with improper reporting on the use of Going Concern basis of accounting by BCL. In the Independent Auditor's report for FY 2017-18, the EP had incorporated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn basis. 20. The EP stated that in his opinion, the doubt regarding going concern was not significant enough to consider the same as entirely inappropriate and accordingly he incorporated EOM for the same. He also acknowledged that proper interpretation of SA 570 by him could have resulted in issuing a qualified or adverse opinion rather than inclusion of EOM. He admitted that this was an error in making a professional judgement. 21. We have analysed in para 17 of this Order that the EP failed to comply with SA 570. We have already noted that as per Para 22 of SA 570, if adequate disclosure about the material uncertainty is made by the entity in its financial statement, the auditor shall express an unmodified opinion and the auditor's report shall include a separate section under the heading "Material Uncertainty Related to Going Concern". However, in terms of para 23 of SA 570, if adequate disclosure is not made and the auditor opines that the use of going concern is doubtful, the auditor is required to express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705. We find that the EP has failed to perform such analysis to meet the requirements o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned copy of MRL. 25. In this regard, we observe that as per para 13 of SA 580, the date of written representation shall be as near as practicable to, but not after, the date of the auditor's report on the financial statements. In light of this, we are not proceeding further with this charge. D. Articles of Charges of Professional Misconduct by the EP 26. As discussed in the foregoing paragraphs, the EP has made departures from the Standards and the Law, in his conduct of the audit of BCL for FY 2017-18. The EP has accepted the charges listed out in paragraph 18 (a) to 18 (e) of the SCN, reproduced below: (a) The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he "fails 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". This charge is proved as the EP failed to disclose in his report the material non-compliances by the company as explained in Para 14 to 22 above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the FY 2017-18 and other materials available on record. E. PENALTY & SANCTIONS 27. It is the duty of an auditor to conduct the audit with professional scepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity 11 28. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law. 29. 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. As we have explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Shekhar Sharad establish his professional misconduct. Critical examination of the use of assumption of Going Concern is a significant audit procedure, as it can affect the value at whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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