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TMI Blog2023 (11) TMI 1173X X X X Extracts X X X X X X X X Extracts X X X X ..... Related Party - Failure to report non-disclosure of Material Information relating to pledge of fixed deposits - Penalty and Sanctions. Failure to report non-consolidation of subsidiary - HELD THAT:- In the qualified opinion by the EP, when there was sufficient basis for an adverse opinion, was without due diligence and without obtaining sufficient appropriate audit evidence, and thus the EP failed to comply with Para 8 of SA 705 - the EP too during personal hearing has acknowledged this lapse. Failure to prepare audit documentation - HELD THAT:- The Executive Counsel to the Financial Reporting Council (FRC), the UK Audit Regulator, in the matter pertaining to Deloitte LLP and John Charlton in the audit of Mitie Group plc. for the year ended 31 March 2016, imposed a financial sanction of Two Million Pounds, a published statement in the form of severe reprimand against Deloitte and a financial sanction of 65,000 Pounds and a published statement in the form of a severe reprimand against Charlton besides other things, for breach of ISA 230 as they failed to adequately document the audit work papers. Failure to report issues related to disclosure of Credit Risk Exposure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Examination of the Audit File revealed that EP did not even determine materiality or performance materiality in the audit of Financial Statements of MIIL - it is emphasised that materiality is one of the most important concepts in the audit of Financial Statements. Where material information is omitted or misstated, the Financial Statements will not be in compliance with the requirements of the SAs and therefore of the Law as Section 143(9) of the Companies Act, 2013 requires the auditors to comply with the SAs - As there is no working paper in the Audit File evidencing determination of materiality by the EP, it is concluded that the EP has failed to adhere to the mandatory requirements of determining Materiality in accordance with SA 320 and falsely stated in his report that he had conducted the audit in accordance with the SAs specified under Section 143(10) of the Act. Failure to perform risk assessment procedures and response to such risks - HELD THAT:- It is observed from the Audit File and the reply submitted, that the EP has failed to identify and document the applicable financial reporting framework where he is found wanting with non-identification of Ind AS 101, an In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Related Party Loans on gross basis - HELD THAT:- combined reading of various prescriptions of Ind AS 24 in Para 18, Para 20, Para 21 and Para 24, shows that they require the entities to disclose Related Party Transactions (RPT) on gross basis, since the overarching objective of Ind AS 24 is to disclose information that is relevant to understand the effect on financial position as well as profit or loss of the entity. For example, outstanding receivables and payables to a related party, though arising from transactions in earlier years would affect the financial position or nature of its assets and liabilities. Further, disclosure of RPTs on a net basis would obscure the extent (volume) of quantitative effect of RPTs on the financial performance and cash flows of the entity, if they have been squared off or netted before the year end - it is found that the EP has erred by failing to exercise due professional care by not reporting such non-disclosure. Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 - HELD THAT:- The EP has failed to address the non-disclosure in respect of MSME and explain its impa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R In the matter of CA Nilesh Chheda (ICAI Membership No 124810) under Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority Rules 2018. 1. This Order disposes of the Show Cause Notice ( SCN hereafter) of even no. dated 16.11.2022, issued to CA Nilesh Chheda. CA Nilesh Chheda is a Member of the Institute of Chartered Accountants of India ( ICAI hereafter) and was the Engagement Partner ( EP hereafter) for the statutory audit of MAN Industries (India) Limited, Mumbai ( MIIL or the Company hereafter) for the Financial Year ( FY hereafter) 2016-17. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction Background C. Major Lapses in the Audit D. Other Lapses in The Audit E. Articles of Charges of Professional Misconduct by the EP F. Penalty Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India s independent regulator, in respect of matters relating to accounting and auditing, of prescribed classes [Rule 3 of NFRA Rules, 2018] of entities which can be broadly described as Public Interest Entities (PIEs). 4. NFRA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to give an adverse opinion (para 18-21) where the effect is material and pervasive. b) Financial Statements did not contain required disclosures mandated by Ind AS 24 [Indian Accounting Standard 24, Related Party Disclosures (Ind AS 24) ] and the Act, in respect of critical and sensitive information pertaining to Related Party Transactions and non-disclosure of full particulars of loans etc. (para 84-86 and 91- 93). c) Disclosures in respect of Credit Risk Profile of Trade Receivables were erroneous and were not in compliance with requirements of Ind AS 107 [Indian Accounting Standard 107, Financial Instruments: Disclosures (Ind AS 107) ] (para 35-44). d) The EP did not obtain Sufficient Appropriate Audit Evidence (SAAE) in a number of critical areas of audit viz., non-consolidation of a material subsidiary (para 18-21), credit risk evaluation of Trade Receivables (para 43-44) and failure to perform risk assessment procedures and response to such risks (para 64-72). e) The EP failed to demonstrate sufficiency and appropriateness of audit work in virtually every critical building block of an audit of Financial Statements i.e., Audit Strategy, Planning (para 45 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he possible violations of the SAs by the Statutory Auditor of M/s MAN Industries (India) Limited (MIIL), a company situated in Mumbai. 13. MIIL is a manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and Potable Water. MIIL is listed on Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) and therefore falls under the jurisdiction of NFRA under Rule 3 of NFRA Rules, 2018. As per Rule 4 of the Companies (Indian Accounting Standard) Rules, 2015, MIIL is required to comply with the Indian Accounting Standards (Ind AS) prescribed under these rules for the preparation and presentation of its annual Financial Statements from the FY 2016-17. Table 1 below depicts certain key financial features of MIIL and the shareholding pattern of MIIL for the FY 2016-17, FY 2015-16, and FY 2014-15, which indicate substantial public interest. Table 1: Some key financial features of MIIL (Numbers except percentages are in Rs Crores) Particulars 31.03.2017 31.03.2016 31.03.2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to report a material misstatement known to him to appear in a financial statement with which the EP is 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 sufficiently material to negate the expression of an opinion; and (e) failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances. 17. The EP vide letter dated 15.12.2022 requested for extension of time for submission of reply to the SCN, which was granted. The EP submitted his reply vide email dated 16.01.2023. The EP also availed the opportunity of personal hearing, which was held on 21.09.2023 at the office of NFRA, New Delhi. The EP was assisted by Mr. Nirav Mehta, Partner of the firm, and was also represented by legal counsel Mr. Karan Malhotra, Advocate. This Order is based on the review of the Audit File, written responses of the EP, submissions made during and after personal hearing and other material available on record. Each of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on legal opinion provided by the Company. The EP admitted that he should have given an adverse opinion instead of a mere qualification in view of the material and pervasive effect of the non-consolidation. NFRA also sought clarification from the Company whether there was any stay order of Hon. Bombay High Court on consolidation of MSPL with MIIL and provide a copy of such order, if any. The Company vide email dated November 20, 2023, informed that the legal opinion obtained from a reputed law firm in December 2015 was that since the Hon. Bombay High Court was seized with the implementation of the Scheme of Merger and Demerger, consolidation of MSPL with MIIL be deferred until adjudication thereof. 21. The EP issued a qualified opinion on account of non-consolidation of MSPL in MIIL. The EP stated in his reply to the SCN that the consolidation would have resulted in contempt of the court of law due to the pendency of the proceedings before the Hon. Bombay High Court. We observe that the Audit File for FY 2016-17 as also the EP s reply to the SCN, do not contain any order of Hon. Bombay High Court, nor any evaluation of the legal opinion provided by the Company taken in 2015. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the valuation report for impairment testing from the external professionals [Page 1587 to 1620 of Audit Paper Book] , actuarial valuation report from the external professionals [Page 1188 to 1531 2848 to 2891 of Audit Paper Book] , confirmation for bank balance, outstanding bank loan, bank guarantee and letter of credit directly from the bankers [Page 299 to 614 of Audit Paper Book] . The EP stated that external confirmations as required by SA 505 had been undertaken by him. 24. Our review of the Audit Files submitted to NFRA shows several anomalies clearly evidencing tampering by creation of additional documents to mislead NFRA. Page Number 11 to 14 of the Audit File 1 HO contains the Audit Firm s letter dated 15 April 2017 to the Company requesting information regarding Statutory Requirements for the period from 01.04.2016 to 31.03.2017 but the letter refers to the facts relating to a later period as shown below: i) Clause (A) 9 10, reproduced below, contain audit requirements relevant to Goods and Services Tax (GST) which was introduced in India on 01.07.2017. These requirements would not be relevant for the audit of Financial Statements for the Financial Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ..After learning that the Board s Division of Registration and Inspections ( DRI ) would be inspecting the Firm s audit work for the Issuer A Component Audit and Issuer B Component Audit, KPMG Colombia personnel improperly modified work papers and backdated those work papers to conceal from DRI that they had been modified. As a result, and as further described below, the Firm violated PCAOB Rule 4006, Duty to Cooperate with Inspectors; AS 3, Audit Documentation; and ET 102, Integrity and Objectivity . For this misconduct, inter-alia, a civil money penalty in the amount of USD 4 Million was imposed on KPMG S.A.S., required the firm to undertake remedial actions. 27. We also observed other deficiencies in the following work papers mentioned by the EP in his reply regarding audit documentation: Table 3 S.No. Working Paper No. Particulars Observation I Working paper at Page 42 to 43 of Audit Paper Book Working Paper regarding final audit points identified by the EP and discussed with the EQCR Partner Signed by the EP and EQCR Partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit documentation was sufficient to enable him to understand the nature, timing and extent of audit procedures performed, is not tenable as it fails in one of the objectives of the audit documentation that is sufficient to enable an experienced auditor having no previous connection with the audit to understand (a), (b) and (c) above. 30. Further, there was no audit evidence as to who performed the audit work, who reviewed the audit work performed, and the date and extent of such review, reflecting violation of Para 9 of SA 230. 31. The EP has also failed to document discussions of significant matters with TCWG, including the nature of significant matters discussed, and when and with whom the discussions took place as per Para 10 of SA 230. We therefore conclude that the EP has not only tampered with the Audit Work Papers but failed to comply with provisions of SA 230 thereby showing gross negligence and failure to adhere to the fundamental principles of Code of Ethics [Para 100.4 (a) and (e) of Code of Ethics 2009 issued by the Institute of Chartered Accountants of India] viz. Integrity and Professional Behavior. 32. The above position clearly demonstrates EP s negligen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence obtained, and conclusions reached, including in those areas of the audits involving significant risks. For the FY 2016 and 2017 Issuer A audits, the documentation also failed to demonstrate who performed the work and the date such work was completed. Additionally, in each of the Issuer A and Issuer B audits, the audit documentation was insufficient to demonstrate which aspects of the audit and which audit documentation Bharat Parikh reviewed. 34. The Executive Counsel to the Financial Reporting Council (FRC), the UK Audit Regulator, in the matter pertaining to Deloitte LLP and John Charlton in the audit of Mitie Group plc. for the year ended 31 March 2016, imposed a financial sanction of Two Million Pounds, a published statement in the form of severe reprimand against Deloitte and a financial sanction of 65,000 Pounds and a published statement in the form of a severe reprimand against Charlton besides other things, for breach of ISA 230 as they failed to adequately document the audit work papers. C3. Failure to report issues related to disclosure of Credit Risk Exposure 35. The EP was charged with failure to report issues related to disclosure of Credit Risk Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or spurious transactions. 40. The EP was also charged for not questioning the disclosure by the Company in its Financial Statement for 2016-2017 that the credit risk from Trade Receivable was perceived as historically low. It is observed that during the previous FY i.e., 2015-16, the Company had written off substantial amounts of Trade Receivables (Rs. 28.12 Crore), a significant class of account balance constituting a material percentage (30.43 %) of the PBT for FY 2015- 41. Responding to this charge, the EP stated that determination of credit risk exposure as low, medium, or high is based on indicators as on the date of the balance sheet, past record etc. and professional judgement of the auditor. The EP further stated that he had compared the bad debts written off by the Company in the past five (5) years which was Nil in 2016-17; Rs.28 Crores in 2015-16; Rs.5.33 Crores in 2014-15, and Nil in 2013-14; and formed the opinion regarding low credit risk on the basis of evaluation of historical data of last 5 years. The EP also mentioned that merely a rise in the write-off in the previous year, 2015-16 shall not in any way warrant determination of the exposure to be higher. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not reporting the non-disclosure of trade receivables in accordance with Para 35M and 35N of Ind AS 107, not obtaining external confirmation as per SA 505 and not exercising due care in the audit of Trade Receivables. C4. Failure to plan the audit of Financial Statements 45. The EP was charged with non-compliance with Para 6, 8 and 11 of SA 300 which require the auditor to establish an overall audit strategy that guides the development of the audit plan and not documenting the audit strategy and any changes made thereto during the engagement, on the basis that there was no evidence in the Audit File of performance of these activities. 46. Responding to the charge, the EP referred to documentation such as preliminary audit requirement list [Page 11 to 14 of Audit Paper Book] , engagement letter [Page 4 to 10 of Audit Paper Book] , audit programme [Page 15 to 27 of Audit Paper Book] , CARO and Ind AS checklist [Page 28 to 41 of Audit Paper Book] . which purportedly include a description of nature and extent of planned risk assessment procedures carried out and audit procedures executed so that the engagement complies with the SAs. 47. We observed the following def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utory requirements. Further, the working paper was signed by the EP and EQCR partner, however, no date is mentioned on such work paper casting doubt on its integrity. 48. The above not only reflect the EP s lack of competence to perform audit of public interest entities, but his failure to identify and evaluate events or circumstances that may adversely affect the auditor s ability to plan and perform the audit engagement as per SA 300. We, therefore, conclude that the explanations given by the EP fail to establish compliance with SA 300. 49. Failure to make an appropriate audit plan has been viewed seriously by other regulators as well. For example, PCAOB, the US Regulator, charged L.L. Bradford Company, LLC (the Firm ) for its failure to develop an appropriate audit plan for the audit of Web:XU Inc.'s ( WebXU ) and concluded that the the Firm violated PCAOB rules and auditing standards with respect to an audit and a quarterly review of one issuer audit client. Specifically, the Firm in conducting its audit of the financial statements of WebXU for the year ended December 31, 2011, failed to properly assess the risks of material misstatement. As a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performance of Analytical Procedures: Table 8 S.No. Working Paper No Particulars Observations I. Working Paper - Para 8 @ Page 86 of the Audit Paper Book) Management Representation Letter No analytical procedure performed by the EP. The EP referred to Management Representation Letter of MIIL 2016-17 placed in Audit File where no analysis, judgement/conclusion is done or documented by the EP. There are no reasons recorded by the EP regarding substantial decrease of revenue from operations by 23.80 % and profit before tax by 53.27 %. II. Working Paper -Para 5 @ Page 43 of the Audit Paper Book Working Paper regarding final audit points identified by the EP and discussed with the EQCR Partner Working paper was signed by the EP and EQCR partner, however, no date is mentioned on such work paper. There is no proof that discussion took place with EQCR partner and clearance given by EQCR partner on or before the date of the auditor s report. No analytical procedure performed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not evidence any analytical procedures performed, which proves that the EP failed to design and perform analytical procedures and enquire with the management regarding fluctuations in the figures from previous FY. We, therefore, conclude the EP has violated Para 3(b) and Para 6 of SA 520. C6. Failure to determine Materiality 55. The EP was charged for failure to comply with Para 10 and 14 of SA 320, which requires an auditor to determine materiality for the Financial Statements as a whole while establishing the overall audit strategy and document the amounts and the factors considered in his determination of materiality for the Financial Statement as a whole and for performance materiality. 56. Responding to the charge, the EP responded that . nothing has been set out in the SCN or let alone proved to indicate that alleged misstatements have significantly impacted the usability of financial statements. It is submitted that materiality for the audit of financial statements as a whole had been determined, to form a true and fair opinion on the same . 57. According to Para 10 of SA 320, when establishing the overall audit strategy, auditor shall determine the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board pursuant to its Clarity Project. According to the new format the Standards on Auditing (SAs) would now contain two distinct sections, one, the Requirements section and, two, the Application Guidance section. IV. The fundamental principles of the Standard are contained in the Requirements section and represented by use of shall . Hitherto, the word, should was used in the Standards, for this purpose. 60. The EP s assertion that nothing has been set out to indicate or prove that alleged misstatements have significantly impacted the usability of Financial Statements is false and misleading. Examination of the Audit File revealed that EP did not even determine materiality or performance materiality in the audit of Financial Statements of MIIL. As brought out in this Order, non-consolidation of a material subsidiary (para 18-21 of this Order), failure to report non-disclosure of Related Party loans on gross basis (para 84-86 of this Order), failure to report non-disclosure of Trade Payable under MSME Act (para 87-90 of this Order) and failure to report full particulars of RPTs (para 91-93 of this Order) constitutes material misstatements impacting the Financial St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also stated that he has maintained adequate audit documentation to show that he has performed risk assessment procedure for material misstatement. 64. We observe that there is no evidence in the Audit File to show that any risk assessment procedures have been performed by the EP. Also, the EP s reply does not refer to any work paper where he has performed risk assessment procedures for material misstatements at the Financial Statement and Assertion levels and his audit responses to such risks etc. 65. As per Para 5 of SA 315, the auditor is required to perform risk assessment procedures at the Financial Statement and Assertion levels. Assertions generally used by the auditor to consider the different types of potential misstatements that may occur are shown in the Table 10 below: Table 10 Assertions used by the Auditor to consider different types of material misstatements. (Refer to Para A110-113 of SA 315 for more details) Assertions Material Misstatement Categories Class of Transactions/Events during the audit period Account balances at the period end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Standards on Auditing deemed to be prescribed under Section 143(10) of the Act to the extent applicable to an audit of internal financial controls. 68. Para 16 of Section II of the Guidance Note states that a benchmark system of internal control, based on suitable criteria, is essential to enable the management and auditors to assess and state adequacy and compliance of the system of internal control. Para 17 of the Guidance Note mentions that the requirements in Appendix 1 of SA 315 provide necessary criteria for IFCoFR. 69. Section IV of the Guidance Note prescribes technical guidance on audit of IFCoFR. Some of the critical prescriptions are: 69.1 While the auditor should combine the audit of IFCoFR and the audit of Financial Statements, the objectives of the audits are not identical. However, the auditor must plan and perform the work to achieve the objectives of both audits. 69.2 The auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously: 69.2.1 To obtain sufficient evidence to support the auditor's opinion on IFCoFR as of year-end, and 69.2.2 To obtain SAAE to support the auditor's con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusions reached thereon, and significant professional judgements made in reaching those conclusions. C8. Failure to obtain Sufficient Appropriate Audit Evidence (SAAE) 73. The EP was charged with failure to comply with SA 200 [SA 200 Overall objectives of the Independence Auditor and the Conduct of an Audit in accordance with Standards on Auditing] as he did not obtain reasonable assurance whether the Financial Statements were free from material misstatements and failed to obtain sufficient appropriate audit evidence. 74. Responding to the charge, the EP submitted that the charge does not survive on account of the submissions made by him hence, the allegation of failure to obtain reasonable assurance that the financial statements were free from material misstatement is incorrect. 75. The response of the EP which is casual is not acceptable. As we discussed in this Order, the EP failed to obtain SAAE to support his assurance that the Financial Statements were free from material misstatements in the following critical areas of audit: (i) Non-consolidation of a material subsidiary (Para 18-21), (ii) Credit risk evaluation of Trade Receivables (Para 40-4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omply with the requirements of Para 16 of SA 240 where Auditor is required to perform the procedures as mentioned in Paragraphs 17 to 24 of SA 240, to obtain information for use in identifying the risks of material misstatement due to fraud. Further, the EP failed to evaluate whether the information obtained from other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present and therefore did not comply with Para 24 of SA 240. We also observe that it is nowhere documented in the Audit File whether EP had inquired from the company s staff in respect of internal control processes or observed the staff performing the controls. The reply is an afterthought to mislead NFRA and hide his deficiencies in conduct of audit. In the light of above, we conclude that the EP failed to comply with the requirements of Para 16 and 24 of SA 240. C10. Failure to communicate with Those Charged with Governance (TCWG) 79. The EP was charged with failure to determine TCWG and communicate with TCWG about the responsibilities as an auditor, overview of planned scope, timing of the audit and deficiencies in Internal Control etc. The EP was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the EP failed to do so. Further, Para 9 of SA 265, requires that the auditor shall communicate in writing significant deficiencies in internal control identified during the audit to those charged with governance on a timely basis for which there is no evidence in the Audit File. 82. In the light of above, we conclude that the EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG and consequently, failed to comply with the requirements of SA 260 and SA 265. 83. Failure to appropriately communicate with Audit Committee (which is a part of the TCWG) has been viewed seriously by international regulators too. For example, PCAOB, the US Regulator, charged the public accounting firm L.L. Bradford Company, LLC (Audit Firm) for its failure to communicate with the audit committee during the audit of WebXU lnc.'s ( WebXU ) and noted that the Firm also violated a PCAOB rule that requires a registered public accounting firm to communicate, in writing, to the audit committee ............. The PCAOB, for this misconduct among others, censured the Firm, revoked its registration, and imposed a civil money penalty of $12500. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Act, 2006 87. The EP was charged with failure to report the non-disclosure of the amount of principal and interest outstanding as required under the Micro, Small and Medium Enterprises Development Act, 2006 during the year as per Schedule III of the Companies Act, 2013. As per the Annual Report of the Company for 2016-2017, there is no disclosure of information required to be disclosed under the Micro, Small and Medium Enterprises Development Act, 2006 to the extent such parties have been identified and amount of principal and interest outstanding during the year as per Schedule III of the Companies Act, 2013. 88. Responding to the charge, the EP submitted that queries were raised to TCWG regarding the same and the management vide their representation letter intimated that such nondisclosure was on account of non-identification of suppliers [Ref: Para 24 @ Page 92 of Audit Paper Book] . The EP referred to the notes to account no. 48(i) contained in the SFS, wherein it has been expressly disclosed that the Company had not initiated the process of identifying 'suppliers' covered under the MSME Act and hence such disclosure had not been made. In view of the above, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frastructural facilities and therefore, there was no violation as alleged. The EP stated that the management vide its letter dated May 30, 2017 had given a confirmation that they have not contravened any provisions of the Companies Act, 2013 [Ref: para l4(d) @page 87 and para 27 @ Page 93 of Audit Paper Book] . 93. The company is absolved from disclosure requirements of Section 186(4) provided it is a company exempted under Section 186(11) i.e., a company established under the object of and engaged in the business of providing infrastructural facilities. We have reviewed the provisions of Section 186(11) and related Schedule VI vis-a-vis the actual activities of MIIL and its main object clause in its Memorandum of Association and are of the opinion that it is not explicitly clear whether MIIL is eligible for exemption under Section 186 (11) of the Act. Notwithstanding the above, there is no evidence of any comment/conclusion/judgement recorded in the Audit File that MIIL enjoys exemption as envisaged under Section 186(11) of the Act being a company involved in infrastructural facilities. Further, there is also no evidence to show that the EP discussed this issue with the manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e light of this, the EP submits that he cannot be held responsible when both external and internal audit evidence gathered reflected that there was no lien on the fixed deposit. 96. We have considered the reply of the EP. In view of the explanation and workpapers submitted by the EP, the charge is dropped. E. Articles of Charges of Professional Misconduct by the EP 97. As discussed in the paragraphs above, the EP has made significant departures from the standards and the Companies Act, 2013 in the conduct of the audit of MIIL for 2016-2017. Based on above discussion, we note that the EP has given an unmodified opinion in SFS and a qualified opinion on the CFS without obtaining SAAE. The poor quality of audit, incomplete documentation, attempt to mislead through tampering of the Audit File, and evasive replies establish that CA Nilesh Chheda committed professional misconduct, as defined defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, and as detailed below: (i) CA Nilesh Chheda committed professional misconduct as defined in clause 5 of Part I of the Second Schedule of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir job. This could lead to a serious failure of the financial system which could ultimately result in a breakdown in trust and confidence of investors and the public at large. 101. Thus, the Auditor is duty bound to examine and ascertain the integrity of Financial Statements of such entities [41 As defined in Rule 3 of NFRA Rules 2018] in larger public interest. The Auditor s duty of exercising due diligence is owed to the users of the Financial Statements. 102. The Auditor in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this order, substantial deficiencies in audit, abdication of responsibility, failure to act with due diligence and inappropriate conclusions on the part of CA Nilesh Chheda establish his professional misconduct. Despite being a qualified professional, CA Nilesh Chheda has not adhered to the Standards and has thus not discharged the duty cast upon him. Under the circumstances, we proceed to order the following sanctions keeping in mind deterrence, proportionality, and the signalling value of sanctions. 103. As per in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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