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TMI Blog2023 (8) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the Independent Audit Report dated 20.05.2015 was without any basis and unreliable and hence, invalid. Accordingly, serious view is taken that of the failure of the EP to respond to NFRA's repeated communications and conclude that the EP by not responding to the proceedings undertaken by NFRA, has violated Section 132 (4) of the Act, 2013, which is a 'professional or other misconduct' in terms of Section 132 (4) (c) of the Act, 2013, read with Clause (2) of Part III of Schedule I of the Chartered Accountants Act, 1949. Misuse of Emphasis of Matters for issuing a modified audit opinion - HELD THAT:- It is clear that the EP misused the Emphasis of Matter part of the Audit Report to include matters that should have been evaluated separately and considered for effecting modification to the audit opinion under para 6 of SA 705 Para 6 of SA 705 clearly states that auditor should modify the opinion when he concludes that the financial statements are not free from material misstatements or if he is not able to obtain sufficient appropriate audit evidence for the same. Resorting to EoM para in the matters detailed is a clear violation of provisions of SA 706. Erroneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss is to be adjusted for the effects of transactions of non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows - In this case, Net Profit before Tax is derived after considering the non-cash income relating to waiver of interest and leased rental charges by the lenders. However, these items being non-cash items should have been adjusted to arrive at 'Cash flow from Operating Activities'. Since the same has not been done, the Cash Flow from Operating Activities has been inflated - Further, waiver of principal amount of Rs 9.74 crores is shown as Increase/(Decrease) in other reserves in the Cash Flow Statement. Since waiver of principal amount is a non-cash transaction, it should have been excluded from Cash Flow Statement as per para 40 of AS 3 As this has not been reported by EP, the failure to report and address the errors in cash flow statement stands established. Significant Accounting Policies not as per applicable accounting standards - HELD THAT:- Employee Benefit Expense of financial statements states that the provision for gratuity fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship No. 023806), proprietor of Mis T. Raghavendra Associates (ICAI Firm Registration no. 003329S), Hyderabad, who is a Member of the Institute of Chartered Accountants of lndia ('ICAI' hereafter) and was the Engagement Partner ('EP' hereafter) for the statutory audit of M/s Bartronics India Limited (Bartronics' or 'the company' hereafter) for the eighteen-month period from 01.10.2013 to 31.03.2015 (FY 2013-15, hereafter). 2. This Order is divided into the following sections: A. Executive Summary B. Introduction Background C. Major lapses in the audit D. Other lapses in the audit E. Articles of Charges of Professional Misconduct F. Penalty Sanctions A. EXECUTIVE SUMMARY 3. Pursuant to the information received from the Ministry of Corporate Affairs regarding irregularities observed by Financial Reporting Review Board (FRRB, hereafter) of ICAI in the Financial Statements of FY 2013-15 of Bartronics 1 , whose equity shares are listed at Bombay Stock Exchange ('BSE' hereafter) and National Stock Exchange of India Ltd ('NSE' hereafter), NFRA initiated an investigation under Section 132(4) of the Companies A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of service of the professions associated with ensuring compliance with such standards. NFRA has powers of a civil court and is empowered under Section 132(4) of the Act to investigate the prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 8. The statutory auditors, both individual and firm of chartered accountants, are appointed by the members of company under Section 13 9 of the Act. The statutory auditors, including the Engagement Partners and Engagement Team, that conduct the audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, Standards on Auditing (SA, hereafter), including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Section 132(4)(c) of the Act. 9. On a reference received vide letter dated 05.11.2019 from the Ministry of Corporate Affairs indicating gross financial irregularities observed by FRRB of ICAI in the Financial Statements of Bartronics for FY 2013-15, NFRA initiated investigation into the role o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sional misconduct on the following grounds: a. failure to disclose material facts known to him, which is not disclosed in a financial statement, but disclosure of which is necessary in making such a financial statement, where he is concerned with that financial statement in a professional capacity, b. failure to report a material misstatement known to him to appear in a financial statement with which EP is concerned in a professional capacity, c. failure to exercise due diligence and being grossly negligent m the conduct of professional duties, d. failure 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; and e. failure to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances. 14. As no reply was received from EP within the said timeline, the EP was given one more opportunity vide email and letter dated 02.11.2022 to submit his response to the SCN by 15.11.2022. It was also conveyed that no further extension of time for submission of response would be given and in case of failure of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count and other documents and inspection of any books, registers and other documents of any person summoned under Section 132(4)(b). By not cooperating with NFRA, the EP has prevented NFRA from carrying out its legal mandate Order in the matter of statutory audit of Mis Bartronics India Limited for FY 2013-15 Page 4 of 12 to protect public interest and the interests of investors, creditors and others associated with the companies or bodies corporate governed under Rule 3 of NFRA Rules, 2018. These require NFRA to exercise oversight of auditing functions performed by auditors and investigate cases of professional misconduct under Section 132 of the Act, 2013. For the purpose of monitoring and enforcing compliance with Standards on Auditing ('SA', hereafter) under the Companies Act, 2013 and under Rule 3 of NFRA Rules, 2018, NFRA is mandated to review working papers and communications related to the audit and to require the personal presence of the auditor for seeking additional information or explanation in connection with the conduct of an audit. 19. Failure to co-operate with NFRA and non-submission of the required information and documents such as audit work paper file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Section 132 (4) of the Act, 2013, which is a 'professional or other misconduct' in terms of Section 132 (4) (c) of the Act, 2013, read with Clause (2) of Part III of Schedule I of the Chartered Accountants Act, 1949. C.2 Misuse of Emphasis of Matters for issuing a modified audit opinion 22. The EP issued an unmodified audit opinion certifying that the financial statements presented a true and fair picture of the affairs of the company. Under the Emphasis of Matter part in the audit report the EP reported the following: a) Reference is invited to Note IO of the financial statements, the company has not provided interest on unsecured loans as terms are not clearly available with the Company and consequently uncertainty arises in Financial Statements as to the exact amount. b) Reference is invited to Note I 5(i)(a) of the financial statements, the Company's capital advances to the extent of Rs. 9,062.09 Lakhs. We are unable to ascertain whether such balances are fully recoverable. Accordingly, we are unable to ascertain the impact, if any, that may arise in case any of these advances are subsequently determined to be doubtful of recovery. Had the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d debts and the extent of misstatements on account of the same. These matters, hence, should not be included in the EoM para in the Auditor's Report. 25. Point (d) regarding the non-repayment of FCCB and point (e) regarding uncertainties relating to MCD Project are matters concerning the Going Concern status of the company and should have been evaluated separately whether they needed to be considered for qualification. 26. Further it is seen that Trade receivables which are more than three years old account for more than 50% of the Balance Sheet size and FCCB which have not been paid are more than 20% of the Balance Sheet size. These are material balances warranting sufficient appropriate audit procedures before forming audit opinion. The EP has abdicated his responsibility by simply including them in the EoM section of his report. 27. In view of the above, it is clear that the EP misused the Emphasis of Matter part of the Audit Report to include matters that should have been evaluated separately and considered for effecting modification to the audit opinion under para 6 of SA 705 15 Para 6 of SA 705 clearly states that auditor should modify the opinion when he conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal amount had been credited to Capital Reserve account and the amount of interest and leased rental charges to Other Income account. However, this accounting treatment is erroneous in the light of para 32 of AS 25 18 and para 91 of the Framework 19 31. The waiver of the principal amount of Rs 9.74 crores should have been recognised as Income in the Statement of Profit and Loss. Also, in view of the unusual nature of the event i.e. waiver of the loan liability by creditor, a separate disclosure should have been made by the company in accordance with para 12 of AS 5 20 This was not done by the company and the EP has not pointed out the error in his audit report. 32. In Note 30 to the Financial Statements, the company has only disclosed the adjustment relating to waiver of balances and its accounting treatment. However, it has not disclosed the terms of concessions, revised loans balances, repayment period, and rate of interest of One Time Settlement with the lenders. As per para 25 of the Framework, qualitative characteristics of Financial Statements are the attributes that make the information provided in financial statements useful to users. Two of the qualitative charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w from Operating Activities has been inflated. 36. Further, waiver of principal amount of Rs 9.74 crores is shown as Increase/(Decrease) in other reserves in the Cash Flow Statement. Since waiver of principal amount is a non-cash transaction, it should have been excluded from Cash Flow Statement as per para 40 of AS 3 23 As this has not been reported by EP, the failure to report and address the errors in cash flow statement stands established. D.5 Significant Accounting Policies not as per applicable accounting standards 37. Note 24: Employee Benefit Expense of financial statements states that the provision for gratuity fund and leave encashment is made on ad hoc basis and not as per the actuarial valuation as required by AS 15 24 . In contrast, in note 2(i) in Significant Accounting Policies, it is stated that the estimated liability for the employee benefits is determined in accordance with the requirements of AS 15 and liability for gratuity is determined and charged to Profit and Loss account based on valuation by independent actuary. The EP did not report these contradictory disclosures and non-adherence of provisions of AS 15, which shows lack of due diligence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mportant. 40. In view of the fact that the EP has not only shown blatant disregard to the Standards on Auditing in conducting audit of a company that affects public interest, but has also shown scant regard to the legal process undertaken by NFRA under Section 132 (4) of the Companies Act, 2013 we take a serious view of his professional misconduct, which assumes further importance in light of the fact that he had long association with the company being its statutory auditor for five financial years from FY 2012-13 to FY 2017-18. As per information available in Annual Report for FY 2013-15, EP was paid Rs 12,20,000 (which included audit fees of Rs 8,00,000 and limited reviews of Rs 4,00,000 and Rs.20,000 for other services). 41. Considering that the professional misconducts by the EP have been proved and considering the nature of the violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order: i. Imposition of a monetary penalty of Rs.5,00,000 (Rupees Five Lakhs) on the EP, CAT. Raghavendra, proprietor of M/s T. Raghavendra Associates. ii. Debarment of CAT. Raghavendra, proprietor of M/s T. Raghave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Para 6 of SA 706 states that 6. lf the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor's report provided the auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. Such a paragraph shall refer only to information presented or disclosed in the financial statements. 14 Note 10 of the Annual Report of the Company for FY 2013-15 reads as follows: Note 10: Other Current Liabilities Current maturities of long-term debt (Refer note No. 5) 45,571.54 45,924.72 Interest accrued but not due on borrowings - 3.87 Interest accrued and due on borrowings 10,194.84 4,999.74 Inter corporate Deposits 4.660.70 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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