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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 ..... s. The Auditors, in complete disregard of the previous audit opinion, certified the true and fair view of the accounts, while the BCL continued to adopt the same policy on the basis of which the accounts for FY 2017-18 had been qualified by the previous auditor. The flawed accounting treatment by BCL resulted in understatement of liability and reported loss for the FY 2018-19 by t 15 .66 crores. The Auditors were required to report this material misstatement in their audit report, which they failed to do. Therefore, the charge against the Auditors of failing to report nonrecognition of interest cost on borrowings is established. Failure to report effect of Income Tax order in the Financial Statements of the company - HELD 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, 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. Non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responsible for not ensuring the testing of impairment of PPE, and the resultant non-reporting of misstatement in the financial statements, as the PPE accounted for 84% of the total assets. Non-assessment of risk of material misstatement in balances of Trade Receivables - HELD THAT:- 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 previous auditor had qualified the debtor balances, the Auditors in FY 2018-19 were required to perform additional audit procedures as required by SA 510 for evaluating the effect of debtors in the current year's FS. The audit file contains no such working - the Auditors failed in assessment of risk of material misstatement in balances of trade receivables. Non-appointment of Engagement Quality Control Reviewer (EQCR) - HELD THAT:- 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questioning the management's decisions leading to material misstatement in the Financial Statements. 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 l32(4)(c) of the Companies Act, 2013, it is ordered that: i. Monetary penalty of Rupees Five Lakhs upon CA Manjeet Kumar; ii. CA Manjeet Kumar Verma is debarred for 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. - Dr. Ajay Bhushan Prasad Pandey Chairperson, Dr. Praveen Kumar Tiwari Full Time Member And Smita Jhingran Full Time Member ORDER In the matter of M/s K. Pandeya Co. and CA Manjeet Kumar Verma under Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority 2018 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) no. NF-23/12/2022 dated 30th September 2022, issued to M/s K. Pandeya Co. ('Fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oing concern basis despite the fact the BCL had reported 1 loss of Rs 12.67 crores for the year ended 31.03.2019 and an accumulated loss Rs 115.64 crores, which had resulted in erosion of its net worth to(-) Rs 13.07 crores; was highly debt ridden i.e., its Total Debt was 83.19% of its Total Assets; was defaulting in payment of debts amounting Rs 234.15 crores; 2 and had a negative working capital i.e. (-) t 241.46 crores. The Auditors merely included the going concern matter in the Emphasis of Matter ('EOM' hereafter) without questioning the appropriateness of going concern assumptions by the BCL management and without analysing whether a modified audit opinion was warranted. 6. The Financial Statements of BCL for FY 2018-19 were materially misstated due to failure of BCL to recognise provision or disclose contingent liability Rs 17.53 crore arising out of Income Tax Dispute and to recognise interest cost on Borrowings classified as Non-Performing Assets (NP As), which resulted in understatement of interest cost and current liabilities by Rs. 15 .66 crores and understatement of the reported loss Rs. 12.67 crores by at least Rs 15.66 crores, i.e.,Rs.123.6% of the repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functions and activities of any company or body corporate. B. INTRODUCTION BACKGROUND 11. The National Financial Reporting Authority ('NFRA' hereafter) is a statutory authority set up under section 132 of the Companies Act 2013 to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA has the powers of a civil court and is empowered under section 132 (4) of the Act to investigate the prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 12. The statutory auditors, both individual and firm of chartered accountants, are appointed by the members of company under section 139 of the Act. The statutory auditors, including the Engagement Partners 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, including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly accepted in India ...... . 17. Accordingly, NFRA proceeded to take action under sub-section ( 4) of section 132 of the Act, and a Show Cause Notice (SCN) was issued to the Audit Firm Mis K. Pandeya Co. and the Engagement Partner (EP) CA Manjit Kumar Verma (collectively referred to as Auditors in this Order) on 30.09.2022 asking them to show cause by 30.10.2022 why action should not be taken for professional misconduct in respect of their performance as the Statutory Auditors of BCL for the FY 2018-19, detailed as follows: a. failure to disclose a material fact known to them, which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement, where they are concerned with that financial statement in a professional capacity; b. failure to report a material misstatement known to them to appear in a financial statement with which the Auditors are concerned in a professional capacity; c. failure to exercise due diligence, and being grossly negligent in the conduct of professional duties; d. failure to obtain sufficient information which is necessary for expression of an opinion, or its exceptions are sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd UV Asset Reconstruction Company for settlement of debts and once BCL could finalize its negotiations and crystallize the debt, it would make the provision of interest cost. 21. The SCN stated that the above referred accounting treatment followed by BCL was not in conformity with Para 3.3.1 and para 4.2.1 read with para B5.4.1 of Ind AS 109 10 . As per Para 3 3.1 an entity shall remove a financial liability (o r a part of financial liability) from its balance sheet when, and only when, it is extinguished, i.e., when the obligation specified in the contract is discharged or cancelled or expired . The SCN noted that credits from the banks were neither discharged nor cancelled by the respective lenders. Therefore, the mere fact that negotiations with UV Asset Reconstruction Company for settling its loan obligations were underway, did not discharge BCL of its liability of the interest cost on the borrowings classified as NP A. 22. The SCN noted that even by conservative estimate, the interest cost on the borrowings classified as NPA in FY 2018-19 (Rs 234.15 crore) would be Rs 15.66 crores, against which merely Rs 0.002 crores were recognized by BCL, which is a Misstateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enal interest (according to the contract between customer and bank). This accounting treatment by the lending bank cannot be a premise for the borrower to stop accruing the interest liability in their books of accounts. The borrower will continue to be covered by the provisions of Ind AS 109 in relation to discharge of a liability, as mentioned in paragraph 21 of this Order. b) We do not find any merit in the argument advanced by the Auditors. BCL was required to account for the interest cost on the borrowings classified as NP As according to the provisions of Ind AS 109, which mandate recognizing interest cost on the borrowing availed by the Company (Para 4.2.1) and accounting for the same, till such financial liability is extinguished (Para 3. 3 .1). The understanding and the contention of the Auditors in support of accounting policy of BCL to not to recognize interest cost on the borrowing classified as NP As is completely flawed and against the requirements of Ind AS 109. c) We note that in the Independent Auditor's Report on the financial statements of BCL for the FY 2017-18, the previous auditor had issued a qualified opinion on the basis, among others, of non-recog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it file did not have a copy of the IT Assessment Order, or a copy of the appeal filed, or any stay of the demand or any working by the auditor in this regard. The audit file showed no evidence of evaluation by the Auditors of adherence by BCL to the applicable provisions of Ind AS 37. As per Para 10 of SA 580 13 and Para 12 of SA 501 14 , the Auditor were required to take written representation from the management that all the transactions had been recorded and reflected in the Financial Statements and had to reach an understanding regarding disputed dues, the amount involved and the forum where the disputes were pending; and carry out necessary procedures to verify the information provided by the management. However, the audit file did not have any documentation in this regard. The SCN also alleged that the Auditors made a false declaration under Clause 7b of CARO 2016 report that no dispute under income tax was pending on the part of the company. The Auditors reported in Annexure-A to the Statutory Auditors' Report- CARO (page no. 63 of the Annual Report 18-19) that, .......On the basis of the information and explanation given to us during the course of our audit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not arise . The EP's reply to SEBI clearly shows that the Auditors were fully aware of the said ITAO. Therefore, the contention of the Auditors that since they were not aware of IT AO the dispute related to the same, they did not conceal any information under CARO 2016, cannot be accepted. b) The contention of the Auditors that they tried to obtain the required information about contingent liabilities vide their letter dated 29.04.2019 to the management, and that the BCL had denied them access to information vide their reply dated 30.04.2019, is not evidenced from the audit file and therefore the same is deemed as an afterthought. c) Even if the contention of the Auditors is accepted, then on denial of user credentials by the BCL, we note that the Auditors did not make any further attempts to get the information after the initial request. In matters of non- availability of information from the management during the audit, the Auditors were required to deal with the situation as per Para 11 of SA 705 15 , according to which if after acceptance of the audit, the management imposes limitation on the scope of the audit, which can result in auditor qualifying or discla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the use of going concern basis and had to evaluate the same to conclude if any material uncertainty existed. However, the SCN noted that the audit file neither contained any representation from the management on the use of going concern basis, nor did it have any working by the Auditors regarding testing of appropriateness of such basis. 30. Responding to the above charge, the Auditors replied that - a) They had obtained written confirmation from management, where BCL had clearly mentioned that it was a going concern. The Auditors had concluded that BCL was a going concern after taking into account all the facts like regularity in payment of salary, payment to its creditors, trading estimates and cash flow forecast. b) The UV Asset reconstruction company had taken over the loan of Central Bank of India, vide letter dated 08.04.2019, and BCL had an off-take agreement with Ultratech limited, whereby 100 % production of BCL was sold to Ultratech. Accordingly, there was no reason to believe that BCL was not a going concern. c) They had obtained sufficient appropriate audit evidence regarding the appropriateness of management's use of going concern basis, and there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... civil monetary penalty of $ 10000 on the firm. Bravos was barred from being an associated person of a registered public accounting firm. C.4 Non-evaluation/ verification of Property, Plant and Equipment (PPE) 34. The Auditors were charged with non-evaluation for impairment of PPE that constituted 84% of the total assets and failure in respect of physical verification of the same. According to the SCN, BCL's internal audit report 21 dated 08.05.2019, which was a part of the Audit File, had reported that the management did not carry out any physical verification of Fixed Assets, but the Auditors had reported 22 on 17.05.2019 that the management had carried out physical verification of PPE. There was a clear contradiction between the internal audit report and the statutory audit report. In accordance with Para 15 of SA 200, which requires the auditor to apply professional skepticism, read with Para Al-A22 of SA 200, the Auditor was required to be alert to the audit evidence that contradicted the other audit evidence obtained. 35. The Auditors replied that the majority of the fixed assets held by company were part of the factory located at Patratu; they had verifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensuring the testing of impairment of PPE, and the resultant non-reporting of misstatement in the financial statements, as the PPE accounted for 84% of the total assets. 37. Such lapses have been viewed seriously by international regulators as well. For example, PCAOB 24 , the US Regulator, charged Chisholm, Bierwolf, Nilson Morrill, LLC (the Firm or CBNM ) and Todd D. Chisholm, CPA ( Chisholm ) (collectively, Respondents ) for their failure in the audit of Hendrx's 2006 Financial Statements and noted that Hendrx's 2006 financial statements disclose goodwill in the amount of $31,854,137, representing 74% of total assets. Goodwill had to be tested for impairment at least annually, and more frequently if events occur or circumstances change that would, more likely than not, reduce the fair value below its carrying amount. Chisholm and the Firm failed to perform sufficient audit procedures to determine whether management had appropriately tested goodwill for impairment. . For misconduct including this and others, PCAOB revoked the Firm's registration and Chisholm (Engagement Partner) was barred from being an associated person of a registered public accounting fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Responding to the above charge, the Auditors replied that The additional income identified by income tax department in the IT AO was not related to debtors of the company and such income was also not known to them on that date. Audit of debtors was done properly keeping in mind earlier write-offs. External confirmation was not taken as all the sales was made to Ultratech, the ledger of which was thoroughly checked to satisfaction, and they did not consider it necessary to attach its copy in the working file. The Auditors added that after discussion with the management, they came to know that majority of the remaining balances were opening balances. Since the earlier auditor had qualified the report for 2017-18 and as all the bad and doubtful debts had already been written-off, so he reached the conclusion that the remaining balances were all good and hence no adverse remarks were made in the report. 42. The contention of the Auditors that additional income identified by income tax department in the ITAO was not known to them cannot be accepted as explained earlier in para 27 of this Order. The submission of the Auditors that the sales were made to a single party i.e., Ult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reviewer (EQCR) 44. The SCN charged the Auditors for not determining if an EQCR had been appointed for the audit of BCL, it being a listed entity. The SCN noted that para 19(a) of SA 220 31 stipulates that for audits of financial statements of listed entities .... an engagement quality control review is required, the engagement partner shall determine that an engagement quality control reviewer has been appointed .... Para 60 of SQC1 stipulates that the firm should establish policies and procedures requiring, for appropriate engagements, an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. Such policies and procedures should require an engagement quality control review for all audits of financial statements of listed entities ...... The SCN stated that as per the combined reading of Para 60 of SQC1 and Para 19(a) of SA 220, the Audit Firm, and the EP jointly, had to ensure the appointment of EQCR partner for the audit of BCL. 45. The Auditors replied that: We appointed an EQCR for statutory audit of BCL for FY 2018-19. CA Shiv R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BCL ... ..... .. I have not worked as an Audit Engagement Partner or Member for the audits of Financial Statements of listed entities during my career as a Qualified Chartered Accountant. From the statement of CA Shiv Raj, it is established that the submissions made by the Auditors in this regard are false. Subsection 111 of Part 1 of Code of Ethics 2009 (12 th Edition) issued by ICAI states that the principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and employment relationships. Integrity also implies fair dealing and maintaining an impartial attitude and truthfulness . In the present case, the Auditors were not truthful in their submissions and have tried to mislead NFRA. This is unprofessional and unethical and is in contravention of the principles of Integrity as per of the Code of Ethics issued by ICAI. 48. Non-appointment of EQCR has been viewed seriously by international regulators as well. For example, the PCAOB 32 , the US Regulator, charged public accounting firm Stein Company, LLP (Audit Firm) for its failure in connection with audit of Health Talk Live, Inc. ( Health Talk ) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the audit of BCL after discussion among the team members and after analysing the work involved. For this, an initial audit engagement letter, containing all the preconditions was prepared on 14.08.2018 and it was acknowledged by BCL. A copy of this letter has been attached along with the reply to the SCN. They further added that vide letter dated 21.08.2018, they had sought any objection regarding their proposed appointment from the previous auditor (CA Shekhar Sharad), but no such objection was received. After being completely satisfied, the audit was accepted. They also reportedly visited the factory of BCL and the place where all the books of accounts were kept (factory site) and had a walk through the data flow, production flow, system flow and only thereafter, the audit was accepted. The Auditors stated that after being appointed as Auditors of BCL, a thorough examination of all books of accounts was done. They observed that all sales were made to a single party namely Ultratech cement Ltd. and major purchases of raw material were also from a single supplier. The Auditors stated that considering that there was only one debtor and one creditor, they constituted a team compri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the audit file, it cannot be accepted at this stage. It is important to understand why an auditor is required to obtain an audit engagement letter containing the pre-conditions of audit. Para Al O of SA 210 states that an audit is conducted on the premise that management has acknowledged and understands that it has the responsibilities as set out in paragraph 6 of SA 210, which requires that the auditor's role does not involve taking responsibility for the preparation of the financial statements or for the entity's related internal control, and that the auditor has a reasonable expectation of obtaining the information necessary for the audit in so far as management is able to provide or procure it. The premise is fundamental to the conduct of an independent audit. To avoid misunderstanding, agreement is required to be reached with the management that it acknowledges and understands that it has such responsibilities and the same is reflected in the audit engagement letter. As discussed above, the absence of audit engagement letter from the audit file clearly shows the Auditors' failure to ensure the required agreement with the management of BCL to undertake the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le does not bear the seal of the Audit Firm, while the new audit programme bears the seal. This indicates tampering with the Audit File and therefore the reply cannot be accepted. e) Tampering with the audit work papers is a serious matter and casts a shadow on the integrity of the audit work. Such acts have been viewed seriously by the international regulators. For example, PCAOB 38 , the US Regulator, penalized Peter C. O'Toole, CPA, ( O'Toole or Respondent ) stating that the Respondent repeatedly violated both Rule 4006, Duty to Cooperate with Inspectors, and Auditing Standard No. 3 ( AS3 ), Audit Documentation. Respondent improperly created, added, and backdated a working paper in advance of the Board's inspection of the Audit. Respondent, and others supervised and authorized by him, provided misleading documents and information to the Board, in violation of Rule 4006 . PCAOB barred O'Toole from being an associated person of a registered public accounting firm and imposed a civil money penalty of $50,000 against him. 54. On the charge pertaining to non-compliance with the provisions of SA 315 failing to understand the entity and its environment: a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the reasons, if any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification (subsection 4); complying with the auditing standards (subsection 9); and reporting to the Central Government matters which he believes involve the offence of fraud (subsection 12). Mis K. Pandeya Co. was the appointed Statutory Auditor of BCL and accordingly, it was responsible for all the lapses in the conduct of the audit, including the lapses of the EP. 57. Paragraph 2 of SA 220 stipulates that Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQCl, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that: a) The firm and its personnel comply with professional standards and regulatory and legal requirements; and b) The reports issued by the firm or engagement partners are appropriate in the circumstances. 58. Para 5 of SQC 1 makes it applicable to all the firms. SQC1 establishes standards and provides guidance regarding a firm's responsibilities for its system of quality control for audits and rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary 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 in the area of recognition of interest cost on the borrowing classified as NP As, accounting treatment addressing the effect of IT AO and assessment of Going Concern, as explained in paras 20 to 33 above. ii. The Auditors committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 6 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 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 Auditors failed to disclose in the audit report the material misstatement in the area of recognition of interest cost on the borrowing classified as NP As, accounting treatment addressing the effect of ITAO and assessment of Going Concern, as expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e evidence in the Audit File, the Audit Report issued by auditor, the submissions made by auditor, the annual report of BCL for the FY 2018-19 and other materials available on record. F. ADDITIONAL ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT SPECIFIC TO THE AUDIT FIRM 61. In addition to above, the Audit Firm has committed Professional Misconduct as defined in Section 132 ( 4) of the Act read with section 22 of the CA Act, as amended from time to time, by failing to exercise due diligence and being grossly negligent in the conduct of professional duties in respect of matters explained at Section D above and thus, violated SAs and SQC 1. 62. Therefore, we conclude that all the charges of professional misconduct in the SCN stand proved based on the evidence in the Audit File, the Audit Reports issued by the EP on behalf of the Firm, the submissions made by the Auditors and the Financial Statements of BCL for the FY 2018-19. G. PENALTY AND SANCTIONS 63. It is the duty of an auditor to conduct the audit with professional skepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be determined by the National Financial Reporting Authority. 68. As per the information furnished by M/s K. Pandeya Co. vide email dated 01.05.2023, the statutory audit fees of BCL for the FY 2018-19 was Rs .. The total professional fees received by M/s K. Pandeya. for the FY 2018-19 was Rs out of which CA Manjeet Kumar Verma had share. As per the details of the audited capital account of CA Manjeet Kumar Verma for the year ended 31.03.2019, he received net profit and other remuneration amounting Rs .. from M/s K.Pandeya Co. 69. 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 l32(4)(c) of the Companies Act, 2013, hereby order: M/s K. Pandeya, Co., the Audit Firm - Monetary penalty of Rupees Twenty-Five Lakhs upon the Audit firm, Mis K. Pandeya Co. CA Manjeet Kumar Verma, the Engagement Partner i. Monetary penalty of Rupees Five Lakhs upon CA Manjeet Kumar; ii. CA Manjeet Kumar Verma is debarred for Five Years from being appointed as an auditor or internal audi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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