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TMI Blog2023 (9) TMI 822X X X X Extracts X X X X X X X X Extracts X X X X ..... t Team for the statutory audit of Tanglin Developments Ltd ('TDL' hereafter) for the Financial Year ('FY' hereafter) 2019-20. (All are collectively called as the Auditors). 2 This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Major lapses in the Audit D. Other non-compliances with Laws and Standards E. Omission and Commission by the Audit Firm F. Points of Law raised by the Auditors. G. Finding on the Articles of Charges of Professional Misconduct by the Auditors H. Finding on the Additional Articles of Charges of Professional Misconduct by the Audit Firm I. Penalty & Sanctions A. EXECUTIVE SUMMARY 3 Pursuant to Securities and Exchange Board of India ('SEBI' hereafter) sharing in April 2022 its investigation regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL, NFRA initiated investigations into the professional conduct of the statutory auditors of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir Independent Auditor's Report. The Auditors failed to report that Internal Financial Control over Financial Reporting was completely absent in TDL despite large scale evergreening of loans through structured circulation of funds among group companies and use of pre-signed blank cheques for diversion and circulation of funds. They failed to evaluate their potential conflict of interest and failed to maintain their independence from TDL by having audit and non-audit relationships with a large number of Coffee Day Group companies and the promoters' family members They also made an attempt to mislead NFRA by adding more documents to as well as altering the documents in their audit file which amounted to tampering with the Audit File. 6 Based on investigation and proceedings under section 132 (4) of the Companies Act 2013 and after giving the Auditors opportunity to present their case, NFRA found the Audit Firm and its partners who performed the audit as Engagement Partners, guilty of professional misconduct and imposes through this Order the following monetary penalties and sanctions with effect from a period of 30 days from issuance of this Order: a) Monetary penalty of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chartered Accountants or firm of Chartered Accountants, are appointed by the members of companies as per the provision of section 139 of the Act. The Statutory Auditors, including the Engagement Partners ('EPs' hereafter) and the Engagement Team that conduct the 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. 9 NFRA started action under section 132(4) of the Act, on receipt of information from SEBI vide Letters dated 01.04.2022 & 29.04.2022 sharing its investigation regarding diversion of funds worth Rs 3535 crores (as on 31-07-2019) from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL, Tanglin Developments Ltd is one of the group companies of CDE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the diversion of funds. 15 TDL is a subsidiary company of Coffee Day Enterprises Limited. It is engaged in setting up a fully integrated Information Technology Park and campuses for software development in Bangalore and Mangalore. TDL had three subsidiaries i.e., Giri Vidhyuth India Limited, Tanglin Retail Reality Developments Private Limited and Way2Wealth Securities Private Limited. TDL opted not to prepare consolidated financial statements in accordance with the exemption available as per para 4(a) of IND AS 110 'Consolidated Financial Statements' and prepared separate financial statements. TDL did not have any business relations with MACEL, a related party of TDL. Although an unlisted Public Company, TDL had borrowing/deposit of Rs 2254.46 crores as on 31.03.2019, and thus falls under the jurisdiction of NFRA in terms of Rule 3 of NFRA Rules 2018, which includes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, this Order is based on examination of the facts of the matter, charges in the SCN, written replies of the Auditors and other materials available on record. 19 Since CA Megha Sundaresha Andani was EP for the audit of FS of TDL for FY 2019-20, an SCN was issued to her but in reply she informed that she was not a part of the Engagement team. It was clarified by TDL that they had inadvertently mentioned her name and that CA C Ramesh was the EP. Accordingly, proceedings initiated against CA Megha Sundaresha Andani are hereby dropped. General submissions by the Auditors 20 The Auditors have stated that they had provided a 'Disclaimer of Opinion' on the Financial Statements and also in respect of Internal Financial Control over Financial Reporting. They further stated that facts available with them today after various investigations were not available with them at the time of conclusion of the audit, except for the investigation report of Mr. Ashok Kumar Malhotra and Agasthya Legal LLP. 21 We have considered this submission. Before going on to the Disclaimer of Opinion and the Standards, we note that the death of VGS in July 2019 and the subsequent investigation report wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial controls over financial reporting with reference to these Ind AS financial statements as at March 31, 2020 and whether such internal financial controls were operating effectively. Accordingly, we do not express an opinion on Internal Financial Controls Over Financial Reporting with reference to these Standalone Ind AS financial statements". 22 At this stage , the provisions of para 27 of SA 705 are important to note. These provide that the Auditor* is required to report all matters having material effect on the financial statements. The relevant para states that "Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial statements, the auditor shall describe in the basis for opinion section the reasons for any other matters of which the auditor is aware that would have required a modification to the opinion, and the effects thereof". Its explanatory material at para A24 further explains: "An adverse opinion or a disclaimer of opinion relating to a specific matter described within the Basis for Opinion section does not justify the omission of a description of other identified matters that would have otherwise required a modification of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lure to detect fraudulent diversion of funds of Rs 2,448.23 crores and evergreening of loans through structured circular transactions of funds. II. Continuation of the Audit engagement disregarding Independence requirements III. Tampering of the Audit File and related lapses - SA 230 'Audit Documentations' IV. Lapse in audit of the sale of 'Global Village Undertaking" at a net consideration of Rs 721 crores. These charges are discussed in the following paragraphs. I. Failure to detect fraudulent diversion of funds of Rs 2,448.23 crores and evergreening of loans through structured circular transactions of funds 26 The Auditors were charged with non-compliance4 with section 143 (1) (b), section 143 (3) (i), section 143 (12) of the Act, the Companies (Auditors Report) Order 2016 (CARO), SA 200, SA 240, SA 250, SA 315, SA 330, and SA 500 as they did not report suspected fraudulent diversion of Rs 2,448.23 crores to MACEL, an entity owned by father of VGS, and others group entities detailed below. The Auditors were also charged with failure to detect evergreening of loans through structured circular transactions of funds. They were further charged for not questioni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion referred to did give blanket approval of lending Rs 10000 crores. But every transaction thereafter under the aegis of this approval had to be backed by approval of the Board, which had not been done. Hence, shareholders' approval alone cannot cover up for all the subsequent transactions. As the Auditors, it was their duty to look into the transactions, question the management on the same and finally report the lapse in their Audit Report. None of this was done. Thus, the advance of Rs 783 crores to MACEL, a company owned by the promoter group, was given without necessary approvals, without business purpose and without any agreement. 27.3 As per the Auditors reply, the advance of Rs 954.26 crore given to TRRDPL was within the blanket approval received from the shareholders to lend to group companies and was a part of the exercise to secure the release of pledged Mindtree shares owned by the promoter group for eventual sale to L&T. We have in above para detailed why the argument of blanket approval by shareholders of TDL does not hold. Coming to the argument that 954.26 crores was advanced to secure the release of Mindtree shares, we have to take a closer look at the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in case of money advanced from TDL to GVIL. As mentioned in the preceding paras, the money advanced by TDL to GVIL was again advanced by GVIL to MACEL and SICAL. It was surprising how the Auditor chose not to issue a Disclaimer relating to the recoverability of TDL's advance to GVIL which was finally given to MACEL. Responding to the same, the Auditors did not comment on the advance given to MACEL but stated that GVIL had made an investment and an advance to SICAL, a group company, which had a positive networth and hence they did not give a disclaimer as regard to money advanced by TDL to GVIL. This reply of the Auditors is not borne out of the audit file as there is no audit procedure in the Audit File to evaluate the money advanced to GVIL which had finally been transferred to MACEL, from whom recoverability was doubtful as the money had already been transferred to the promoters controlled entities. It is not understood as to how the advances to SICAL will finance the recoverability from MACEL. Similar arguments has been made in relation to advances to TRRDPL which finally reached MACEL. A prudent auditor has to evaluate each transaction on its own merit and cannot overloo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to their failure to perform basic audit procedure of agreeing the financial statements with trial balance in respect of provision of doubtful advance of Rs 275 crores given to Mrs. Vasanthi Hegde. They have simply mentioned that TDL reassessed and reversed the provision and that ledger copies are available with TDL. However, there is no evidence in the Audit File about reassessment and reversal of provision for doubtful advance of Rs 275 crores. We treat their reply to this charge as an afterthought attempt to coverup audit deficiencies. 28.2 The Auditors had given a Disclaimer of Opinion for failure to obtain audit evidence regarding the recoverability of land advance from Kiran Hegde. Even in this case, it is seen that the Auditors have not performed any audit procedures, not questioned the management, not evaluated this transaction of Rs 100 crores given during the year and also written off during the same year. This is clearly a case of fraudulent diversion which remained unquestioned by the Auditors who resorted to covering it up with a Disclaimer without any inquiry. 29 In view of analysis at para 27 and 28 above, the charges regarding violation with section 143 (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TDL also. 30.5 The Audit Firm had audited GVIL (a subsidiary company of TDL) whereas CDGL & TRRDPL (also subsidiary companies of TDL) were audited by M/s ASRMP & Co. a related audit firm of the Auditors. As explained in this Order later while dealing with the charge relating to independence, both audit firms i.e., M/s Sundaresha & Associates and M/s ASRMP & Co., were in fact operating as a single unit. Therefore, circulation of funds could easily be detected by the Auditors, had the audit been performed with professional skepticism. We do not agree with the submission of the Auditors that a statutory auditor is not required to delve into the source of funds, especially when circulation of funds was clearly visible from the bank statements and required due diligence and professional skepticism. Accordingly, we conclude that the Auditors failed to report fraudulent diversion of funds to MACEL and evergreening of loans through structuring circulation of funds. 31 As pointed out in para 27 above, TDL had, in total, advanced a sum of Rs 2073.23 crores to MACEL directly and through its subsidiaries. It is also seen that TDL had borrowed Rs 2027.46 crores from related parties and advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of our audit." This is a violation of section 143(12) of the Act and CARO. 33 As mentioned in para 26 above, the Auditors were charged with failure to report infraction of Prevention of Money Laundering Act 2002 (PMLA 6) resulting in non-compliance with SA 250. The Auditor's stand is that RPTs has been correctly classified, and sources of funds were identified. As such the provisions of PMLA and those of section 420 of IPC were not attracted and there was no non-compliance with SA 250. 33.1 At this stage, it is important to look again at the quantum of funds (Rs 2403.12 crores) diverted to promoters through banking channels: a) Rs 607.81 crores had been directly diverted by TDL to promoter's company MACEL; b) Rs 370 crores was diverted to MACEL through its subsidiary company GVIL; c) Rs 1050.31 crores was diverted to MACEL through another subsidiary company TRRDPL; d) Rs 275 crores was diverted by TDL to Mrs. Vasanthi Hegde (mother of Group chairman VGS); and e) Rs 100 crores was diverted by TDL to Mr. Kiran Hegde (director of TRRDPL). The fact that transfers were made through banking channels by itself does not provide immunity from the PMLA, as cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. 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 could not find any evidence in the Audit File about performance of any test of control in this regard. 34.3 The Auditors accepted that they had access to investigation report issued by Mr. Ashok Kumar Malhotra and Agastya legal LLP (Investigation report). We also note that being auditors of TDL, GVIL and TRRDPL, they also had access to banks statements of these group companies. The movement of funds, pre-signing of blank cheques and understatement of loan balances on reporting date have been reported in the investigation report. Despite having access to all this information, the Auditors did not report this weakness in IFC in their report on IFCR. This shows that Auditors have deliberately hidden such weakness in IFC from users of the Financial Statements, resulting in violation of section 143(3)(i) of the Act. 35 The Auditors were charged with non-Compliances with SA 550 (Related Parties) & SA 505 (External Confirmations), as they failed to perform appropriate audit procedures to identify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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 penalty of $25,000 on the Engagement partner John E. Klenner besides barring him from being an associated person of a registered public accounting firm. 36.2 Similarly, failures to perform audit procedures and exercise professional skepticism in related party transactions and internal control over financial reporting have invited serious action by audit regulators in other jurisdictions too. For example, in case of Cheryl L. Gore, CPA and Stanley R. Langston, CPA, PCAOB8 had observed that "Gore failed to obtain sufficien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the requirements on Independence as per SQC 1, SA 200 and SA 220. The interrelationship of these three audit firms is depicted in Table-5 below. Table-5 37.2 The Auditors have denied the charge stating that M/s Sundaresha & Co., a Proprietary concern of CA A. S. Sundaresha was established in 1978: M/s Sundaresha & Associates, .a partnership firm, was formed in 1997: and M/s ASRMP & Co., also a partnership firm, was founded in 2018. CA A. S. Sundaresha, founder of M/s Sundaresha & Associates retired from this firm in 2017, and his daughter CA Megha Sundaresh, was one of the partners of M/s Sundaresha & Associates. The Auditors claim that these are functionally separate independent entities. They also stated that none of the partners of the Firm is partner of other two firms, therefore the 40% fees limit was not breached as each firm be treated independently. Regarding sharing the same address, they contended that they have a separate section for their Firm, for which rent was being paid. 37.3 The Auditor's response states that they have complied with independence requirements and that their firm & partners do not have any financial interest in any of the CCD group compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relationship among the three firms is corroborated by another fact that CA Pradeepa Chandra C. (Partner of M/s Sundaresha & Associates) was involved in the statutory audit of CDGL for FY 2019-20 and was named as external reviewer in the Audit File. Further, CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande (both Partners of M/s Sundaresha & Associates) were also involved in the statutory audit of CDGL for FY 2018-19 and were named as external reviewers in the Audit File of CDGL for 2018-19. The totality of facts, the sharing of human resources and sharing of office address all indicate their close inter-relationship and lack of independence. In view of the interrelationship among these three audit firms, the 40% fees limit is to be assessed for three audit firms as a whole. 37.7 It is equally important to understand the relationship of these audit firms with Coffee Day Group and its promoters. M/s Sundaresha & Associates and M/s ASRMP & Co. were statutory auditors of inter alia six Coffee Day Group companies (except CDH&RPL- as per serial no-5 in Table-1). These companies were involved in the diversion of Rs 3,380 crores i.e., 95.62% of total diverted amount of Rs 3,535 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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."..... " ..... Marcum BP 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. 38.2 Similarly, in AWC (CPA) Limited, WONG Chi Wai, CPA, and WONG Fei Cheung, CPA, PCAOB observed "As the engagement partner, Albert Wong was responsible for AWC's compliance with independence requirements. Although Albert Wong knew at the time of the Kandi 2012 Audit that Mui had accepted a Power-of-Attorney from Kandi in order to handle the New York State agency matter, he failed to evaluate whether Mui's activities on Kandi's behalf constituted prohibited non-audit services that would impair Mui's independence, as well as AWC's and its associated persons. Albert Wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply 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 arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. As per SA 230 the Auditors were required to document in the Audit File, inter alia, the record of name of person & date of performing audit procedures, name of person performing review, date & extent of review and discussion of significant matters with management & Those Charged With Governance (TCWG) etc. From examination of the Audit File, an experienced auditor cannot understand features stated in para 8 of SA 230 as name of the engagement team member & date of performing audit procedures are not mentioned in any of the audit work paper, and name of the team member who reviewed the audit work and extent of review are not mentioned any of the audit work paper. Accordingly, the Auditors were charged with non-compliance with SA 200, SA 220, SA 230 and Standard on Quality Control-I. 40.1 While denying this charge, the Auditors have replied that maintenance of editable Exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) Paragraph 8 of SA 230: The auditor shall 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 arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. c) Paragraph 9 of SA 230: In documenting the nature, timing and extent of audit procedures performed, the auditor shall record: (a) The identifying characteristics of the specific items or matters tested; (b) Who performed the audit work and the date such work was completed; and ( c) Who reviewed the audit work performed and the date and extent of such review. d) Paragraph 14 of SA 230: The auditor shall assemble the audit documentation in an Audit File and complete the administrative process of assembling the final Audit File on a timely basis after the date of the auditor's report. e) Paragraph 16 of SA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it." ... "Accordingly, KPMG India violated QC§ 20 and QC§ 30 by failing to implement, communicate, and monitor adequate policies and procedures to provide the Firm with reasonable assurance that its personnel complied with PCAOB audit documentation standards-including standards concerning documentation of the date audit work was completed, of the date audit work was reviewed, and of any changes to the work papers after the documentation completion date". For this misconduct, a civil money penalty in the amount of $1,000,000 was imposed on KPMG Assurance and Consulting Services LLP, and a civil money penalty in the amount of $75,000 was imposed on Sagar Pravin Lakhani besides suspending Lakhani from being an associated person of a registered public accounting firm for a period of one year, censuring both and requiring KPMG India to undertake and certify the completion of certain improvements to its system of quality control. 42.2 In another similar case of Deloitte Canada relating to tampering of audit file, PCAOB observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available in the Audit File submitted to NFRA. The submission by the Auditors of additional documents now, subsequent to the submission of Audit File, to defend the charges in the SCN, points to the incorrect averments made in the affidavit submitted by the Firm. 44 Therefore, considering the provisions of the auditing standards and the affidavit filed by the Firm, the submission of the Auditors regarding the additional documents cannot be accepted and in light of the facts, circumstances and analysis above, we find these additional documents to be an afterthought to cover up the deficiencies in the Audit. Further, this also constitutes tampering of the Audit File. This is unbecoming behavior on the part of Professionals. Besides our Standards, the case laws quoted above show that internationally Regulators treat the integrity of the Audit file as sacrosanct and any kind of tampering is viewed seriously attracting significant sanctions. 45 In view of above analysis, we find that the Auditors have violated SQC 1, SA 200, SA 220 and SA 230. IV. Lapse in audit of sale of 'Global Village Undertaking" at a net consideration of Rs 721 crores 46 During the year, the company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation report which is neither available nor mentioned in the Audit files for FY 2018-19 and FY 2019-20. The Audit file does not mention the encashment of debentures valuing Rs 286 crores. In respect of the no objection from Lenders, it was seen that these are letters issued on or after 27.03.2020, i.e., post the date of sale transaction (24.02.2020). There is no Audit evidence on file to show that the Auditors looked into these transactions in light of the provisions of Ind AS 109 . 47.3 These details and documentation about valuation, no dues from borrowers are additional documents given with the reply which cannot be entertained at this stage for reasons enumerated in Section-C-III of this Order. Thus, we conclude that no Audit procedures were performed in this matter and the Auditors have not complied with SA 500 and Ind AS 109. D. OTHER NON-COMPLIANCES WITH LAWS AND REGULATIONS In addition to the major charges mentioned in Section - C of this Order, the Auditors were also charged with the following non-compliances with Laws and Regulations: - I. Failure to report non compliances with section 134(1) of the Act. II Failure to comply with SA 315 - "Identifying and asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was financed, to understand the classes of transactions and account balances 10, the Auditors have denied this charge stating that they had obtained the understanding of TDL during the previous years' audit and obtained relevant documents in previous years' audit11, 12,13 .There were no changes in the nature of operations, ownership, governance structures, types of investment and how it is financed except for the death of VGS and sale of Tech Park. The Auditors replied that they had obtained balance confirmations from related parties and verified that transactions with related parties were within approved limits. They could not get Sufficient Appropriate Audit Evidence regarding provision for doubtful advance and hence had mentioned the same in the basis of disclaimer of opinion. After considering these submissions, we observe that risk assessment procedures are required to be performed every year by understanding the company and its environment. There is no evidence in the Audit File about performing any risk assessment procedure at planning stage of audit. No analysis of borrowings and loans/advances granted to related parties was done by the Auditors at planning stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that communication with TCWG & its documentation in Audit File is a mandatory requirement, to be complied with by the auditors, which they did not comply. Further, deficiencies in internal control with reference to diversion of funds to promoter owned entities and evergreening of loans through structured circulation of funds have already been proved. The Auditors have failed to communicate such deficiencies in internal control with TCWG. Accordingly, we find that this charge is proved. 48.5 The Auditors were also charged with non-compliance with SA 210- Agreeing the terms of audit engagements. Having considered the reply, we drop this charge. E. OMISSIONS AND COMMISSIONS BY THE AUDIT FIRM In addition to being jointly responsible for the lapses in Audit performed by the EP and other members of the engagement team, the Audit Firm was charged with omissions and commissions solely attributable to it. These are discussed below. Lapses of Audit Firm on assigning responsibility of audit of TDL 49 The Audit firm was charged with bifurcating responsibility of audit engagement of TDL for FY 2019-20 and assigning it to two engagement partners in violation of SQC 1, which requires t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner and CA Chaitanya G. Deshpande was shown as EP in the audit plan. Chaitanya has not disputed this position in his reply. Therefore, we hold that CA C. Ramesh, as well as CA Chaitanya G. Deshpande were members of engagement team and are jointly and severally responsible for all lapses. The audit firm is also responsible for lack of due diligence in constituting their Engagement Team with multiple EPs in violation of SQC 1. 53 We observe from the Audit Firm's reply that there was no clarity about the EP who was required to take ultimate responsibility for the Audit Engagement. This led to a situation where the entire audit was conducted in a perfunctory manner and no single ET member took the ultimate responsibility of the audit engagement. This has adversely affected the performance of audit engagement as evident from the preceding paras. Therefore, we find that the charge that the Audit Firm bifurcated responsibility of audit engagement of TDL for FY 2019-20 and assigned it to two engagement partners in violation of SQC 1, is proved Responsibility of the Audit Firm for the audit work done by the Engagement Team 54 In addition to lapses in constitution of the engagement t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formed by Engagement Team on behalf of the Audit Firm appointed as statutory auditor under section 13 9 of the Act. The audit reports are signed on behalf of the Audit Firm and, therefore, the Audit Firm remains responsible for all the acts of omissions and commissions by the Engagement Team as well as for violation of duties and responsibilities specifically required of the Audit Firm. M/s Sundaresha & Associates was the Statutory Auditor of TDL for FY 2019-20. We have already considered in the preceding paragraphs, the point wise replies of the Audit Firm and determined that the Audit Firm and the Engagement Team have been grossly negligent in not ensuring that the Audit of TDL was performed in accordance with the applicable laws and rules and that the Audit Report issued on behalf of the Audit Firm was appropriate. Therefore, as per the SAs and the legal provisions mentioned above, in addition to the Engagement Team, the Audit Firm is also responsible for the lapses discussed in the preceding paragraphs of this Order. F. POINTS OF LAW RAISED BY THE AUDITORS 56 Before proceeding with the articles of charges of professional misconduct by the Auditors, we would like to record so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atements made by the Company as explained in Section - C-I, C-IV, and D-(I & III) above. c) 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 proved as the Auditors failed to conduct the audit in accordance with the SAs and applicable regulations, failed to report the material misstatements in the financial statements arising from diversion of funds & circulation of funds and failed to report non-compliances made by the Company, as explained in Section -C and D above. d) The Auditors committed professional misconduct as defined by clause 8 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 obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion". This charge is proved as the Auditors failed to conduct the audit in accordance with the SAs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimer on a particular aspect is given. The Auditors have failed in their statutory duty and have tried to hide behind Disclaimer of Opinion, which was incomplete as they did not cover all aspects of infraction of the Laws and the Standards. The death of VGS, the key player of the entire financial fraud, happened in July 2019 and the Auditors had sufficient time to evaluate all the parameters spelt out in this Order where the Standards have not been adhered to. The Auditors had access to the investigation report of Mr. Ashok Kumar Malhotra, which contained complete details of diversion of funds and its modus operandi, including signing of blank cheques. Despite this, they did not report fraudulent diversion of funds, just to maintain their professional relationship with the promoters of the auditee company. They deliberately chose to shy away from discharging their statutory duty to protect the public interest. Besides the non-adherence to the Standards as detailed in this order, the Auditors tampered with the Audit File. All of this weighs heavily on our mind while determing the quantum of penalty. 62 As detailed. in this Order, substantial deficiencies in Audit, abdication of res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 26.04.2023 in case of TDL for FY 2018-19 and Order no. NF-23/14/2022 dated 30.05.2023 in case of GVIL for FY 2019-20. b) 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. This debarment period will run concurrently along with debarment ordered by the Order no. NF- 23/14/2022 dated 26.04.2023 in case of TDL for FY 2018-19 and Order no. NF-23/14/2022 dated 30.05.2023 in case of GVIL for FY 2019-20. c) Imposition of a monetary penalty of Rs Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande 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. This debarment period will run concurrently along with debarment ordered by the Order no. NF-23/14/2022 dated 30.05.2023 in case of GVIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not reported to the Central Government, shall disclose the details about such frauds in the Board's report in such manner as may be prescribed." Para 3 (x) of CARO - The auditor's report on the accounts of a company to which this Order applies shall include a statement on the following matters, namely "whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated". Para 16 of SA 200 provides that 'The auditor shall exercise professional judgment in planning and performing an audit of Financial Statements'. Para 13 (k) of SA 200 defines Professional Judgement as 'The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement'. Professional skepticism is defined at para 13(1) of SA 200 as - 'An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transactions working'. 6 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'. 7 PCAOB Release No. 105-2020-012 and PCAOB Release No. 105-2020-013 both dated 24.09.2020. 8 PCAOB Release No. 105-2021-020 dated 14.12.2021. 9 PCAOB Release No. 105-2016-016 dated 18.05.2016 and PCAOB Release No. 105-2019-022, PCAOB Release No. 105-2019-023 both dated 10.09.2019. 10 para 11 (b) of SA 315- "Identifying and assessing the risk of material misstatement through u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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