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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 ..... ular transactions of funds - HELD THAT:- 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 the risk of material misstatements associated with related party relationships and transactions. Further, the Auditors were charged with failure to obtain balance confirmations from related parties. The Auditors have denied the charge stating that they have disclaimed the Financial Statements of TDL as a whole. They stated that they had verified completeness of related party list; obtained management representation; mapped nature of relationships in first year of audit; tracked related party transactions (RPT); checked authorisation of RPT and reported the RPT outside the normal course of business in the audit report and obtained balance confirmations. They also attached copies of balance confirmations obtained from related parties. Having considered the reply, it is noted that the reply is not supported by the evidence in the Audit File except that the Auditors had verified the arithmetical accuracy of the related party transactions - In similar cases of diversion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hion that the liabilities of Rs 1520.64 crores and assets of Rs 1051.25 crores were transferred to GVTPPL, which issued debentures of Rs 721 crores to TDL. Thereafter, the GVTPPL was taken over by the Sattva Group. Debentures worth Rs 286.72 crores were redeemed and debentures worth Rs 434.28 crores are held as investment in the balance sheet of TDL - There is no evidence in the Audit File that consent from the lenders was obtained before transfer of borrowings by TDL to GVTPPL. The Auditors did not verify whether TDL had complied with the requirement of lnd AS 109 before extinguishing financial liabilities. Failure to report non compliances with section 134(1) of the Act - HELD THAT:- As per section 134(1) of the Act, approval of the Financial Statements by the Board and its signing by the persons authorized by the Board are prerequisites before an auditor makes a report on such approved signed financial statements. Further, the reliance on the Doctrine of Indoor Management is misplaced as this Doctrine is applicable to third parties, not having access to the internal records of a company. The Auditors should have obtained a certified copy of the Board resolution approvin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter 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, it is found that this charge is proved - Auditors were also charged with non-compliance with SA 210- Agreeing the terms of audit engagements. Having considered the reply, this charge is dropped. Penalty and Sanctions - HELD THAT:- Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law. Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered: a) 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 four years from being appointed as an auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anya' hereafter), who are members of ICAI and were members of Engagement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e misstatements amounted to Rs 4475.69 crores, which the Auditors did not identify and report in their 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual Chartered Accountants or firms of Chartered Accountants. 8 The Statutory Auditors, whether individuals 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it transpired that MACEL did not have any business transactions with the 6 of the 7 subsidiary companies (the 7th company being CDGL). MACEL was used as a conduit to transfer funds from CDEL's subsidiaries to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, as loans and advances that were never returned to MACEL/CDEL. 14 The modus operandi of the alleged diversion of funds discovered by the SEBI during its investigation was that VGS used to ask the Authorized Signatories to sign a bunch of cheques which were kept in his possession and used them as and when required'' . Such pre signed blank cheques of bank accounts of various Coffee Day Group companies were used for 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o SCN, which was allowed. After availing extension of time, the firm vide letter dated 01.02.2023 submitted reply to SCN. Ramesh vide letter dated 04.02.2023 and Chaitanya vide letter dated 03.02.2023 intimated that reply of the Firm may be treated as their reply and they did not submit separate replies. In the interest of natural justice, opportunity of personal hearing was also given to the Auditors on 17.03.2023 at 11 :00 AM / 2:30 PM. However, both the Firm and the CA C. Ramesh withdrew their requests for personal hearing vide letters dated 28.02.2023. CA Chaitanya G. Deshpande, vide letter dated 08-03-2023, expressed his inability to attend the personal hearing and requested NFRA to decide the case based on his written submissions. Accordingly, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and which is not in accordance with relevant Ind AS . In respect of compliance with accounting standards, they reported that We are unable to comment whether the financial statements comply with the Accounting Standards specified under Section 133 of the Act, because of the matters described in the Basis for Disclaimer of Opinion section above . In the Basis of Disclaimer of Opinion section in their audit report on Internal Financial Control over Financial Reporting, they reported that Due to the possible effects of the matters described in the Basis for Disclaimer of Opinion paragraph in our main audit report, we are unable to obtain sufficient appropriate audit evidence to provide a basis for our opinion on whether the Company had adequate internal financial 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 importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been provided to them. In this regard, the relevant extracts of the SEBI report that were relied upon in the SCN, have been provided to the Auditors and thus there is no merit in this objection. 25 The Auditors have further submitted that they have inadvertently missed certain evidences with respect to their Audit File as they were not aware about NFRA's expectations in relation to verification of Audit File and have submitted 8 additional documents (total 84 pages) for consideration. This issue is dealt in Chapter -III of Section C. C. MAJOR LAPSES IN THE AUDIT After considering the general issues raised by the Auditors in their reply, we now move on to the major lapses found in their Audit for which they were charged. The SCN charged the Auditors for following lapses: I. Failure 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 Undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval during the company's AGM on 23.01.2019, by a special resolution permitting TDL to lend/invest upto Rs 10000 crores to group companies and others. The Auditors responded that the transactions were in conformity with section 180 and section 186 of the Act. They further replied that there was no business relation between TDL and MACEL. They also relied on section 185 (3) (c) of the Act by virtue of which, no approval was required for advancing money to a wholly owned subsidiary like TRRDPL. The money advanced to the subsidiary viz GVIL and TRRDPL was for furthering their business. Lastly, they relied on the fact that related party disclosures had been made in the audited accounts of the company. 27.2 Analyzing the responses of the Auditors on the issue of diversion of funds, we find that the specific resolution 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt the same as required under the Act and auditing standards. 27.4 In the case of diversion of Rs 511.16 crore to GVIL, the Auditors replied that sums had been advanced in earlier years, to further the business of GVIL, which is a subsidiary. It is seen that GVIL has no business and so the money advanced to GVIL was actually for facilitating structured circulation of funds within the group which is discussed subsequently. 27.5 At this point, we feel that it would not be out of place to mention that M/s Sundaresha Associates, the audit form for TDL, was also the Auditor of GVIL and their related firm Mis ASRMP Co was the Auditor of TRRDPL. In the case of TDL, GVIL and TRRDPL, the Auditors issued a Disclaimer of Opinion regarding recoverability of monies due from MACEL. However, a similar declaimer was not issued 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trial Balance. There is no evaluation as to why such huge advance was still appearing and why the land had not been transferred in the name of TDL. Non-registration of land even after two and half years of releasing the advance was a good reason to do in-depth analysis, exercising professional skepticism and asking questions to TCWG/Management. 28.1 We notice that non-registration of land in TDL's name, absence of any plan in TDL to utilize that land for business purpose and TDL's initial thinking to make provision for doubtful advance were good reasons to apply professional skepticism to the possibility that Rs 275 crores were fraudulently diverted to promoter's family members. The Auditors failed to report on such fraudulent diversion of funds. Further, the Auditors could not give satisfactory reply with reference 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 Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t OF MACEL 30.4 It can be observed from Table-4 that on 10.04.2019 MACEL got Rs 90 crores from CDGL, which started a series of sham payments on the same day in a circular manner. The fund was circulated among MACEL, TDL, GVIL TRRDPL, such as Rs 90 crores was paid by MACEL to TDL, which then paid Rs 90 crores 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 to MACEL, which then paid Rs 90 crores to TRRDPL, thereafter Rs 90 crores was paid by TDL to MACEL, which then paid Rs 80 crores to TDL, and so on .... This could also be observed by the Auditors from the bank statements of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ulterior motive of diversion to promoter controlled entity without approvals and any agreement. These were indications of fraudulent intention of the promoters, which required the Auditors to perform the audit with professional skepticism and as per the auditing standards and the Act. We find in the instant case that the Auditors did not perform any such procedures and thus failed to comply with auditing standards and the Act. 32 The Auditors had the statutory duty to report this fraud to the Central Government under section 143(12) of the Act, which they did not comply. On the contrary, the Auditors reported in para (x) of CARO that According to the information and explanations given to us, and on the basis of test checks carried out in accordance with the generally accepted auditing procedure, no material .fraud on or by the company has been noticed or reported during 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as silent on this aspect of absence of IFC. 34.1 The Auditors response to this charge primarily rests on the argument that the audit of FY 2019-20 was not the first year of audit, they had verified bank reconciliation statements, they were not the forensic auditors, and that the investigations by Mr. Ashok Kumar Malhotra and Agastya legal LLP were sufficient to indicate lapses in internal controls. They also stated that signing of cheques, circulation and fraudulent diversion of funds cannot be detected from regular audit procedures and requires extensive forensic procedures at the group level to detect the same. 34.2 It may be noted that an Auditor is required to review the Internal Financial Control every year as there is possibility of changes in the control processes. From the replies, we find that the Auditors have tried to justify this failure by relying on other audit procedures done by 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocedures and exercise professional skepticism in related party transactions and internal control over financial reporting, PCAOB (Public Company Accounting Oversight Board- US Audit regulator) have penalised the auditors in following cases. 36.1 The PCAOB 7 in matters of diversion of funds to related parties on the pretext of purchase of material, observed 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to audit engagements of financial statements. SA 220 requires the Auditor to form a conclusion on compliance with independence requirements that apply to the audit engagement. 37.1 The Auditors have three related audit firms. These three audit firms have provided a large number of audit and non-audit services to the Coffee Day Group (CCD Group) and promoters and the founding partner of the Audit firm was associated with the group for a long time. This has created self-interest and familiarity threat. It was also seen that the total billing for services rendered to the CCD group had increased from 31 % of total fee earned in FY 2018-19 to 41.68% of total fee earned in FY 2019-20, which was in excess of the threshold of 40% given in the Code of Ethics. The SCN charged the Auditors of not having evaluated their independence from TDL before continuing with this audit engagement and thus were not in conformity with 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 concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... address. 37.5 From the information obtained from CDGL, we note that CA Pradeepa Chandra C. (Partner of M/s Sundaresha Associates) worked at M/s ASRMP Co, Statutory Auditor of CDGL, and gave presentation on behalf of M/s ASRMP Co. in the Audit Committee Meeting(' ACM' hereafter) of CDGL held on 07.02.2019 and 24.05.2019. These presentations related to review of quarterly results of CDGL by the Auditor, scope of engagement, audit approach, observations of the Auditor on the Statutory Audit of the annual financial statements for FY 2018-19 and applicability of Ind AS 116 for FY 2019-20. A perusal of the Audit File shows that the presentations given by CA Pradeepa Chandra C. to the Audit Committee of CDGL on 24.05.2019 were authored by CA Megha Sundaresha Andani, partner of M/s Sundaresha Associates. This clearly shows the sharing of resources between these two audit firms and their interrelationship. 37.6 The inter- 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. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate their independence from Coffee Day Group and its promoters before continuance of audit engagement of TDL for FY 2019-20. A similar finding was recorded by us in para no. 33 of our Order dated 26.04.2023 regarding statutory audit of TDL for FY 2018-19 ,when we found that M/s Sundaresha Associates had accepted the audit assignment by disregarding and grossly violating the principles of Independence mentioned in the Standards on Auditing. In light of the facts stated above , it is clear that the Auditors have violated the provisions of SQC 1, SA 200 and SA220. 38 In cases relating to violation of independence requirements, PCAOB has penalized audit firms and their partners 9 38.1 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. ..... ..... Marcum BP failed to implement, effectivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Audit File are not permissible as per SA 230. 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, which in this case. was 21.11.2020. Accordingly, the Audit File was required to be assembled by 20.01.2021. Thereafter, any modification in the Audit File is not permissible as per para 16 of SA 230. Analysis of the Audit File indicates that modifications were made in the Audit File after 26.07.2022, the date (NFRA asked for the Audit File), making the Audit File unreliable. 40 Further, as per 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 arising during the audit, the conclusions reached t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge number of audit documents were modified and at least three new audit work papers were created after NFRA called the Audit File for examination. 41 Along with reply to SCN, the Auditors have also submitted eight additional work papers (84 pages) for consideration and stated that they have inadvertently missed certain evidence as they were not aware about NFRA's expectations in relation to verification of Audit File. SA 230 emphasizes the importance of timely preparation of audit documentation and its archival within a reasonable time after the issuance of the audit report. We highlight below some of the paras of the Standard:- a) Paragraph 7 of SA 230: The auditor shall prepare audit documentation on a timely basis. The explanatory material to the Standard at Para Al, inter alia, states that Documentation prepared after the audit work has been performed is likely to be less accurate than documentation prepared at the time such work is performed. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve scope for large scale production of additional documents as an afterthought upon commencement of disciplinary proceedings. 42.1 In the Matter of KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani (Engagement Partner) relating to tampering of audit file, PCAOB (Public Company Accounting Oversight Board - Audit Regulator of United States of America), observed that PCAOB standards require that audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement . .. to determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review .... PCAOB standards further require an auditor to archive a complete and final set of audit documentation as of a date not more than 45 days after the report release date (i.e., the documentation completion date). Any documentation added after the documentation completion 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 fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misconduct, PCAOB had imposed a civil money penalty of $350,000 on the firm besides censuring the firm, requiring it to take corrective actions to establish, revise, or supplement, as necessary, its quality control policies and procedures. 42.3 There have been many other instances of such wrongdoings being penalized by the PCAOB, e.g., KPMG Singapore- Tan Joon Wei (2021), BDO-Mexico (2019), and Deloitte Brazil (2016) etc. 43 We further note that while submitting the Audit File to NFRA, through a duly notarized affidavit dated 10.08.2022 signed by CA Pradeepa Chandra C., partner of the Firm, it was averred that The Audit File for the financial year 2019-20 as defined in Para 6(b) of SA 230 has been submitted .... It is certified that the above information is true and complete in all respects, and nothing has been concealed . The Auditors are expected to know what constitutes Audit File as per SA 230 and accordingly, all audit work papers were expected to be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t File that consent from the lenders was obtained before transfer of borrowings by TDL to GVTPPL. The Auditors did not verify whether TDL had complied with the requirement of lnd AS 109 before extinguishing financial liabilities. 47.1 While denying the charge, the Auditors stated that they had obtained copies of three valuation reports of GVU during audit for FY 2018-19 and attached their copies with reply to SCN. They also attached some no dues or no objections certificate purported to be from lenders of Global Village Tech Park. They stated that debentures of Rs 286.72 crores were redeemed by TDL to repay various lenders and stated that there is no difference in recording the accounting and disclosure of the consideration of Rs 721 crores. They finally stated that they had complied with SA 500 and Ind AS 109. 47.2 As mentioned earlier, GVTPPL was created in August 2019, after the death of VGS for the sale of GVU. The Auditors, in their reply, are relying on an earlier year valuation 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Board and its signing by the persons authorized by the Board are prerequisites before an auditor makes a report on such approved signed financial statements. Further, the reliance on the Doctrine of Indoor Management is misplaced as this Doctrine is applicable to third parties, not having access to the internal records of a company. The Auditors should have obtained a certified copy of the Board resolution approving the Financial Statements and authorizing the Directors to sign the Financial Statements and should have kept the same in the Audit File before its assembly. The Auditors did not do the same. Thus, the charge that the Auditors did not ensure compliance with section 134(1) of the Act by TDL, is proved. 48.2 With respect to the charge relating to failure to perform audit procedures as per SA 315, SA 330 and SA 500 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 10 , the Auditors have denied this charge stating that they had obtained the understanding of TDL during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found not satisfactory. We are of the view that such fraudulent transactions were required to be considered while drawing conclusions, which the Auditors failed to do. Accordingly, we find that the Auditors were grossly negligent in drawing conclusions and forming audit opinion. We find that the Auditors did not comply with SA 700. 48.4 With respect to the charge relating to failure to determine TCWG, failure to communicate with TCWG about the responsibilities of auditor; overview of planned scope; timing of the audit; and deficiencies in Internal Control etc., the Auditors replied that due to small mid-sized nature of their firm, possibly each and every discussion with TCWG might not have been recorded but they have relied on the facts and applied professional judgement skepticism during the course of audit and arrived at audit conclusion based on audit evidence obtained during audit, explanation provided during the audit and discussion with the management/TCWG. Having considered the reply, we note 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reported to CA Ramesh who reviewed the work of the team and signed off the engagement. There is no bifurcation of duties. 52 It can be noted that the term 'Engagement Partner' (EP) is defined in SQC 1 as the partner or other person in the firm who is a member of the Institute of Chartered Accountants of India and is in full time practice and is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body . As per this definition, the EP has to take complete responsibility for the engagement, its performance, and for the audit report. Further, it is noticed from the Audit File that Chaitanya was doing only day to day work whereas responsibility of engagement was on Ramesh, who signed the audit report. Though as per SQC 1, one engagement can have only one EP, in this case the audit firm appointed one signing partner and one EP. CA C. Ramesh was appointed as signing partner 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... described in the Basis for Disclaimer of Opinion section of their audit report on the Financial Statements and Internal Financial Control over Financial Reporting. d) They were unable to comment whether books of accounts as required by the law have been kept by the Company; and whether the Financial Statements comply with the Accounting Standards specified u/s 133 of the Act, because of the matters described in the Basis for Disclaimer of Opinion section of their audit report. e) The Balance Sheet, the Statement of Profit and Loss (Including Other Comprehensive Income), the Statement of Changes in Equity and Statement of Cash Flows dealt with by their Audit Report are in agreement with the books of account. f) In compliance with section 143(12) of the Act, the Audit Firm replied that there is no fraud identified by them, hence there is no reporting requirement to the Central Government. g) They had complied with provisions of section 143 in performing their duties as auditor of the financial statements of TDL. 55 Statutory Audits are performed by Engagement Team on behalf of the Audit Firm appointed as statutory auditor under section 13 9 of the Act. The audit report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : a) The Auditors committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he ''fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity . This charge is proved as the Auditors failed to disclose in their report the material non-compliances by the Company as explained in Section - C-I, C-IV, and D-(I III) above. b) 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-I, C-IV, and D-(I III) above. c) The Auditors comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, we conclude that all the charges of professional misconduct in the SCN (Except charges relating to noncompliance with SA 210, which has been dropped) stand proved based on the evidence in the Audit File, the Audit Report dated 21.11.2020 issued on behalf of the Firm, the submissions made by the Auditors and the Financial Statements of TDL for the FY 2019-20. I. PENALTY SANCTIONS 60 Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law. 61 This order has detailed out all the lapses in Audit and the non-compliances with the SAs, Quality Control Standards and Code of Ethics by the Auditors. The constant refrain of the Auditors throughout their reply has been that they had given the Disclaimer of Opinion indicating non recoverability of advances made to MACEL and Kiran Hegde. The Standards on Auditing do not free an Auditor from reporting all other misstatements once a Disclaimer on a particular aspect is given. The Auditors have failed in their statutory d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es vide letter dated 10.09.2022 and M/s ASRMP Co. vide letter dated 29.09.2022, the statutory audit fees of TDL for 2019- 20 was Rs and total professional fees received by the Audit Firm during FY 2019-20 was Rs .CA C. Ramesh and CA Chaitanya G. Deshpande earned total professional fee of Rs .. and Rs ..respectively during FY 2019-20. 65 Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order: a) 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 four 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely by book entries are prejudicial to the interests of the company; Section 143(3)(i) - the Auditor's repmt shall also state whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls; Section 143(12) - Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed: Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed: Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements and other laws and regulations that may have a material effect on the financial statements. As per para 5 of SA 315 , Auditor is required to perfom risk assessment procedures to provide a basis for the identification and assessment of Risks of Material Misstatement (ROMM) at the financial statements and assertion levels. As per para 25 of SA 315, Auditor is required to identify assess the ROMM at financial statements level and assertion level for classes of transactions, account balances and disclosures. As per para 5 of SA 330 , Auditor is required to respond to the identified ROMM. As per para 19 of SA 330, Auditor is required to consider whether external confirmation procedures were to be perfomed as substantive audit procedure. As per para 6 of SA 500 'Audit Evidence', Auditor is required to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining Sufficient Appropriate Audit Evidence (SAAE). 5 Trial Balance available in Audit work paper 'Related Party Transac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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