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TMI Blog2023 (9) TMI 823X X X X Extracts X X X X X X X X Extracts X X X X ..... ('BCL' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2018-19. 2. This Order is divided into the following sections: A Executive Summary B. Introduction & Background C. Lapses in the audit D. Specific Lapses of the Audit Firm E. Article of Charges of Professional Misconduct by the Auditors F. Additional Articles of Charges of Professional Misconduct specific to the Audit Firm G. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) against the Auditors of Burnpur Cement Limited, West Bengal, for professional or other misconduct in relation to statutory audit for FY 2018-19, pursuant to information received from Securities and Exchange Board of India ('SEBI' hereafter). The SEBI vide letter dated 11.03.2022, shared information pertaining to non-reporting of contingent liability arising out of the Income Tax ('IT' hereafter) Department order dated 31.12.2018, which identified additional income of Rs 63.11 crores and imposed additional tax (including interest) of Rs. 17.53 crores. SEBI letter pointed to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery of their dues and warranted proper presentation of their valuation in the balance sheet after consideration of impairment in accordance with the applicable provisions of lnd AS 364. 8. While the standards lay significant emphasis on the Engagement Quality Review Process and appointment of EQCR, the Auditors failed to perform their obligation under Standard on Quality Control ('SQC 1' hereafter), that the Auditors shall determine that an Engagement Quality Control Reviewer ('EQCR' hereafter) was appointed for the audits of listed entities. The Auditors also made an effort to hide such failures, as they provided false information and thereby misled NFRA regarding such appointment. 9. The Auditors failed in applying sufficient appropriate audit procedure and professional skepticism in identifying and reporting of material misstatements in the financial statements. The Auditors were grossly negligent in the conduct of the audit, which led to erroneous reporting and portraying a misleading picture of the company to the investors and stakeholders. 10. Based on the investigation and proceedings under section 132 (4) of the Companies Act and after giving the Auditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds ('Ind AS' hereafter), as notified by Ministry of Corporate Affairs. 14. NFRA took up investigation under Section 132 (4) of the Companies Act, 2013 after receipt of a letter dated 11.03.2022 from SEBI, which pointed out non-reporting by BCL of contingent liability arising out of the IT Department order dated 31.12.2018. The IT order identified additional income of Rs 63.11 crores and imposed additional tax (including interest) of Rs 17.53 crores. The SEBI letter also conveyed the failure of the Auditors in reporting in the CARO 2016 report about the dispute regarding levy of this additional income tax. 15. Vide letter dated 29.03.2022, the Audit File for the FY 2018-19 along with other information, was called from the Auditors, giving 30 days' time for submission of the required documents. The Auditors submitted the Audit File on 28.04.2022. As part of the investigation, a questionnaire dated 19.07.2022 was also sent to the Auditors and their response was received on 17.08.2022. 16. On examination of the Audit File, it was observed that despite prima facie violations of the SAs and the relevant requirements ofCA-2013, and a qualified report issued by the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e written responses of the Auditors. The major lapses include non-recognition of interest cost on borrowings classified as Non-Performing Assets (NPAs), non-recognition of provision for liability / disclosure of contingent liability arising out of Income Tax dispute and non-reporting of the same under CARO 2016, nonassessment of going concern basis, non-evaluation / verification of Property, Plant and Equipment (PPE), non-assessment of risk of material misstatement in balances of Trade Receivables, non-appointment of EQCR and improper planning of audit. These have been discussed in Part 'C' of this Order. Part 'D' deals with the specific lapses of the Audit Firm. Part C C.1 Failure to report non-recognition of Interest Cost on Borrowings classified as Non-Performing Assets (NPAs) 20. The Auditors were charged with failure to report non-recognition of lnterest Cost on Borrowings classified as Non-Performing Assets (NPA). It was observed8 that BCL had availed of credit facilities from Central Bank of lndia (CBI), State Bank of India (SBI) and United Bank of India (UBI). There were defaults in payment of interest and principal amounts pertaining to the credit taken by the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Company had not provided for accrued interest on loans taken from bank in its books of company is under process of arriving at a settlement for repayment of these dues. Accordingly, interest will be provided only when the liability crystallizes. " When any loan is declared as NPA we don't recognize interest on it. Management did not agree to charge interest as loans had become NPA. Banks from which loan was taken had not charged any interest from company during that period. Negotiation was going on with bank for settlement of loan and waiver of interest, so interest could not be charged. As a general accounting practice, we don't charge interest when any loan becomes NP A. Same principle was applied by us in accounting of BCL also. No interest was charged by the lending banks for the said date hence there was no obligation on company to pay interest, hence no material misstatement was there." 24. On the Auditors' reply, we observe the following: a) The contention of the Auditors that since no interest was being charged by the bank, there was no obligation on the BCL to recognize interest cost, is not correct. The Auditors are completely wrong in their assumpti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the charge against the Auditors of failing to report nonrecognition of interest cost on borrowings is established. C.2 Failure to report effect of Income Tax order in the Financial Statements of the company 25. The Auditors were charged with failure to perform audit procedures to analyse and point out nonreporting of the effect of Income Tax Assessment Order in the form of provision for liability or disclosure of the contingent liability. As per the information received from SEBI, the IT department had issued an assessment order ('ITAO' hereafter) dated 31.12.2018 against BCL, identifying additional undisclosed income of t 63.11 crores pertaining to FYs 2010-11 to 2016-17, on which additional income tax (including interest) of n 7.53 crores was levied. The company was required to make provision for such liability or had to disclose it as contingent liability, which it failed to do. The Auditors also failed to challenge that such accounting treatment by the management was in violation of Para 14 of Ind AS 37 and Para 28 of Ind AS 37 - I. As per Para 14 of lnd AS 3712 : A provision shall be recognised when: a. An entity has a present obligation (legal or construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t they were unaware of any IT order (ITAO) and also submitted that" .... The management also failed to provide us with necessary information on contingent liability. We relied on all papers and documents present at that time in office. The examination of the documents and other material on record didn't have any indication o[existence o[liability. So as on that date reporting was done seeing the documents and scenario present at that time. We were totally unaware of any such liability existing on that date ... .... " The Auditors claimed that they first came to know about the contingent liability vide the SEBI letter, and since they were unaware of the ITAO, Ind AS 37 was not to be invoked and that nothing was concealed while reporting under CARO 2016. 27. In this regard, we observe the following: a) In his reply dated 13.02.2022 to SEBI in this connection, the EP didn't mention about being unaware about the IT AO or about non-availability of user credentials or denial of information by the management of BCL. His reply is reproduced below: "Although there was an Assessment order passed by the DCIT, Income Tax Department in the matter of Burnpur cements Limited, as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the management. In light of Para 11 - 13 of SA 705, as the limitations remained, the Auditors could not issue unmodified opinion in the Independent Auditor's Report, as they did. 28. It is evident from the preceding discussion that the Auditors were aware about the ITAO and, therefore, they were required to ensure that its impact was reflected as a provision for the liability or as disclosure of the contingent liability, which they failed to do. Accordingly, we hold the Auditors responsible for the charge pertaining to their failure to report non-recognition of provision for liability or failure to report non-disclosure of contingent liability on account of additional income tax. C.3 Non-assessment of going concern assumption 29. The Auditors were charged with non-evaluation of the appropriateness of the going concern assumption in preparation of financial statements by the BCL. The SCN noted that BCL had prepared the financial statements of 2018-19 on going concern basis, despite presence of the following adverse factors,16 indicating material uncertainty about the entity's ability to continue as going concern in foreseeable future: a. BCL reported loss of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia by UV Asset Reconstruction Company and had carried out analysis of trading estimates & future cash flow, cannot be established, as these are not part of the Audit File. 32. The Auditors incorporated18 an Emphasis of Matter on the going concern basis, however, we did not find any working paper in support of inclusion of such EoM. According to SA 70619 , an EoM can be included by an auditor if he has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. Therefore, it was incumbent on the Auditors to evaluate the matter accordingly, especially in view of the qualified opinion given by the previous auditor and several other factors (as mentioned in Para 29 above), that raised a question mark on the going concern assumption. The Auditors, based on their own independent evaluation, were required to determine if they needed to modify their opinion. We find that the Auditors failed to do this and issued an unmodified opinion. 33. Such lapses have been viewed seriously by international regulators as well. For example, Public Company Accounting Oversight Board20 ('PCAOB' hereafter), the US Regulator, charged Bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the effect of the matter, if any, on other aspects of the audit. However, we did not find any working paper that conclusively records that physical verification of PPE was carried out by the management and concluding that the internal audit report was not reliable. The Auditor's submission that as per their assessment, valuation of the PPE was more than the above value recorded in the books of accounts, is not supported by documentation in the audit file containing assessment of the value of PPE and their impairment testing as per applicable provisions of Ind AS 36. As per Para 12 (f) of lnd AS 36, an entity needs to consider the following indication for testing of the impairment of assets: "Significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near.future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Auditors to ascertain the correctness of the amounts of Trade Receivables reported by the company. b. The previous auditor in his Independent Auditor's Report for 2017-18 had qualified25 the audit report due to inability to comment upon the correctness of Trade Receivables. The opening balance of Trade Receivables for FY 2017-18 (Rs. 34.39 crores26) had reduced significantly to Rs. 1.13 crore on the closing date i.e., 31.03.2018, mainly by making provision for doubtful debts and write-offs of the bad debts. 39. In light of the above, the SCN charged that the Auditors were required to assess the risk of material misstatement in the balances of trade receivables as per SA 31527 and perform procedures as per Para 5 and 6 of SA 33028 in response to the assessed risk by verifying the amounts of Trade Receivables including by independent external confirmation as per Para 3 of SA 50529 , but no such documentation was found in the audit file. 40. The SCN also stated that the Auditors had earlier replied on 17.08.2022 that most of the produce was sold to Ultratech and its ledger was reconciled on regular basis, therefore no external confirmation was obtained. But on perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion that they had considered the qualification on trade receivables from the previous financial year's audit report is in contradiction of their reply dated 17.08.2022 that since the previous auditor had not made any adverse comments on the balances of trade receivables, they did not verify the opening balances. Para 5 of SA 51030 states that" The auditor shall read the most recent financial statements, if any, and the predecessor auditor's report thereon, if any, for information relevant to opening balances, including disclosures". Para 7 of SA 510 states that "If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period's financial statements, the auditor shall perform such additional audit procedures as are appropriate in the circumstances to determine the effect on the current period's financial statements ... . . . ". FY 2018-19 was the first audit year for the Auditors and accordingly, they were required to consider the most recent FS, i.e., of FY 2017-18 and the predecessor auditor's report thereon for information regarding opening balances. In the instant case, since the previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusions they reached. Para 66 of SQC1 requires that the engagement quality control reviewer conducts the review in a timely manner at appropriate stages during the engagement so that significant matters may be promptly resolved to the reviewer's satisfaction before the report is issued. Paras 68-72 of SQC1 prescribe the criteria for the eligibility of engagement quality control reviewers and lay down the guidelines for ensuring his independence and objectivity for the assigned work of quality control in the engagement. For the listed entities, the SA 220 [Para 19(a)] makes it mandatory to ensure appoint an EQCR. 47. In the backdrop of the above requirements of the statutes, we observe that when an e-mail dated 13.01.2023 was sent by NFRA to CA Shiv Raj to confirm his appointment as EQCR, CA Shiv Raj, vide his email dated 19.01.2023. denied the same and stated that he was neither appointed nor worked as an EOCR partner for the statutory audit of BCL for the FY 2018-19. He stated that he had worked for Mis K. Pandeya & Co. as an employee and was associated with the statutory audit of BCL for FY 2018-19 in the capacity of an employee only. His reply in verbatim is as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he referred case, the respondent failed to cooperate with a Board investigation by submitting audit documentation to the Division that they knew to contain false declarations. For this misconduct, including others, PCAOB censured the Firm and revoked its registration permanently. Further, Douglas A. Labrozzi, CPA, the Engagement Partner, was barred from associating with any registered public accounting firm. C.7 Non-planning of Audit 50. The Auditors were charged with: (a) failure to perform the procedures as required by Para 6 of SA 21034, which deals with ensuring the existence of pre-conditions for an audit; (b) non-compliance of the procedures relating to the acceptance of the audit of BCL as required by Para 12 of SA 220, which requires an auditor to obtain information before accepting an engagement with the new client, to ensure: * Integrity of the principal owners, key managers of the entity. * Competence of the engagement team to perform the audit engagement including time and resources. * Compliance of ethical requirement by the firm and the engagement team (c) non-compliance with Para 11 of SA 315, according to which the Auditors were required to understand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they had reviewed the off-take agreement with Ultratech Cement Ltd. and that all the sales were made in accordance with off-take agreement; and that the audit papers were prepared regularly but a copy of the same had not been kept, since there was no requirement to keep and maintain every working paper. 53. We have examined the replies submitted by the Auditors for non-compliance with the provisions of SA 210 & 220 and note that: a) Para 6 of SA 210 provides for pre-conditions of audit and Para 10 of SA 210 requires that the agreed terms of the audit engagement shall be recorded in an audit engagement letter. The Auditors submitted that this requirement was fulfilled as they had obtained the engagement letter dated 14.08.2018. However, we observe that the letter dated 14.08.2018, submitted along with the reply to the SCN, was not part of the audit file submitted to NFRA. When NFRA had asked the Auditors earlier about the Audit Engagement Letter, vide questionnaire dated 19.07.2022, the Auditors did not mention about the letter dated 14.08.2018, but referred to the appointment letter35 issued by BCL on 27.07.2018 as engagement letter. Para 10 of SA 210 lays significant emph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, the Auditors failed to ensure such fundamental requirement of independence. c) As per Para 14 of SA 220, the auditor was required to be satisfied that the engagement team collectively had appropriate capabilities and competence to perform the audit engagement in accordance with professional standards and regulatory and legal requirements. On perusal of the audit file, we did not find any audit document specifying the composition of the engagement team and analysis of their competencies and suitability to the extant audit. This clearly establishes that the firm accepted the audit engagement only for commercial consideration, overlooking the quality of work, as established in subsequent paragraphs of this Order, in violation of Para 11 of SQC1 . d) The audit file did not have any audit documentation regarding the composition of the audit team. It is only when NFRA asked about the engagement team, that the Auditors submitted that the audit team comprising CA Gaurav Vijay, Aayush Kejriwal and other staff had been formed. The name Gaurav is mentioned in the work paper "Audit Programme37 " in the audit file but a different "Audit Programme" was submitted to us along wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of para 8 of SA 230 that the auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the procedures performed. d) Such lapses have been viewed seriously by international regulators as well. For example, PCAOB40 , the US Audit Regulator, charged L.L. Bradford & Company, LLC (the "Firm") in connection with audit of WebXU Inc.'s ("WebXU") for the year ended December 31, 2011 for failure to properly assess the risks of material misstatement, failure to properly identify significant risks and failure to properly establish an overall strategy for the audit and develop an audit plan. For this misconduct, including others, PCAOB censured the Firm, revoked its registration permanently and imposed a civil money penalty of$12,500 upon the Finn. D. SPECIFIC LAPSES OF THE AUDIT FIRM 55. In addition to the lapses mentioned in the foregoing paragraphs of this Order, the Audit Firm was charged in the SCN specifically for the failure to fulfll its duties prescribed under section 143 of Companies Act, along with failure to adhere to the requirements of SQC 1. 56. The powers and dutie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF PROFESSIONAL MISCONDUCT BY THE AUDITORS 60. As discussed in the foregoing paragraphs, the Auditors have made a series of serious departures from the Standards and the Law, in their conduct of the audit of BCL for the FY 2018-19. Based on the above discussion, it is proved that the auditor issued unmodified opinion on the Financial Statements without any basis. The poor quality of audit, tampering of audit files, the cover up in terms of submission of additional documents that did not exist in the Audit File, incomplete documentation, and attempt to mislead through false and evasive replies further compound the professional misconduct of the auditors. Based on the foregoing discussions and analysis, we conclude that the Auditors have committed Professional Misconduct as defined under section 132 ( 4) of the Companies Act 2013 in terms of Section 22 of the Chartered Accountant Act 1949 (CA Act) as amended from time to time, and as detailed below: i. The Auditors committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 5 of Part I of the Second Schedule of the Chartered Accountants Act 1949 ( as amended from time to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor 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 and applicable regulations as well as due to their failure to report the material misstatements and non-compliances of the Company in the financial statements, as explained in the paras 20 to 43 and paras 50-54 above. v. The Auditors committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ''fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the Auditors failed to conduct the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s K. Pandeya & Co. (Audit Firm) and CA Manjeet Kumar Verma (EP) establish their professional misconduct. The Auditors chose to place blind reliance on the assertions of the management without applying professional skepticism to the assessment of impact of IT AO, accounting of interest cost on borrowings classified as NP As and assumption of Going Concern basis for the preparation of Financial Statements and failed in discharging their statutory duty to protect public interest by exercising professional skepticism and questioning the management's decisions leading to material misstatement in the Financial Statements. 67. Section 132(4) (c) of the Companies Act 2013 provides that National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for A) imposing penalty of (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (Il) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms; (b) debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r FY 2018-19 9 As per Note no 34 of the notes to accounts on page no 115 of Annual Report of BCL for FY 2018 19 10 Ind AS I 09 "Financial Instruments". 11 SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing" 12"Indian Accounting Standard 37 "Provisions, Contingent Liabilities and Contingent Assets" 13" SA 580 "Written Representations" 14 SA 501 "Audit Evidence-Specific Consideration for Selected Items" 15 SA 705 "Modifications to the Opinion in the Independent Auditor's Report". 16"As per Financial Statements of BCL for the FY 2018-19, 17" SA 570 "Going Concern" 18 As per Point no 1 of Emphasis of Matter para of the Independent Auditor's Report on page no 60 the Annual Report of BCL for the FY 2018-19. 19 SA 706 "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report" 20 PCAOB release No. 105 2015 028 dated 23.07.2015. 21 As per point no 13 of the Page no 243-244 of the Internal Audit Report of the Audit File submitted. 22 As per point no lb of Annexure A to the Independent Auditor's Report on page no 63 of the Annual Report of BCL for FY 2018- ..... 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