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TMI Blog2023 (8) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... e audit procedures to evaluate and maintain their independence from TDL. In spite of the Auditors having an independence threat, they accepted the audit engagement as statutory auditor of TDL from FY 2018-19 by disregarding and grossly violating the principles of lndependence mentioned in the Standards on Auditing and the Code of Ethics. In view of this, the charge stands proved that the Auditors have violated SQC 1, SA 200 and SA 220. Tampering of Audit File and related lapses (SA 230, Audit Documentation) - HELD THAT:- It is clear that even the ICAI had also advised to document the timing of performing audit procedures in the Audit File. Therefore, the reply of the Auditors is misconceived. We cannot also give credence to the claim that the dates of conducting the audit by article assistants are available in time sheet maintained separately, because these records have not been maintained as part of the Audit File as required under SA 230 - The clear evidence of the Auditors tampering with the Audit File without valid reasons displays unprofessional behavior unbecoming of a professional auditor. We have already seen in the cases decided by PCAOB that internationally any attem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act provides certain rights to auditor and does not cast any duty on the auditor is not acceptable as the auditor is required by section 14 3 (1)(b) to inquire whether the transactions of the company which are represented merely by book entries are prejudicial to the interest of the company. Obviously, the Auditors have failed to comply with these provisions in this case - the charge that the Auditors have violated section 143(1)(b), 143(12) of the Act, CARO, SA 200, SA 240, SA 250, SA 315, SA 330 and failed to report violation of section 179(3) of the Act by TDL, is proved. Lapses in audit of fraudulent recognition of Interest income of Rs 75.58 crores - HELD THAT:- The importance of revenue recognition can be understood from the fact that SA 240, which deals with the auditor's responsibilities relating to fraud in an audit of financial statements, made it mandatory for auditors to presume fraud in recognition of revenue. The risk of material misstatement due to fraud is a significant risk and the auditor is required to obtain an understanding of the entity's related controls including control activities. The risk of fraud in revenue recognition is greater in lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores loan given to TRRDPL, reply is given for Rs 500 crores only. Further, this part amount is not supported by any audit evidence available in the Audit File. These loan transactions were required to be evaluated by the Auditor at the time of performing audit procedures, which is not evident from the Audit File. Therefore, the Auditors have given this reply as an afterthought with intention to shield their deficiencies in audit. The bank statements and bank reconciliation statements of TDL and other group companies, given in Chapter C-4 of this Order, all points to the fact that TRRDPL was used by the TDL for evergreening of loans and understatement of loans given to MACEL. This shows that the Financial Statements of TDL and TRRDPL were manipulated to hide diversion of funds to promoter controlled entity-MACEL. It was the Auditors' duty to exercise due diligence while conducting Audit of transactions with TRRDPL. Failure to do so shows their gross negligence in discharging the statutory duty cast upon them by the Auditing Standards and the Act - tthe charge that the Auditors have violated the CARO, SA 200, SA 240, SA 315, SA 330 and failed to report violation of section 179 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etary penalty of Rs One crore upon M/s Sundaresha Associates. In addition, M/s Sundaresha Associates is debarred for a period of two 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. (ii) Imposition of a monetary penalty of Rs Five Lakhs upon CA C. Ramesh. In addition, CA C. Ramesh is debarred for a period of five 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. - NF-23/14/2022 - - - Dated:- 26-4-2023 - Dr Ajay Bhushan Prasad Pandey Chairperson, (Dr Praveen Kumar Tiwari) Full-Time Member And (Smita Jhingran) Full-Time Member ORDER In the matter of Mis Sundaresha Associates and CA C. Ramesh, under Section 132(4) of the Companies Act 2013. 1 This Order disposes of the Show Cause Notice ('SCN' hereafter) no. NF-23/14/2022 dated 10th November 2022, issued to Mis Sundaresha Associates, Firm No: 008012S ('Firm' hereafter) and CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MACEL (b) land advance of Rs 275 crores given to Mrs Vasanthi Hegde (mother of the then chairman of CDEL), (c) land advance of Rs 200 crores given to another individual for lands inter alia owned by Mrs Vasanthi Hegde (which was reportedly repaid) and (d) land advance of Rs 140 crores given to another related party; failed to evaluate understatement of loan by Rs 474 crores fraudulently given to MACEL and evergreening of loans through structured circulation of funds among group companies; failed to evaluate loan of Rs 507.05 crores fraudulently given to Giri Vidhyuth (India) Limited (a subsidiary company); and failed to evaluate loan transactions of Rs 1743.42 crores fraudulently entered into with Tanglin Retail Reality Developments Private Limited (another subsidiary company). The Auditors failed to perform sufficient appropriate audit procedures in respect of recognition of interest income of Rs 75.58 crores from MACEL, without any contract/agreement with MACEL, which did not recognize this interest expense in its Financial Statements. Thus, the total material and pervasive misstatements amounted to Rs 1471.63 crores, despite which the Auditors falsely reported that the Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing ('SA' hereafter), including the Standards on Quality Control ('SQC' hereafter) and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalty prescribed under section 132 (4) (c) of the Act. 8 On receipt of information from SEBI vide letters dated 01.04.2022 29.04.2022 sharing its investigation regarding diversion of funds worth Rs 3,535 crores (as on 31-07-2019) from seven subsidiary companies of Coffee Day Enterprises Limited, a listed company, to Mysore Amalgamated Coffee Estate Limited, an entity owned and controlled by the promoters of CDEL, NFRA started investigation into the role of the statutory auditors under its powers in terms of section 132 (4) of the Companies Act 2013. 9 Late V. G. Siddhartha ('VGS' hereafter) was Chairman Managing Director of CDEL till 29.07.2019. VGS and his family reportedly owned around 10,000 acres of coffee estates through various entities owned by VGS and operated and managed by MACEL, whose 91.75% shares were held by Late S.V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors of unlisted Public Companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year. TDL, an unlisted Public Company having borrowings/deposits of Rs 2,477.53 crores as on 31.03.2018, falls under the jurisdiction of NFRA. 15 M/s Sundaresha Associates was the statutory auditor of TDL for the Financial Year 2018-19 and CA C. Ramesh signed the Financial Statements of TDL and the Independent Auditor's Report. NFRA called from the Statutory Auditor the Audit File of TDL for Financial Year 2018- 19 to examine the role of the Auditors and for investigation under section 132(4)(b)(i) of the Act. Based on the examination of the Audit File and other material on record, NFRA issued a Show Cause Notice ('SCN' hereafter) to the Auditors on 10.11.2022 asking them to show cause by 10.12.2022 why provisions of section 132(4)(c) of the Companies Act 2013 should not be invoked for professional misconduct of: a) Failure to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l , indicating unequivocally their mandatory character. Further, ICAI in its Implementation Guide on Reporting Standards issued in Nov 2010 had opined in response to question no-12 relating to the auditor's responsibility paragraph that A key assertion that is made in this paragraph is that the audit was conducted in accordance with the Sas. SA 200 3 , which in a way is the ''parent standard on auditing, prohibits the auditor from representing compliance with SAs in the auditor's report unless the auditor has complied with the requirements of this SA and all other SAs relevant to the audit. This is a very broad and onerous assertion for an auditor to make. If during a subsequent review of the audit process, it is found that some of the audit procedures detailed in the SAs were not in fact complied with, it may tantamount to the auditor making a deliberately false declaration in his report and the consequences for the auditor could be very serious indeed . In this case, the Auditor in its Independent Auditor's Report dated 20.05.2019 has inter alia asserted that We conducted our audit in accordance with the Standards on Auditing specified under section 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a conclusion on compliance with independence requirements that apply to the audit engagement. In doing so, auditors are required to: i. Obtain relevant information from the firm and, where applicable, network firms, to identify and evaluate circumstances and relationships that create threats to independence; ii. Evaluate information on identified breaches, if any, of the firm's independence policies and procedures to determine whether they create a threat to independence for the audit engagement; and iii. Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is permitted by law or regulation. The engagement partner shall promptly report to the firm any inability to resolve the matter for appropriate action. 22 The SCN noted that in the Independent Auditor's Report dated 20.05.2019, the Auditors have reported that, We are independent of the company in accordance with the code of ethics issued by the Institute of chartered Accountants of India (!CAI) together with the ethical requirements that are relevant to our audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay Group), which is partially due on account of financial constraint faced by the group. They have replied in response to charge relating to fraudulent loan transactions with TRRDPL that they are independent of M/s ASRMP Co. They argued that they have complied with the Standards of Auditing and provisions of the Act. 26 We have considered the reply. It is important to understand the inter relationship of the three audit firms. As per information obtained from the audit firms, CA A. S. Sundaresha has a sole proprietorship firm, namely M/s Sundaresh Co. He was also the promoter and founder of M/s Sundaresha Associates, a partnership firm in practice since 10.11.1997, but he had retired from this firm w.e.f. 31.03.2017. After his retirement, his daughter CA Megha Sundaresh Andani is one of the five partners of this Audit Firm with 72% share in the profit of this firm. CA A. S. Sundaresha has also established another partnership firm namely, M/s ASRMP Co. w.e.f. 01.04.2018, which was appointed as the statutory auditor of CDGL from FY 2018-19. CA A. S. Sundaresha has 81 % share in the profit of M/s ASRMP Co., which had four partners. All these firms operate from the same of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the diversion of Rs 3,380 crores i.e., 95.62% of total diverted amount of Rs 3,535 crores. Further, during the Financial Year 2018-19, M/s Sundaresha Associates provided audit and non-audit services to 27 Coffee Day group entities, M/s Sundaresh Co. provided audit and non-audit services to 29 Coffee Day entities including promoter's family members and M/s ASRMP Co. provided audit and non-audit services to four Coffee Day group companies. This indicates that M/s Sundaresha Associates had accepted the audit engagement of TDL from FY 2018-19 despite serious conflict of interest. The relationship of three related audit firms with Coffee Day Group indicates creation of self-interest and familiarity threat. The Auditors of CDGL had admitted that CA A. S. Sundaresha is associated with Coffee Day Group for a very long time, therefore there is familiarity threat. It is evident that the replies of the Auditors regarding steps taken to reduce the self-interest threat and familiarity threat are mere general statements without detailing the specific steps taken to reduce such threats, despite the three audit firms having audit and non-audit relationships with a large number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to evaluate at the time of first appointment, whether to accept the clients/engagement and thereafter, such evaluation is required every year for continuance of the client/engagement. Such evaluation requires in- depth analysis of financial parameters of auditee company, background check of promoters, ultimate beneficial owners, key managerial personnel, and ethical requirements etc. Such evaluation is required to be recorded in the Audit File and thereafter the auditor issues engagement acceptance letter to the client intimating the auditor's decision about acceptance of the appointment. We note that the copies of independence confirmations of the engagement team members and the letter issued to TDL for acceptance of audit engagement, attached by the Auditors along with their reply to SCN, are not available in the Audit File submitted to NFRA. Such additional documents cannot be considered as they are not part of the Audit File. We have dealt with this point further in the charge relating to tampering of the Audit File in section C-2 of this Order. The reply of the Auditors reveals their ignorance of the basic requirement of ensuring independence as stated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s created on 30-08-2022, after NFRA asked the Auditors to submit the Audit File. Such modifications and additions in the Audit File are not permissible as per SA 230 and amount to tampering. Further, as per SQC-1, SA 200 and SA 220, the Audit Firm and the Engagement Team are required to adhere to ethical principles like integrity professional behavior. The Audit File is required to be assembled within 60 days of the signing of the audit report. In this case, the audit report was signed on 20.05.2019; accordingly, the Audit File was required to be assembled by 19.07.2019. However, the Auditors continued tampering with the Audit File till 01-09-2022 even after 39 months of signing the Independent Auditor's Report. 35 Further, as per para 8 of SA 230, the Auditors were required to prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements; (b) The results of the audit procedures performed, and the audit evidence obtained; and ( c) Significant matters arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and created new work papers. Once modifications are made in Excel files, it is impossible to find out what was modified. Further, creation of new Excel file from the workings in loose sheets itself is a proof of tampering of audit documentations. We note that a large number of audit documents were modified and at least one new audit work paper was created after NFRA called the Audit File for examination. After being confronted in the SCN, the Auditors have given an evasive reply that only cosmetic changes were made and that the contents were not changed. 39 Further, the Auditors have submitted 12 additional documents (109 pages) and requested to consider these stating that they had inadvertently missed certain evidences in their Audit File as they were not aware of NFRA's expectations in relation to verification of the Audit File. 40 Acceptance of the Auditors submission at this stage is fraught with the risk of relying on documents that may not have been considered during the audit and will open the floodgates for other auditors to take similar pleas in future proceedings. It is important to look into SA 230, which emphasizes the importance of timely preparation of audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanatory material to the Standard at Para A22 states that the completion of the assembly of the final Audit File after the date of the auditor's report is an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions. 41 Similar requirements exist in para 7, 14, A21 A22 of ISA 230 (UK Ireland), para 7, 14, A21 A22 ASA 230 (Australia) and para 15 of AS 1215 (PCAOB, U.S.) 42 Even internationally, as seen from the following paragraphs, alteration, backdating of work papers/reviews, substitution or addition of the new work papers, placing blank audit papers so as to perform audit procedures ( commonly referred to as Audit File Tampering) subsequent to issuance of audit report or the assembly of final Audit File by the Auditors are not accepted, as it would leave scope for large scale production of additional documents as an afterthought upon commencement of disciplinary proceedings. 43 In the Matter of KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani (Engagement Partner) relating to tampering of audit file, PCAOB 10 (Public Company Accounting Oversight Board - Audit Regulator of United ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r entered a sign-off, the current date was automatically generated. At the time the Firm adopted its new system, personnel from the Firm's National Office were aware of a risk that individuals could override the new system by changing their computer date settings to backdate work paper sign-offs. Despite that awareness, the Firm did not take sufficient steps through written policies, guidance, training, or otherwise to address that risk. During the 16 month-period following the adoption of the new work paper system, Firm personnel overrode the system and backdated their work paper sign-offs in at least six issuer audits and two quarterly reviews subject to PCAOB standards. This conduct occurred while teams were assembling a complete and final set of work papers for retention, or earlier, in these engagements. Additionally, some auditors on these engagements deleted and replaced sign-offs in order to ensure that reviewer sign-offs were dated after preparer sign-offs. Collectively, this conduct obscured the dates on which work had actually been completed and reviewed . For this misconduct, PCAOB imposed a civil money penalty of $350,000 on the firm besides censuring the firm, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure performed and when may have an impact on the audit opinion. The Auditors added that they did not carry out any audit procedure for which timing was critical to audit opinion and referred to FAQ 25 of Implementation guideline to SA 230 issued by ICAI, which provides guidance for audit documentations and states: Recording the identifying characteristics serves a number of purposes. For example, it enables the engagement team to be accountable for its work and facilitates the investigation of exceptions or inconsistencies. Identifying characteristics will vary with the nature of the audit procedure and the item or matter tested For example: For a detailed test of entity-generated purchase orders, the auditor may identify the documents selected for testing by their dates and unique purchase order numbers. For a procedure requiring selection or review of all items over a specific amount from a given population, the auditor may record the scope of the procedure and identify the population (for example, all journal entries over a specified amount. from the journal register). For a procedure requiring systematic sampling from a population of documents, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal auditor. We have already seen in the cases decided by PCAOB that internationally any attempt to tamper with the audit file is taken very seriously by the auditing regulators and entails significant regulatory sanctions. 52 In view of the above analysis, we conclude that the charge that the Auditors have violated SQC 1, SA 200, SA 220 and SA 230 is proved. C.3 Failure to understand the audited entity, to perform risk assessment procedure to identify, assess respond to Risk of Material Misstatement due to fraud, and to prepare Audit Plan 53 The Auditors were charged that they did not understand TDL, the audited entity, did not perform risk assessment procedure to identify assess Risk of Material Misstatement ('RoMM' hereafter), did not respond to such RoMM and did not prepare audit plan evidencing noncompliance with SA 300, SA 315 SA 330 13 . They were required to obtain an understanding of the nature of TDL including its operations, its ownership and governance structures, the types of investments that TDL was making and how it was financed, to understand the classes of transactions and account balances. The Auditors were required to establish an overall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le that they had performed such procedures to identify respond to RoMM despite the unusual balances as mentioned in Table-2. Thus, they were charged with non-compliance with SA 300, SA 315 and SA 330. Auditors' Reply Our Findings 57 While denying this charge, the Auditors have stated that the audit was well planned and attached a copy of the audit plan along with reply to SCN. They stated that they had conducted audit of TDL during FY 2017-18 also and were reappointed as statutory auditors for FY 2018-19 to 2021- 22. They claimed to have obtained the Memorandum of Association ('MOA' hereafter) to understand the framework of the company while performing the statutory audit for FY 2017-18 and thereafter changes to MOA were tracked in the minutes of the company. According to them, there was no change in the nature of operations, ownership, governance structures, types of investment and how it was financed during the year. Transactions during the year have been subjected to audit. Regarding high debt equity ratio, they replied that loans were taken on the basis of market value of TDL's assets, which was approx. Rs 2600 crores, whereas cost of assets built ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance by TDL. 60 There is no audit plan available in the Audit File. The Auditors were required to plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. As per SQC-1, the Audit Firm was required to communicate the identity role of Engagement Partner to TDL and assign appropriate staff with necessary competence to perform the audit of TDL. Appropriate staff was not assigned for the audit of TDL as details of engagement team are not available in the Audit File. The Auditors have attached a copy of audit plan along with reply to SCN stating that they maintained a combined audit plan for TDL and GVIL in a single Excel workbook. As audit plan is not available in the Audit File submitted to NFRA and there is no evidence of maintenance of such a combined audit plan either in TDL audit file or in GVIL audit file, this reply is not accepted. Further, the submission of the Auditors regarding discussion with management and TCWG over the years is not supported with any audit evidence in the Audit File. With respect to the submission about analytical and substantive procedures having been performed by the Auditors by collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 crores, therefore, these were unusual transactions. Disbursal of loans to MACEL was an indication of fraudulent diversion of funds. The Auditors were required to exercise Professional Skepticism and Judgement to evaluate the appropriateness of disbursal of such large amount of loans to a group entity without any business relationship/transaction, examine terms conditions of such loans including tenure of loans rate of interest etc. The Auditors were also required to evaluate the purpose and utilisation of loans given to MACEL. There is no evidence in Audit File that the Auditors had done any evaluation and asked any question to TCWG on this matter. 65 As per section 179(3) of the Act, the Board of Directors (BOD) has to exercise its powers to borrow funds grant loans by resolutions passed at meetings of the Board . There is no record in Audit File that the Board of Director of TDL had passed any resolution to borrow funds grant loans to MACEL. 66 On 31.03.2019, MACEL had issued four cheques of total amount of Rs 124 crores from its Corporation Bank account and four cheques of total amount of Rs 350 crores from its Karnataka bank account to TDL without having adequa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank accounts constituted 19.86% of TDL's total assets of Rs 2386.38 crores. This indicated a Risk of Material Misstatement due to fraud. The Auditors were required to perform audit procedures as per SA 315 and SA 330. There is no evidence in the Audit File that the Auditors performed such audit procedures to identify and respond to RoMM due to fraudulent reduction of related party loans, fraudulent diversion of funds and evergreening of loans through structured circulation of funds. 70 The Auditors had a statutory duty to report the fraud to the Central Government under section 143(12) of the Act. Diversion of funds to MACEL, understatement of loans to MACEL and evergreening of loans were indicators of commission of fraud in TDL. However, the Auditors did not comply with section 143(12) of the Act. On the contrary, the Auditors reported 18 that no material fraud by or on the company had been noticed or reported during the course of audit. 71 The Auditors were also charged with non-compliance with SA 250 as they failed to report violation of Prevention of Money Laundering Act 2002 ('PMLA' hereafter) 19 Diverting funds fraudulently to MACEL (an entity owned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in conformity with the terms of sanction; (b) deploying borrowed funds for purposes/activities or creation of assets other than those for which the loan was sanctioned; (c) transferring funds to the subsidiaries/Group companies or other corporates by whatever modalities ; (d) routing of funds through any bank other than the lender bank or member of consortium without prior permission of the lender; (e) investment in other companies by way of acquiring equities/debt instruments without approval of lenders; (f) shortfall in deployment of funds vis-a-vis the amounts disbursed/drawn and the difference not being accounted for. (Emphasis supplied). 75 We note that the definition of diversion quoted by the Auditors as per Black's Law Dictionary includes 'the unauthorised use of funds' . Similarly, diversion of funds defined in RBI's master circular includes 'transferring funds to the subsidiaries/Group companies or other corporates by whatever modalities' . This charge in the SCN relates to transfer of funds to a promoter owned entity MACEL- without proper authorisation. Accordingly, such transactions meet the definitions of dive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te frauds like this one, happen through banking channel only. 79 Regarding understatement and evergreening of loans, the Auditors have replied that they did not have access to the books and bank statements of MACEL, TRRDPL and CDGL. They argued that as Statutory Auditor of TDL, they would not be aware that cheques to TDL were issued without sufficient balance in MACEL. They stated that all the cheques were realized and none of the cheques bounced. They checked the clearance of cheques and they are not required to delve into the examination of source of funds for clearance of those cheques. They further stated that even if it was a well thought out plan by the company, the evergreening of loans could not have been identified by us as auditors of TDL with regular audit procedures and they are not auditor of MACEL to verify MACEL's books or statements. The Auditors further argued that discovery of evergreening of loans can emerge only from an investigation of all group companies and are not capable of being detected within the scope of work of a statutory auditor of TDL. 80 We note the Auditors' claim to have verified subsequent clearance of cheques in TDL's bank acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to GVIL, which then paid Rs 90 crores to MACEL, which then paid Rs 50 crores to GVIL, which then paid Rs 50 crores to MACEL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to GVIL, which then paid Rs 90 crores to MACEL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to GVIL, which then paid Rs 90 crores to MACEL, which then paid Rs 90 crores to TRRDPL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to MACEL, which then paid Rs 80 crores to TDL, which then paid Rs 80 crores to GVIL, which then paid Rs 80 crores to MACEL. Fraudulent understatement of loans by Rs 350 crores given to MACEL and evergreening of loans through structured circulation of funds is clearly evident from above bank statement. This fraud could have been detected by the Auditors from the bank statement of TDL during the course of audit had they applied the professional skepticism expected of them. 85 Further, we do not agree with the submission of the Auditors that statutory auditor is not required to delve into source of funds, specially when circulation of funds was clearly visible from the bank statements. The Auditors' argument is that while lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding from MACEL of Rs 462.32 crores as on 31.03.2019 was fraudulently shown as loan due to MACEL of Rs. 11.68 crore resulting in understatement of loan to MACEL by Rs 474.00 crores (Rs. 462.32 crore plus Rs 11.68 crores). 88 MACEL's account was maintained as current account with regular receipt and payment and no specific approval of the Board was obtained before disbursal of funds. No agreement was entered into with MACEL for such huge transactions. Grant of huge amount of loans without any written agreement without approval of the Board, to an entity owned by the promoters' family not having any business relationship with TDL, were proof of fraudulent transactions. In light of glaring lack of evidence to support a valid business reason for such transfer of funds and clear indications that TD L's funds were being misappropriated, resulting in a material misstatement of the Financial Statements, fraud, and the Auditors' failure to perform requisite additional auditing procedures and question such transactions, we conclude that the Auditors did not exercise the necessary professional skepticism to determine whether these transactions posed a risk of material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot acceptable as the auditor is required by section 14 3 (1)(b) to inquire whether the transactions of the company which are represented merely by book entries are prejudicial to the interest of the company. Obviously, the Auditors have failed to comply with these provisions in this case. 92 In view of the foregoing analysis, we conclude that the charge that the Auditors have violated section 143(1)(b), 143(12) of the Act, CARO, SA 200, SA 240, SA 250, SA 315, SA 330 and failed to report violation of section 179(3) of the Act by TDL, is proved. C.5 Lapses in audit of fraudulent recognition of Interest income of Rs 75.58 crores: 93 The Auditors were charged with failure to exercise professional skepticism and judgement and failure to perform risk assessment procedure while performing audit of interest income of Rs 75.58 crores. TDL had recognized interest income of Rs 76.84 crores, which included interest of Rs 75.58 crores received/receivable from MACEL. However, no such interest payment was shown in the Financial Statements of MACEL either as interest expenses or in the related party disclosure. Further, there was no agreement for payment of interest. In such a situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly that MACEL's account was maintained as current account is not accepted as already discussed in Section C.4 of this Order. We note that presumption of fraud in recognition of interest income requires critical evaluation of the genuineness of revenue recognition. There was no agreement for charging of interest from MACEL. The interest income shown as recoverable from MACEL was 98.34% of total interest income of TDL (Rs. 75.58 crore out of Rs. 76.84 crore). The materiality of the quantum of the interest income recoverable required the Auditor to carry out sufficient audit due diligence and procedure. The Audit File shows that the Auditors did not verify the ledger account of MACEL maintained in the books of TDL. The Auditors did not perform any audit procedure to rule out the possibility of fraud. It is clear from the reply that the Auditors have solely relied on the balance confirmation for audit of recognition of huge interest income. 98 The importance of revenue recognition can be understood from the fact that SA 240, which deals with the auditor's responsibilities relating to fraud in an audit of financial statements, made it mandatory for auditors to presume fraud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (17.12) 5 Total of loan + liabilities - net worth 559.94 6 Loan given to Sical Logistics Ltd (SICAL), a related party 150.00 7 Bank balance 370.00 8 Investment in shares of SI CAL 39.94 9 Total assets 559.94 10 Revenue from operation Nil 100 The SCN noted that there was no record in the Audit File that Board of Directors of TDL had passed any resolution under section 179(3) of the Act to borrow funds grant loans to GVIL. Further, the loan given to GVIL was unusual keeping in view the nature and size of GVIL, which should have attracted suspicion about the nature and purpose of these financial transactions and the terms conditions of loan were required to be evaluated alongwith utilisation of loan for the intended purpose. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proval u/s 179 of the Act shows that loan transactions were not authorised by the Board of Directors, which was additional evidence of fraudulent diversion of funds. 105 The Auditors further replied that no agreement was entered for funds advanced; and such an agreement is legally not compulsory, therefore the question of verifying terms and conditions does not arise. They stated that GVIL was created to execute power projects, however due to several hurdles, GVIL decided to drop the same. They stated that loan given by TDL to GVIL was for furtherance of its business by investing in SI CAL (a group company) through equity and debt in FY 2018-19. They further stated that loan given by GVIL to MACEL was returned at the end of the year. They lastly stated that they were not aware of any offence of frauds as these funds were not diverted from intended purpose. 106 We note that the Audit Firm was the Auditor of GVIL also, thus it was privy to all the business and transactions of GVIL. TDL gave loans of Rs 507.05 crores to GVIL, which in turn loaned out a sum of Rs 150 crores to SICAL. GVIL also invested Rs 56.91 crores in 29,81,570 equity shares of SICAL. As regards the balance am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L was required to recognize an impairment loss allowance for expected credit losses on the loans advances given to these companies. Alternatively, TDL was required to reduce the gross carrying amount of such loans by writing off these loans, based on the recoverability of such loans in terms of Para 5.4.4 of Ind AS 109. Examination of the Financial Statements of TDL and the Audit File shows that TDL did neither. Thus, TDL did not comply with Ind AS 109 and the Auditors did not report the same, therefore the Auditors were charged with non-compliance with section 143(3)(e) of the Act. 110 While denying this charge, the Auditors have stated that Loans of MACEL were fully recovered during the year, therefore the question of impairment or write off does not arise. They further stated that GVIL made a strategic investment in fully operational profitable SICAL Logistics Ltd ('SICAL' hereafter). The Loan given to SICAL was partially recovered during the year and was expected to yield a good return in long run. The Loan given by GVIL to MACEL was also recovered during the year. Accordingly, at the time of finalization of audit, there was no indicator of impairment, therefore th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores). 115 TRRDPL was reportedly engaged in the business of property development, however, it can be observed from Table- 7 that TRRDPL was used by TDL for diversion of funds, as it had no business activity and made loans investment of Rs 2054.20 crores to related parties. Salient features of FS of TRRDPL for FY 2018-19 are as under in Table 7: Table-7 Sr No Particulars Rs in crores 1 Borrowing through debentures 2960.12 2 Other liabilities mainly accrued interest statutory dues 12.94 3 Net worth of TRRDPL (negative) (50.96) 4 Total equity liabilities (1 to 3) 2922.10 5 Total loans Investment in related parties 2054.20 6 Bank balance 863.18 7 Other assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firms is related and they function independently. This issue has already been discussed in the Part C.1 of the order relating to Independence wherein it was established that both the firms are not independent of each other. 119 The Auditors further replied that from their discussion with the management over the years, they understand that TRRDPL did not actively undertake operations, however, has substantial investment in infrastructure companies. They replied that there was no loan agreement with TRRDPL for loan taken or loan given but stated that funds were lent to TRRDPL to invest in SICAL, a subsidiary company of TRRDPL and to give loans to SICAL. The Auditors further stated that loans were given to TRRDPL to lend to other group companies to the extent of Rs 500 crores which was recovered at the end of the year. 120 We note from para A5 of SA 230 that Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation . The Auditors admitted that no agreement was entered into with TRRDPL and the Audit F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not evident from the Audit File. Therefore, we find that the Auditors have given this reply as an afterthought with intention to shield their deficiencies in audit. 124 The bank statements and bank reconciliation statements of TDL and other group companies, given in Chapter C-4 of this Order, all points to the fact that TRRDPL was used by the TDL for evergreening of loans and understatement of loans given to MACEL. This shows that the Financial Statements of TDL and TRRDPL were manipulated to hide diversion of funds to promoter controlled entity-MACEL. It was the Auditors' duty to exercise due diligence while conducting Audit of transactions with TRRDPL. Failure to do so shows their gross negligence in discharging the statutory duty cast upon them by the Auditing Standards and the Act. 125 The above proves the charge that the Auditors have violated the CARO, SA 200, SA 240, SA 315, SA 330 and failed to report violation of section 179(3) of the Act by TDL. C.8 Lapses in audit of suspected fraudulent diversion of Rs 415 crores given as land advances to related parties 126 The Auditors were charged with failure to exercise professional skepticism and judgement and fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that land advances were made in earlier years and agreements were verified at the time of 1 st year of audit or in the year advances were made. Copies of documentation need not be maintained in the Audit File every year. They have assessed the status of these advances and disclosures in the Financial Statements of TDL. 131 They further stated that the advance to Mrs Vasanthi Hegde was given in October 2017 for procurement of land in Mumbai. They had verified the agreement in 2017-18 and the company was waiting for a clear title. Alongwith the reply to SCN, they attached a copy of agreement between TDL Mrs. Vasanthi Hegde and one of many sale deeds in favour of Mrs Vasanthi Hegde. In respect of advance given to SSPL, they stated that amount was pending from earlier years and there was no progress in the case before High Court. They had verified these documents and they are not required to maintain documents of the clients as per implementation guideline to SA 230 published by ICAI. In respect of land advance given to Mr Hallappa, they stated that Mr Hallappa, a land aggregator, was supposed to acquire agriculture lands in Chikkamagaluru and Mysore for the Company and convert t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case. The Auditors could not give any reply about whether they had verified the bank account of TDL to check that Mr Hallappa had refunded this amount to TDL. We found in a similar case of Coffee Day Group matter, that CDGL had shown refund of land advance of Rs 130.55 crores given to one individual (Kumar Hegde) which, as NFRA's investigation revealed, was surreptitiously orchestrated by promoters through round tripping of CDGL's own funds. Two partners of this Audit Firm were also part of the Audit Team which conducted audit of CDGL. NFRA's order dated 12.04.2023 in CDGL matter is available at https://nfra.gov.in/document-category/orders/. Mrs Vasanthi Hegde was mother of the Chairman of the Holding Company and related party transactions have high Risk of Fraud. Despite all these red flags, the Auditors failed to exercise professional skepticism and failed to perform sufficient and appropriate audit procedure. 134 Similarly, despite not having clear title, Rs 140 crores was given as land advance to SSPL, a related party. There is no record in the Audit file about assessment of valuation of these lands, basis which such huge land advances were given. These in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uditors have stated that there exist certain limitations while assessing the internal control of a company. Transactions were undertaken with necessary approvals and through banking channels and did not indicate any lapse of internal control and they had assessed the control environment of TDL. They mentioned that the alleged lapse can only be called as poor governance and not misstatement by itself. 138 We are aware that the Auditors were Statutory Auditors and not Forensic Auditors. However, laws and regulations lay down certain responsibilities of Statutory Auditors with respect to internal financial control and internal controls. Use of pre- signed cheques for diversion of funds and circulation of funds are enough evidence of complete absence of internal control and internal financial control in TDL. Further, we also notice from guidance note issued by ICAI that it expects the auditor to review the segregation of duties relating to authorisation of transactions, handling/issuance of cheques, proper authorisation of banking transactions and safe custody of cheque books etc. The Audit File shows that the Auditors have not performed any such procedures. We note that the Auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the Audit File. 142 On review of closing memorandum sheet in audit tracker and closing memorandum sheet in Audit File, we note that this sheet does not relate to discussion with TCWG but relates to important points and conclusion made by the auditor. There is no record of any discussion with TCWG in this sheet. Further, we could not find the names of the members of TCWG with whom the discussion was held and the date of discussion is also not mentioned in this sheet. SA 260 requires Auditors to determine TCWG and communicate with TCWG about the responsibilities of the Auditor, overview of the plan, scope timing of the audit, and deficiencies in Internal Control. Further, large scale diversion of funds circulation of funds were evident deficiencies in internal control. We note from the Audit File reply of the Auditors that they neither determined TCWG nor communicated these matters to TC WG, thus did not comply with SA 260 SA 265. 143 SA 500: With reference to non-evaluation of the valuation report of investment in property, having fair value of Rs 2609.60 crores, which was more than the balance sheet size of TDL (Rs 2386.38 crores), the Auditors replied that these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e details of Rs 1215 crores loans taken during the year. They stated that these details were maintained in loose sheets which were compiled along with sanction letter, additional documents and attached with their reply to the SCN. 146 We have considered the reply. In Section C-2 of this Order, we have detailed why additional documents submitted alongwith the reply to SCN are not acceptable. Direct confirmations from banks are an important audit procedure to ensure existence of account balances, which the Auditors did not perform. Regarding purpose and utilisation of huge borrowing of Rs 3569.51 crores, the Auditors could submit details of borrowings for Rs 1215 crores only. Thus, details of the entire amount are not available in the Audit File. The Auditors have opined that the financial statements of TDL gave true and fair view of its state of affairs. Outstanding borrowings of Rs 2254.45 crores on 31.03.2019 constituted 94.47% of the total balance sheet size of Rs 2386.38 crores. Bank balances of Rs 10.54 crores and fixed deposits of Rs 176.55 crores were also material items of the financial statements. Before opining on the truthfulness and fairness of such material balances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Auditors had falsely reported that it gave true and fair view of its state of affairs, profit and cash flow. The Auditors were grossly negligent in forming the audit opinion. Accordingly, we find that the Auditors violated SA 700. 151 The Auditors are also charged with non-compliance with SA 210, Agreeing the Terms of Audit Engagements. Based on their reply, we drop this charge. E. Omissions and commissions by the Audit Firm Responsibility of the Audit Firm for the audit work done by the Engagement Team 152 The Audit Firm was also charged with various omissions and commissions attributed to the Auditors in section C and D above. Para 2 of SA 220 and para 3 of SQC 1, stipulate that Quality Control Systems, Policies and Procedures are the responsibility of the Audit Firm. The Audit Firm was charged with failure to establish and maintain a system of quality control to provide it with reasonable assurance that: a) The firm and its personnel comply with professional standards, regulatory and legal requirements; and b) The reports issued by the firm or engagement partners are appropriate in the circumstances. 153 Responding to the charge, the Audit Firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receding paragraphs of this Order. F. POINTS OF LAW RAISED BY THE AUDITORS 155 The Auditors stated that NFRA was established in October 2018 and NFRA Rules were notified on 14.10.2018, therefore these are applicable from FY 2019-20. We note that NFRA's authority to monitor and enforce compliance with the accounting and auditing standards is with reference to such standards as were established by law even earlier and were fully binding on Statutory Auditors. Hence, no new obligation is created on the Auditors as these standards were to be mandatorily followed even prior to NFRA s establishment. The constitution of NFRA has only changed the forum to check the compliances. The Auditors have stated that the accounting and auditing standards that have been notified as on date, are not on the recommendations of NFRA and thus issuance of SCN u/s 132(4) of the Act is beyond the powers of NFRA. This contention of the Auditors is not acceptable. The NFRA's authority to monitor and enforce compliance with the accounting and auditing standards is derived from section 132 of the Act. All the Accounting Standards and Auditing Standards have the force of law 22 and are required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial 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 Auditors failed to disclose in their report the material non- compliances by the Company as explained in Section - C-4 to C-8 and Section - D (a) above. ii, The Auditors committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity . This charge is proved as the Auditors failed to disclose in the audit report the material misstatements made by the Company as explained in Section - C-4 to C-8 and Section - D (a) above. iii, The Auditors committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . This charge is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that The transactions between one of the Issuer s wholly-owned Chinese subsidiaries ( Subsidiary ) and a Chinese purchasing agent ( Agent ) involved the Subsidiary s transfers of loan proceeds to the Agent as prepayments to buy equipment and materials that the Agent never delivered. The loans were obtained from Chinese lenders for the purpose of making these purchases. While the Agent returned a portion of the prepayments some in unusual same-day, round-trip transfers it did not return most of them . .. By failing to adequately respond to the known fraud risks, Marcum s engagement team breached its duty to perform the Audits with the due professional care and professional skepticism required by PCAOB standards. The team also failed to adequately understand the business rationale (or the lack thereof) for the significant unusual transactions and failed to obtain sufficient appropriate audit evidence to support Marcum s opinion on the Issuer s financial statements . For this misconduct, PCAOB censured Audit firm Marcum LLP ( Marcum ); imposed a civil money penalty of $250,000 on Marcum; prohibiting Marcum from audit works for a period of three years. PCAOB also imposed a penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of $1,500,000; and required Grant Thornton to undertake certain remedial actions. 164 In cases relating to independence of auditors, PCAOB 26 has penalized audit firms and their partners. In Marcum Bernstein Pinchuk LLP case, PCAOB observed an accountant is not independent of an audit client if, at any point during the audit and professional engagement period, the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement. ..... ....MarcumBP failed to implement, effectively apply, and appropriately monitor quality control policies and procedures sufficient to provide reasonable assurance concerning the Firm's independence . In this case, PCAOB censured audit firm, imposed monetary penalty and required audit firm to undertake a review of its policies, procedures, staffing, and training with respect to auditor independence. 165 Similarly, in AWC (CPA) Limited, WONG Chi Wai, CPA, and WONG Fei Cheung, CPA, PCAOB observed As the engagement partner, Albert Wong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s laid down by the law. 168 Independent Auditors of Public Limited Companies 28 serve a critical public function of enabling the users of Audited Financial Statements to take informed economic decisions. Quality audits bolster stakeholder s confidence in the credibility of financial reporting. 169 But stakeholder s confidence is not automatic. Trust must be earned, and it must be preserved. Auditors Integrity and Diligence are of utmost importance to preserve the trust of users in Auditing Profession, which plays an important role in the economic development of India. 170 In the instant case, the Auditors, chose to preserve their professional relationship with the promoters of the auditee company, instead of discharging their statutory duty to protect public interest by exercising professional skepticism and questioning the promoters dubious activities and transactions leading to diversion of shareholders and stakeholders money on a large scale. Had they performed the required audit procedures with due professional skepticism, many of the dubious transactions would have been perhaps detected. But by failing to do so, they foreclosed this possibility causing immense har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order: (i) Imposition of a monetary penalty of Rs One crore upon M/s Sundaresha Associates. In addition, M/s Sundaresha Associates is debarred for a period of two 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. (ii) Imposition of a monetary penalty of Rs Five Lakhs upon CA C. Ramesh. In addition, CA C. Ramesh is debarred for a period of five 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. 176 This order will become effective after 30 days from the date of issue of this order --------------- Foot Notes 1 As defined in Rule 3 of the NFRA Rules 2018. 2 Section 143(9) of the Act provides that every auditor shall comply with the auditing standard. Further proviso to section 143 ( l O) of the Act provides that until any auditing stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the audit engagement'. 17 Para I 0, 12 and 32(c) of SA 240, The Auditor's responsibilities relating to Fraud in an Audit of Financial Statements. 18 Para X of Annexure -A (CARO report) of lndependent Auditor report dated 20.05.2019. 19 As per section 3 of PMLA act 2002, 'Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering'. 'Proceeds of Crime', as defined at section 2 (u) of PMLA Act, means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. List of schedule offences in Part A of the schedule under PMLA Act 2002, covers section 420 of Indian Penal Code i.e. 'Cheating and dishonestly inducing delivery of property'. 20 Section 420 of IPC states, 'Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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