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TMI Blog2023 (12) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... onduct, being in existence in the period before 2018, cannot be said to be retrospective and NFRA jurisdiction is established for implementing the process of investigation into misconduct committed in the past as well. Thus, the challenge to the jurisdiction of NFRA with respect to misconduct committed before 2018 does not stand - NFRA has the requisite jurisdiction to monitor compliance with accounting standards, monitor and enforce compliance with the SAS and to investigate matters of professional misconduct of Chartered Accountants falling under the NFRA domain. Charges of Professional Misconduct - HELD THAT:- The EQCR Partner did not perform his duties as per the Standards and the Law in conducting the Engagement Quality Control Review of the statutory audit of DHFL FY 2017-18. Based on the discussion and analysis, we conclude that the EQCR Partner has committed Professional Misconduct as defined in the Act, as below: i. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and penalties - HELD THAT:- Considering the nature and seriousness of violations and principles of proportionality, we, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, following is being imposed: (i) Imposition of a monetary penalty of Rupees Five Lakh upon CA Amit Vinay Chaturvedi, (ii) In addition, CA Amit Vinay Chaturvedi 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 Order under Section 132 (4) of the Companies Act, 2013 in respect of CA Amit Vinay Chaturvedi (ICAI Membership No. 103141) This Order disposes of the Show Cause Notice dated 29.09.2021, issued to CA Amit Vinay Chaturvedi, Partner of M/S Chaturvedi Shah LLP, (C S), who is a Member of the Institute of Chartered Accountants of India (ICAI Membership No. 103141) and was the Engagement Quality Control Review (EQCR) Partner for the statutory audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied upon by him to evidence his work, can only be taken as a means to ensure that no significant matter is overlooked or ignored, and not as final evidence of the actual objective review procedures performed by the EQCR Partner. b. SA 220 requires the EQCR Partner to discuss significant matters with the EP and review financial statements and the proposed auditor's report. On a detailed examination, we observe no evidence in the Audit File that EQCR Partner and EP had discussions on all the significant matters during the audit process. c. The EQCR Partner failed to objectively evaluate and question the EP when the EP failed to meet the relevant requirements of the SAS and violated the Act, and the Code of Ethics in respect of several significant areas. These audit areas are explained in NFRA Order No. 63/2023 dated 05.12.2023, issued in the case of EP. The major lapses proved in the Order included false reporting in the Independent Auditor's Report about the audit of branches, failure to report material misstatements in the Consolidated Financial Statements (CFS), failure to examine non-compliance with NHB Directions, failure to verify internal financial controls, fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dards (AS) notified under the Companies (Accounting Standards) Rules, 2006. 5. C S was the Statutory Auditor of DHFL for FY 2017-18 and CA Jignesh Mehta was the EP for this audit. CA Amit Vinay Chaturvedi, Partner of M/s Chaturvedi Shah LLP, was the EQCR of this Audit engagement. 6. In January 2019, some media reports alleged siphoning of around 01000 crore in public money by DHFL promoters. NFRA, pursuant to the duty cast upon it under Section 132 (2) (b) of the Companies Act, 2013 (the Act, hereafter) and the NFRA Rules, 2018, took up the Audit Quality Review (AQR, hereafter) of the statutory audit (the Engagement, hereafter) of DHFL for the FY 2017-18 carried out by C S. As part of the AQR process, vide NFRA letter dated 22nd February 2019, the Audit File and Audit Report signed by the EP, CA Jignesh Mehta, in respect of the Engagement was called for from the Audit Firm. The Audit Firm submitted the said Audit File on 27th February 2019. 7. While the AQR was in progress, we observed several instances where the audit had been carried out in violation of the applicable SAS, laws and regulations. However, C S issued unmodified audit reports on the SFS and CFS of DHFL for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems to us unworkable to expect the Authority to hear the same argument on jurisdiction repeatedly. How the submissions are to be divided between the parties and their counsel is a matter left to them but the scheduling by the Authority should ideally be in such a way that the jurisdictional point is on one day when all counsel for all matters can be heard. Thereafter a different schedule can be set for the facts for the individual cases that follow thereafter, if necessary, i.e., if the authority finds that it does have jurisdiction.... We clarify that we do not expect the order on jurisdiction to be passed first unless the Authority finds in favour of the present Petitioners in which case it will be the only order to be passed' 11 Against the Order dated 13.06.2023 of the Hon'ble Bombay High Court, the EQCR Partner approached the Hon'ble Supreme Court vide SLP No. 13201-13202/ 2023. The Hon'ble Apex Court, vide its order dated 10.07.2023, upheld the decision of the Hon'ble Bombay High Court and dismissed the Special Leave Petition. 12. In compliance with the above order of the Hon'ble Bombay High Court, an oral hearing before the Executive Body (EB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Section. This clearly implies that even for matters of professional or other misconduct committed prior to the coming into force of Section 132 (4), NFRA can initiate an investigation, which would disentitle any other institute, such as the ICAI, from continuing their proceedings in such matters of misconduct. The expression such matters of mis conduct and misconduct committed would clearly mean misconduct which has been committed prior to 24.10.2018 i.e. the date of coming into force of Section 132 (4) and qua which proceedings were already underway by the ICAI and with effect from 24.10.2018, the said proceeding would be in the exclusive domain of NFRA. 17. Section 132 (4) (a) itself speaks of matters of professional or other misconduct committed by any member or firm of Chartered Accountants, registered under the Chartered Accountants Act, 1949 . So obviously, the Authority has jurisdiction over misconduct committed in the past as well. 18. It is a well-settled law that retrospective applicability can either be expressly provided for or can be inferred by necessary implications from the language employed. The Hon'ble Supreme Court in the case of Zile Singh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r professional work in accordance with the Standards on Auditing and statutory requirements prevailing at the time of the audit. Therefore, there is no bar on NFRA's jurisdiction over the cases of professional or other misconduct committed prior to the establishment of NFRA because the exercise of retrospective jurisdiction, in this case, is only with regard to procedure and forum and is creating any new offence. 21. Given this backdrop and specific wordings of Section 132 and Rule 10 quoted above, it is clear that NFRA has the sole and exclusive jurisdiction to initiate proceedings in cases of professional misconduct committed in earlier years too or else it would lead to an anomalous situation of a regulatory gap where any misconduct committed before the formation of NFRA will go unpunished. The law enabling investigation into professional and other misconduct, being in existence in the period before 2018, cannot be said to be retrospective and NFRA jurisdiction is established for implementing the process of investigation into misconduct committed in the past as well. Thus, the challenge to the jurisdiction of NFRA with respect to misconduct committed before 2018 does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges and their responses are examined in detail in the subsequent paragraphs. 26. The EQCR Partner was charged with failure to exercise due diligence, gross negligence in the conduct of his professional duties and failure to document and report material departures from SAS due to the absence of documented evidence to demonstrate the basis for conclusions reached by him in his capacity as the EQC Reviewer and failure to demonstrate achievement of overall objectives of the Audit. The charge was based on the various non-compliances with SA 220, 230 and SQC-I, listed in the SCN, as evidenced by the Audit Documentation. 27. The EQCR Partner denied all the charges. He submitted that he had visited DHFL premises to review the selected Workpapers (WP), discussed with the ET, reviewed documents and signed the EQCR Checklist. He stated that SA 220 and SQC-I are the only auditing standards applicable to his work and that his work complies with the requirements therein. Documentation requirements of SA 230 apply only to auditors , not to EQCR Partner. He stated that the objective review can be achieved through checklists and yes/no boxes. 28. On examination of the replies and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion Were there any mailers that were to be communicated 10 management and those charged with governance and, where applicable, other parties such as regulatory bodies . However, there is no evidence of any effective two-way communication with TCWG in the Audit f. The EQCR Partner, in his reply, has claimed to have reviewed multiple audit work papers but there is not a single work paper in the Audit File where the EQCR Partner has, at least even signed, to evidence a reading of the WP. There are no WPs cross referenced in the checklist as well. g. The word documented cannot be interpreted to mean a standard checklist that has been simply ticked by the EQCR partner without even a reference to the work papers. The absence of documentation and the absence of any other persuasive evidence is conclusive proof that the required EQCR procedures had not been performed. h. The casual nature of the purported EQC Review is evidenced by the above instances noticed from the Audit File, for which no satisfactory reply backed by evidence from the audit file, has been provided by the EQCR Partner. 29. The documentation requirement in Para 25 of SA 220 is specific to SA 220. Nowhere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent partner; b. Review of the financial statements and the proposed auditor's report; c. Review of selected audit documentation relating to the significant judgments made by the engagement team and the conclusions it reached; and d. Evaluation of the conclusions reached in formulating the auditor's report and consideration of whether the proposed auditor's report is appropriate. Similarly, para 21 of SA 220 lists down mandatory requirements for audits of financial statements of listed entities. Thus, the performance of a mandatory procedure should be evidenced through documentation. SA 230 is the general documentation standard and the documentation in such cases should be based on the principles laid down in SA 230. 31. As per SQC 1 and SA 220, EQCR is an objective evaluation of the significant judgements made by the ET, and the conclusions reached in formulating the auditor's report. It is not an audit of the financial statements. Hence, the basis of conclusions documented by the ET regarding various aspects of the audit alone cannot form the basis of conclusions by the EQCR Parmer. He needs to apply his objective wisdom to ensure that the ET has com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to notice this violation. c. In FY 2016-17, DHFL incorporated a wholly owned subsidiary, DHFL Investments Limited by investing around ZIOO crore in equity share capital. On March 31, 2017, DHFL sold its entire stake in DHFL Pramerica Life Insurance Company Limited to DHFL Investments Limited at a fair market value of 0000.50 crore. This transaction added 1969.43 crore to DHFL's profits. The subsidiary funded the investment through the issue of Compulsorily Convertible Debentures (CCD) of 1901 crore to Wadhawan Global Capital Pvt. Ltd. (WGC), a promoter entity of the DHFL. WGC pledged these CCDs for borrowing around 900 crore through debentures from external sources. Despite DHFL Investments Limited being a 100% subsidiary, DHFL did not consolidate the financial statements of the subsidiary. Had it been consolidated, the liabilities of DHFL would have been more by Z 1901 crore with a corresponding reduction in net worth. The EP did not report this material misstatement in the Consolidated Financial Statements. The EQCR Partner failed to point this out. d. DHFL was regulated by the National Housing Bank (NHB) and hence bound to follow the relevant NHB Guidelines. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form his duty as mandated by para 20 of SA 220, he failed to notice the above deficiencies. 35. Based on the above discussions, all the charges in para 26 regarding failure to exercise due diligence, gross negligence in the conduct of his professional duties, failure to perform and to document EQCR, and failure to report material departures from SAS stand proved. 36. We also observe that such lapses have been viewed seriously by international regulators as well. For example, [PCAOB release no 105 2015 001 dated 12.01.2015] , the US Regulator, charged Grant L. Hardy (CPA) for his failure in connection with his role as Engagement Quality Reviewer ('EQR' hereafter) in the audit of financial statements of some of the issuer clients and noted that Hardy violated PCAOB Auditing Standard No. 7, Engagement Quality Review ( AS 7 ) by providing his concurring approval of issuance without performing with due professional care the EQRs required by this standard for the Firm 's audits of COP sync and Forever Green 's December 31, 2010, financial statements and AEG's June 30, 2011, financial statements. For this misconduct, PCAOB censured the EQR, barring him from b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e failed to notice and document the serious omissions and commissions by the ET that led to the issue of a baseless audit report by the EP, as explained in paras 28 to 35 above. ii. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant 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 EQCR Partner failed to conduct the review in accordance with the SAS and applicable regulations. He failed to notice and document the serious omissions and commissions by the ET that led to the issue of a baseless audit report by the EP, as explained in paras 28 to 35 above iii. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 9 of Part I of the Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report. Such an objective review, if conducted strictly in accordance with the SAS, enhances the quality of the audit. 44. The EQCR Partner in this case failed to provide, as required by SAS, an objective evaluation of the significant judgements made by the ET and the conclusions reached by them in formulating the report. This order has listed out the lapses of the ET, right from relying on the work of illegally appointed branch auditors to, failure to report material misstatements in the CFS, failure to examine non-compliance with NHB Directions, failure to verify internal financial controls, failure to assess the risk of material misstatements, failure to evaluate the going concern assumption, failure to verify the Related Party Transactions, failure to consider suspected violations of laws and regulations. However, the EQCR Partner turned a blind eye to such lapses. The fact that there was no proper audit of branches of the Company alone renders the audit invalid and underlines the absence of objectivity of EQCR. Such an Audit engagement having no evidence in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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