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TMI Blog2023 (12) TMI 320X X X X Extracts X X X X X X X X Extracts X X X X ..... Advisory or to be treated as guidance notes to Auditors - What is professional misconduct for member of ICAI and legal provisions - True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein - Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal - Excessive V/s adequate imposition of penalties on Appellants, herein - Can automatic stay is triggered on deposit of 10% of penalty and appeal is made before NCLAT. Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants - HELD THAT:- After going through provision of Chartered Accountant Act, 1949 and Companies Act, 2013 it becomes clear that disciplinary jurisdiction over the Chartered Accountants remain with both the ICAI and NFRA on concurrent basis. However, on carefully reading it reveals that NFRA has superior and overriding powers in matters relating to professional misconduct of the Chartered Accountants in terms of Section 132 of Companies Act, 2013 - On a pointed query to the Appellants to confirm our understanding, the Learned Counsel for the Appellant confirmed that bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g fraud of about 3,700 Crores by Directors of DHFL happened and the Auditors clearly failed in their duties. Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors - HELD THAT:- According to Section 143 (9) of the Companies Act, 2013 every auditor shall comply with auditing standard. Section 143 (10) of Companies Act, 2013 further empowers Central Government to prescribe the Standards of Auditing (SAs) as recommended by ICAI in consultation and after examination of the recommendation made by NFRA. As per the proviso to Section 143 (10) until any auditing standard are notified, any standard or standards of auditing specified by ICAI shall be deemed to be auditing standard - the Accounting Standards and Auditing Standards have been defined in the Companies Act, 2013 and both sets of standards are to be mandatorily followed by all stakeholders including the companies and the Chartered Accountants. Thus, the Appellants as Auditors were duty bound to follow these standards which they alleged to have been breached in respect of SA 210, SA 230, SA 315, SA 320, SA 330, SA 700 along with few other paragraphs of other SAs and Section 143(8) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not verify if DHFL followed correct procedures for appointment of Branch Auditors before the Appellants accepted the same. The submissions of the Appellants are therefore not convincing. Excessive V/s adequate imposition of penalties on Appellants, herein - HELD THAT:- NFRA applied the principle of proportionality and imposed minimal permissible penalty i.e., a monetary fine of Rs. 100,000 and the Appellants have been barred from practicing for a period of one year which is 10% of max. penalty permissible - The need to deter fraud or collusive behaviour and reckless behaviour of the Auditors and repercussions of negligent audits are quite evident - the penalty as imposed by NFRA on all four Appellants were imposed as deterrent, perhaps keeping in mind all facts, including limited role as branch auditors. This cannot be considered excessive after all; it is fact that there has been fraud in DHFL of Rs. 31,000 Crores and Auditors can t pretend to be ignorant of what was happening. Can automatic stay is triggered on deposit of 10% of penalty and appeal is made before NCLAT - HELD THAT:- This Appellate Tribunal observes that the averments of the Appellants regarding interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned table for the sake of convenience. DHFL Branch Auditors Auditor Harish Kumar AynaTamtam Baskaran Sam Varghese Appeal No. CA (AT) No. 68/2023 CA (AT) No. 87/2023 CA (AT) No. 90/2023 CA (AT) No. 91/2023 SCN 07.12.2022 07.12.2022 07.12.2022 07.12.2022 Impugned Order 13.04.2023 31.03.2023 13.04.2023 12.04.2023 Penalty Rs. 1,00,000 + Debarred for 1 year Rs. 1,00,000 + Debarred for 1 year Rs. 1,00,000 + Debarred for 1 year Rs. 1,00,000 + Debarred for 1 year Allegations Acceptance of audit engagement without valid authorisation and without complying with ethical requirements; and issuing audit report in violation of the Act Failure to comply with Standards on Auditing (SAs) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 023 I.A. No. 2007-2009 of 2023 [Arising out of Order dated 13.04.2023 passed by the National Financial Reporting Authority, in Nf-21/1/2022/03.] 7. The present Appeal in CA AT No. 68/2023 has been filed by CA. Harish Kumar T.K., who was EP in Impugned Order dated 13.04.2023, passed by NFRA under Section 132(4) of the Companies Act, 2013 r/w Rule 11(6) of National Financial Reporting Rules, 2018 (in short NFRA Rules, 2018 ). The Appellant has been saddled with a penalty of Rs.1,00,000/- and is debarred for one year 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. Company Appeal (AT) No. 87 of 2023 I.A. No. 2007-2009 of 2023 [Arising out of Order dated 13.04.2023 passed by the National Financial Reporting Authority, in Nf-21/1/2022/03.] 8. The present Appeal in CA AT No. 87/2023 has been filed by CA. Ayna Tamtam, who was EP in the Impugned Order dated 31.03.2023, passed by NFRA under Section 132(4) of the Companies Act, 2013 r/w Rule 11(6) of National Financial Reporting Rules, 2018 (in short NFRA Rules, 2018). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Coimbatore. b.) CA. Ayna Tamtam was assigned branch audit work as EP of two branches of M/s DHFL at Kannur and Calicut. c.) CA. M. Baskaran was assigned branch audit work as EP of nine branches of M/s DHFL at Zone Tamil Nadu, RPU Chennai, Chennai, Chennai Metro, Chennai OMR, Chennai Sales Vertical, Chennai Tambaram, Chennai Kodambakkam and Parrys. d.) CA. Sam Varghese was assigned branch audit work as EP of two branches of M/s DHFL at Kochi, Kerala. 13. DHFL appointed the Firm on 27.08.2014 as Auditors to Audit 17 Branches of DHFL for the Financial Year 2014-2015 in consultation with the then joint Statutory Auditors of DHFL i.e., M/s. TR Chadha Co. along with M/s. Rajinder Neeti Associates. 14. It is the case of the Appellants that most of the decisions of DHFL were centralised in Head Office of DHFL who followed computerised accounting system through Enterprise Resource Planning System (in short ERP ). As per the Appellants, the Books of Accounts of the Branches mainly concerned with financial effect of revenue and expenses identified to the respective Branches, as well as Fixed Assets and Liabilities being reflected in the Branch accounts. The Appellants e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Firm was involved in Branch Audit for 5 years from 2014-15 to 2018-19. 18. It has been reiterated that DHFL appointed the Joint Statutory Auditors M/s. TR Chadha Co. and M/s. Rajinder Neeti Associate in 30th AGM and then were reappointed as the Statutory Auditor for period of four years (upto 34th AGM), however the Statutory Auditors did not make themselves available to continue at 32nd AGM of DHFL and therefore at 32nd AGM, DHFL passed a Resolution on 20.07.2016 to appoint M/s. Chaturvedi and Shah (in short the 'CAS) as Statutory Auditors to Audit all Company Offices including Zonal and Branch Offices for a period of five years (from conclusion of 32nd AGM to conclusion of 37th AGM). It has been highlighted that despite changes in Statutory Auditors, the Firm continued to receive Appointment Letter for 17 Branches from DHFL for Audit for the FY 2016-17, 2017 - 18 and 2018-19. 19. It has been brought out that on 10.08.2022, M/s K. Varghese Company (the firm) received a letter from NFRA calling for Audit Files of Branch Audits conducted by the Firm for FY 2017 18 with regard to DHFL and the firm submitted the same to NFRA on 25.08.2022. 20. It is the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done without following due procedures as prescribed in the Companies Act, 2013, as well as violation of certain SAs and therefore Appellant was charged for professional misconduct. The Appellant- CA M. Baskaran submitted reply to the same on 04.02.2023 along with supplementary audit documentations. However, NFRA passed the Impugned Order on 13.04.2023 under Section 132 (4) (c) of the Companies Act, 2013, whereby the Appellant was debarred for one year from appointment as Auditor etc., and was asked to pay a monetary penalty of Rs. 1,00,000/- . 24. The Appellant- CA Sam Varghese, in Company Appeal (AT) No. 91 of 2023, stated that, subsequent to furnishing audit files by the firm to NFRA, he received the SCN dated 07.12.2022, whereby NFRA, alleged that prima facie the appointment of Branch Audit was done without following due procedures as prescribed in the Companies Act, 2013, as well as violation of certain SAs and therefore Appellant was charged for professional misconduct. The Appellant- CA Sam Varghese submitted reply to the same on 04.02.2023 along with supplementary audit documentations. However, NFRA passed the Impugned Order on 12.04.2023 under Section 132 (4) (c) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re notified on 13.11.2018, whereas the Financial Statements in question pertains to FY 2017-18 and Audit Reports for different Branch Audit were given on different dates for different branches which were prior to notification bringing NFRA into effect, therefore, the NFRA did not have any jurisdiction to look into the period prior to its own formation on 01.10.2018. It is further the case of the Appellants that there is no mention regarding retrospective applicability in Section 132 of the Companies Act, 2013 or in the MCA Notification issued for the same. 28. Few Judgements have been brought to the notice of this Appellate Tribunal which gives constitutional protection under Article 20 of the Constitution of India regarding non-Application of retrospectivity of penal statute and in defence of other charges. (a) Council of Institute of Chartered Accountants of India' Vs. C.H. Padiya', (1979) 49 Com Cas 478. (b) `Maya Rani Punj' Vs. CIT, Income Tax, Delhi', (1986) 1 SCC 445. (c) 'ICAI' Vs. `Shrui K. Venkatacharyulu', MANU/AP/2140/2014. (d) `S.K. Ganesan' Vs. A.K. Joscelyne', 1956 SCC Online Cal 43. (e) 'ICAI' Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e required to check that their appointments were in accordance with Section 225 of the Companies Act, 1956 and there was no reference in Companies Act, 1913, in fact the amendment for the same was brought out only in 2022. 33. The Appellant assailed the Impugned Orders where NFRA assumed that Chartered Accountant Act 1949 required compliance of Section 224 224(a) of Companies Act, 1956 and also required to check compliance with Section 139 of Companies Act, 2013. It is the case of the Appellant that since the Firm was appointed Branch Auditors for Financial Year 2014 15 at 30th AGM and in terms of Section 139 of the Companies Act, 2013 such appointments were for period of five years and therefore NFRA was incorrect in equating Section 225 of the Companies Act, 1956 to Sections 139 140 of the Companies Act, 2013, whereas these are not equivalent Sections. 34. It has been stated that it was wrong on the part of NFRA to rely on the provision of Section 139(1) of Companies Act, 2013 for annual ratification of Auditors and since they did not receive any Notice for removal under Section 140 of the Companies Act, 2013 the Appellants presumed that they continued as the Branch A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected in the books of accounts of the branches predominantly reflected expenses incurred in administration and maintenance, Fixed Assets in the branch concerned, loans granted and their interest earnings were not retained in the books of accounts of the branches and the accounting effect of operational activities such as loans and deposit, used to be reflected in the books of accounts of the Head Office of DHFL. The Appellants emphasised that risk of misstatement in the accounts of DHFL for the Appellants were only with respect to expenses and income attributed to the branch and pointed out that for example - during F.Y. 2017-18, expenses incurred by Coimbatore Branch of DHFL were approximately Rs. 5.45 crores, whereas, the branch had income of Rs. 4.05 crores. Similarly, revenue of Kottayam branch was Rs. 50 lakhs and its expenses were about Rs. 1.01 crores and Thrissur Branch had revenue of Rs. 99 lakhs and expenses of Rs. 2.40 crores. The Appellants submitted that Risk of management override of controls was assessed as risk of material misstatement. 42. The Appellants refuted the non-compliance with Paras 6-10 of SA 300 as requirements of the said SA have been met by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documentation. 46. The EPs refuted that they have not complied with SA 520 and submitted that SA 520, deals with the auditor's use of analytical procedures as substantive procedures, and as procedures near the end of the audit that assist the auditors when forming an overall conclusion on the financial statements. It has been pointed out that as EPs their work was limited to auditing the Trial Balance of the branches, which did not reflect any operating assets or liabilities attributed to the Branches by virtue of ERP and therefore, no financial statements had been prepared for branches, nor was there any case to form any overall conclusion as provided in SA 520. 47. The Appellants refuted violation of SA 700 and highlighted that their role was confined only to conduct Branch Audits and as such SA 700 was not applicable to them. The Appellant submitted that expressing opinion on financial statements of DHFL as per SA 700 was responsibilities of CAS and the Appellants cannot be held responsible for the same. 48. The Appellant Mr. Harish Kumar TK filed an I.A. No. 2008 of 2023 in CA (AT) No. 68 of 2023, CA Ayna Tamton TK filed an I.A. No. 2402 of 2023 in CA (AT) No. 87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic regarding siphoning of public money of Rs. 31,000 Crores by promoters/ directors of DHFL and action by the Enforcement Directorate's reported action in April 2020 on an alleged banking fraud of about Rs.3700 crore by the promoter/ directors of DHFL, NFRA suo-motu initiated an Audit Quality Review (in short AQR ) to probe into the role of the Statutory Auditors of DHFL for the FY 2017-18, the year in which the alleged fraud was primarily stated to have occurred. While examining the Audit Files of the statutory audit carried out by Chaturvedi and Shah (in short CAS ), certain prima-facie violations were observed relating to the appointment of Branch Auditors and the conduct of branch audits of DHFL which were relied upon by CAS 54. M/s K. Varghese Co. ( the Firm ) was the Auditors of 17 branches of DHFL. Accordingly, to examine the case, the Firm was requested on 10.08.2022, to submit the Audit Files along with some other information/documents. On 25.08.2022, the Audit Firm submitted the Audit Files along with other information in respect of 17 branches for FY 2017-18. After examination of the Audit Files and materials available on record, NFRA found prima-facie case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power exists to prescribe the procedure and such power has not been exercised, the implementing authorities are at liberty to determine and adopt such procedure as they may deem fit subject to the same being fair and reasonable and relied upon the judgment of the Hon ble Supreme Court in the matter of Ramjibhai Vs. State of Gujarat [(1965) 2 SCC 5] as well as om the matters of Chairman MD, BP Ltd.' Vs. Gururaja Ors. [(2003) 8 SCC 567]. 59. The Respondent argued that merely because the manner in which certain powers have to be exercised, has not yet been prescribed would not negate the existence of power itself. It is well settled that exercise of power conferred on an authority by a statute does not depend on the existence of rules or regulations and cited the judgment of the Hon ble Supreme Court in the matter of Surinder Singh' Vs. Central Government Ors. [(1986) 4 SCC 667]. 60. The Respondent strongly refuted the issue raised by the Appellants regarding alleged retrospective jurisdiction exercised by NFRA against the settled law and the Appellants charged NFRA not having the authority to issue SCNs and consequently the Impugned Orders, since the audit of fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change in ingredients of offence and cited judgment in his support :- (i) Gibson' Vs. State of Mississippi, [162 US 565 (1896)]. (ii) Rao Shiv Bahadur Singh' Vs. State of Vindhya Pradesh, [(1953) 2 SCC 111]. (iii) Sajjan Singh' Vs. State of Punjab, [(1964) 4 SCR 630]. (iv) Queens Vs. St. Mary Whitecaple, [116 ER 811]. (v) Om Prakash Shrivastava' Vs. State of NCT of Delhi', [2009 SCC OnLine Del 3264]. (vi) Hitendra Vishnu Thakur' Vs. State of Maharashtra, [(1994) 4 SCC 602]. (vii) 'Union of India' Vs, Sukumar Pune', [(1966) 2 SCR 34]. It is the case of the Respondent that the mischief sought to be remedied by the legislature, has to be kept in mind and cited case of Heydon's Case [76 ER 637]. 65. It is the case of the Respondent that NFRA carefully examined all documents including detailed replies along with audit files and documentations of the four Appellants herein, vis- -vis SCNs issued to them and came to the conclusion that the replies of the Appellants were evasive and misleading, resulting establishing the facts that they the Appellants violated the several SAs. 66. The Respondent alleged th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard. 69. It is the case of the Respondent that the Council in addition to professional misconduct as defined in Section 22 of the Chartered Accountants Act, 1949 has been given power to inquire into the conduct of any member of the institution under circumstances other than those specified in the Schedules to the Act. The Respondent relied on judgments of Hon ble Supreme Court which are as follows :- (i) Council of Institute of Chartered Accountants of India Vs. Y.K. Gupta [(2010) SCC OnLine Del 4192]. (ii) Council of Institute of Chartered Accountants of India' Vs. Mr. Rakesh Aggarwal, [(2010) SCC OnLine Del 4012]. (iii) ICAI' Vs. Vivek Kapoor [(2016) SCC OnLine P7H 7501]. 70. The Respondent castigated the conduct of the Appellants for taking the stand that the appointment of the Branch Auditors was not required to be made under Section 139 of the Companies Act, 1956. As per Respondent, it seems that the Appellants did not even check the requirement of the Companies Act, 1956 since they believed that their appointments were not required to be made under Section 139 of the Companies Act, 1956. The Respondent stated that a change or removal of the bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and may not be detected. 73. It is the argument of the Respondent that mere sending copies of appointment letters to CAS or non- receipt of any special notice for their removal as branch auditors of DHFL as contemplated under Section 140(4)(i) and (ii) of the 2013 Act, did not absolve the Appellants of the mandatory requirements of Chartered Accountants Act, 1949 as detailed in the Impugned Orders. 74. The Respondent stated that in their Independent Branch Auditor s Report which Appellants had issued for the branches for as the EPs and certified under Auditor's Responsibility that we have taken into account provisions of the Companies Act, 2013, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made there under. We conducted our audit in accordance with the Standards on auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance . It is the case of the Respondent that SAs are applicable for the branch statutory audit also and therefore, the Appellant&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t since No prejudice caused to the petitioner hence the objection being purely technical deserves to be rejected based on the ratio of State of Karnataka' Vs. Kuppuswamy Gownder (1987) 2 SCC 74 and Fertico Marketing Investment Pvt. Ltd. Ors. Vs. Central Bureau of Investigation Anr. [(2021) 2 SCC 525]. It is further argument of the Respondent that the doctrine of necessity is not allowed full play in certain unavoidable situations, it would impede the course of justice itself and the defaulting party would benefit therefrom and can be found in the judgments in the matters of Election Commission of India' Vs. 'Subramaniam (1996) 4 SCC 104, Om Pal Singh' Vs. 'Union of India', ILR (2006) II Delhi I and Clariant International Ltd. Anr. Vs. Securities and Exchange Board of India [(2004) 8 SCC 524]. 78. The Respondent refused the allegations of the Appellants that the Appellants were not given suitable opportunity to defend their cases and thereby, the Respondent violated the principles of natural justice. In this regard, the Respondent clarified that under Rule 11(5) of NFRA Rules, 2018, the Appellants were given clear opportunity for personal hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, this Appellate Tribunal observe that in order to finalize these Appeals, following issues are required to be deliberated and decided by us and we shall do accordingly. Issues framed by us 83. Issue No. (I) Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants. Issue No. (II) Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018. Issue No. (III) Violation of Principle of natural justice w.r.t. separate division of NFRA. Issue No. (IV) Role of Statutory Auditors of the Company V/s Statutory Auditors of the Branches of the company. Issue No. (V) Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors. Issue No. (VI) What is professional misconduct for member of ICAI and legal provisions. Issue No. (VII) True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein. Issue No. (VIII) Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal. Issue No. (IX) Excessive V/s adequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for adoption by companies or class of companies or their auditors, as the case may be; (b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed; (c) oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and (d) perform such other functions relating to clauses (a), (b) and (c) as may be prescribed. *** [(3A) Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorized by the Chairperson. (3B) There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions under sub-section (2) [other than clause (a) and sub-section (4).] (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall (a) have the power to investigate, either suo motu or on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in such manner and on payment of such fee as may be prescribed]. (10) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed. 139. Appointment of auditors. (1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed : Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor: Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter taking into account the recommendations of such committee. 140. Removal, resignation of auditor and giving of special notice. (1) The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner: Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable opportunity of being heard. *** (4) (i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be reappointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139. *** (5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely: (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members; (b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company; (c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received from branches not visited by him; (c) whether the report on the accounts of any branch office of the company audited under subsection (8) by a person other than the company s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report; (d) whether the company s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; (e) whether, in his opinion, the financial statements comply with the accounting standards; (f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; (g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; (h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; (i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls; (j) such other matters as may be presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fraud involving such amount or amounts as may be prescribed is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed: Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board s report in such manner as may be prescribed. 145. Auditor to sign audit reports, etc. The person appointed as an auditor of the company shall sign the auditor s report or sign or certify any other document of the company in accordance with the provisions of sub-section (2) of section 141, and the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor s report shall be read before the company in general meeting and shall be open to inspection by any member of the company. 146. Auditors to attend general meeting. All notices of, and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government in respect of making such damages in such manner as may be specified in the said notification. (5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally: Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable. (Emphasis Supplied) NFRA Rules, 2018 2.(g) Division means a division [including the one headed by the chairperson or a full-time member] established by the Authority for the purpose of organizing and carrying out its functions and duties. Rule 3: Classes of companies and bodies corporate govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules. (3) Every body corporate, other than a company as defined in clause (20) of section 2, formed in India and governed under this rule shall, within fifteen days of appointment of an auditor under sub-section (1) of section 139, inform the Authority in Form NFRA-1, the particulars of the auditor appointed by such body corporate: Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment of its auditor in Form NFRA-1. (4) A company or a body corporate other than a company governed under this rule shall continue to be governed by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or aggregate of loans, debentures deposits falls below the limit stated therein. (Emphasis Supplied) Chartered Accountants Act, 1949 21. Disciplinary Directorate: (1) The Council shall, by notification2, establish a Disciplinary Directorate headed by an officer of the Institute designated as Director (Discipline) and such other employees for making investigations in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy or with such other persons having such qualifications as may be prescribed, for the purpose of rendering such professional services from time to time in or outside India. Explanation In this item, partner includes a person residing outside India with whom a chartered accountant in practice has entered into partnership which is not in contravention of item (4) of this Part; (3) accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute: Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in item (2) of this Part; (4) enters into partnership, in or outside India, with any person other than a chartered accountant in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny professional employment, fees which are based on a percentage of profits or which are contingent upon the findings, or results of such employment, except as permitted under any regulation made under this Act; (11) engages in any business or occupation other than the profession of chartered accountant unless permitted by the Council so to engage: Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a company (not being a managing director or a whole time director) unless he or any of his partners is interested in such company as an auditor; (12) allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, profit and loss account, report or financial statements. PART II : Professional misconduct in relation to members of the Institute in service A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person (1) pays or allows or agrees to pay directly or indirectly to any person any share in the emo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in practice; (3) permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast; (4) expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest; (5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity; (6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity; (7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties; (8) 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; (9) fails to invite attention to any material departure from the generally accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered Accountants, who are involved in accounting and auditing work, are governed by the Chartered Accountant Act, 1949, being members of ICAI. Section 22 of the Chartered Accountant Act, 1949, along with Schedule I II describes the professional misconduct of the members of the ICAI. ➢ The Institute of Chartered Accountants of India is the statutory body which regulates the profession of Chartered Accountants in India. ICAI was set-up by the act of parliament. It was formed under Chartered Accountants Act, 1949 to regulate the professionalism of its members including auditors in India. Every member of ICAI is duty bound to follow the professional standards and code of ethics ICAI. It needs to be appreciated that any violation of professional standards and code of ethics, results in disciplinary issue and ICAI is required to take action against the member of ICAI. The disciplinary board of ICAI is entrusted to take action against its members who are found guilty of professional misconduct, under the Chartered Accountants Act, 1949. It is the duty of the Disciplinary Directorate of the ICAI to keep watch on alleged irregularities committed by its members. There are prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total companies as on 31.03.2022, the total Public Limited Companies registered in India are 67,451 out of which 60,708 are unlisted companies and only public 6,743 companies are listed. Remaining 13,60,921 are Private Limited Companies. Thus, 95.95% of total registered companies in India as on 31.03.2022 (as per 8th Annual Report of MCA- tables 3.16 3.17) are Private Limited Companies. Auditors of such large no. of Companies are still regulated by ICAI exclusively. Source :- 8th Annual Report of Ministry of Corporate Affairs (MCA) ➢ The role of ICAI, therefore, can t be underestimated. The role of NFRA is all together different, of-course, having overriding powers over ICAI for the companies covered under Section 132 of the Companies Act, 2013. ➢ We note that the Hon ble Supreme Court of India in its landmark judgment in the matter of S. Kumar Vs. Secretary ICAI Ors. [(2018) 14 SCC 2018] dated 26.02.2018 issued direction to Government for considering suitable mechanism and law for oversight of auditors on the lines of Sarbanes Oxley Act, 2002 [which came after Enron episode and resulted into establishment of Public Company Accounting Oversight B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew (AQR). The main objective of the AQR is to access the quality control system of the audit firm and the extent to which the quality control system has been complied with the auditing standards. NFRA has the authority to ask auditors to report on its governance practices and internal processes established to promote Audit Quality. ➢ NFRA has the power to investigate the professional misconduct of the auditors and the law states that, if NFRA starts investigating on any case, no other institution has the power to continue or initiate any proceeding against the same case. This reduces the power of ICAI to act against the professional wrongdoing of its members as stipulated in Section 132 of the Companies Act, 2013. Before the formation of NFRA, ICAI had the exclusive right to take any action against the professional misconduct of its auditors. ➢ There are many regulatory bodies which govern the audit governance of the listed and unlisted companies in India including NFRA, ICAI, MCA and SEBI. Out of these, NFRA and ICAI are established for the similar objective to protect the interest of creditors, investors, and other parties who are directly or indirectly assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 132 of Companies Act, 2013 as discussed in details earlier. ➢ On a pointed query to the Appellants to confirm our understanding, the Learned Counsel for the Appellant confirmed that both the ICAI and NFRA have jurisdiction over Chartered Accountant Act, 1949. We observe that for all matters, by default, ICAI has disciplinary jurisdiction over Chartered Accountant. However, it is required to be clearly understood that in term of Companies Act, 2013 and NFRA Rules, 2018 over important and serious matters especially involving large alleged accounting or financial frauds, or matters of public interest, etc., NFRA suo-moto can initiate investigation or take for investigating and ICAI will cease to exercise such disciplinary jurisdiction. ➢ Hence, we may conclude NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters as stipulated in Section 132 of Companies Act, 2013. ➢ We clarify the Issue No. 1 accordingly. Issue No. (II) Retrospective or prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018. ➢ As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 271(1)(a) of 1961 Act. That penalty contemplated under the respective sections of the two Acts quasi criminal in character is not disputed. Mr Dholakia for the appellant canvassed before us that in Jain Brothers case the challenge raised by the assessee was not examined with reference to the provisions of Article 20(1) of the Constitution. Under sub-article (1) of Article 20 no person is to be subjected to a penalty greater than that which might have been inflicted under, the law in force at the time of the commission of the offence. According to counsel, when there was default in furnishing the return within September 28, 1961, the breach had occurred and the assessee had exposed himself to be visited with penalty. That was a time when the Act of 1922 was in force. Therefore, for levying penalty on the assessee resort should have been made to the provisions of Section 28 of the 1922 Act and not to Section 271(1)(a) of 1961 Act. If the 1922 Act applied, in the absence of a prescription of any particular rate or the minimum, it was open to the Tribunal to reduce the penalty*** (Emphasis Supplied) ➢ S.K. Ganesan' Vs. A.K. Joscelyne', 1956 SCC Online Cal 43. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not to inflict punishment on anyone but to protect the public from undesirable persons, bearing the stigma of a conviction or misconduct on their character, the ordinary rule of construction need not be strictly applied. *** 34. Judging by that test, I am unable to hold that the respondent acted in this case with reasonable care. The difficulty, however, is that he has been charged only under items (o) and (p) of the Schedule, but has not been charged under item (q) which is concerned with 'gross negligence' in the conduct of professional duties. Even apart from negligence, there might have been a ground for proceeding against the respondent if it could be established against him that he had been a willing party to or at least had connived at the concealment of the payment of the selling commission by the Directors. On that point again, there is the difficulty that the complainant withdrew the allegation that the respondent had acted with a desire to accommodate the Managing Agency and the Directors in regard to their concealing the payment of the commission. Speaking for myself, I am inclined to think that in a case of professional misconduct charged against an Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary and it can be inferred by implications by reading language of the statute, intent of the parliament, rational and objective behind bringing the law or changes in the law, precedents as available, judgments of Courts and so on. ➢ It has further been argued before us by the Respondent that on the same logic, any law which only empower a new authority in place of old authority or prescribes same or lesser penal provisions cannot be treated as retrospective application of jurisdiction. ➢ In this regard, we will refer to another judgment in the matter of Hitendra Vishnu Thakur and Ors. vs. State of Maharashtra and Ors. [(1994) 4 SCC 602], where it was held in Hon ble Supreme Court that :- 26. The Designated Court has held that the amendment would operate retrospectively and would apply to the pending cases in which investigation was not complete on the date on which the Amendment Act came into force and the challan had not till then been filed in the court. From the law settled by this Court in various cases, the illustrative though not exhaustive, principles which emerge with regard to the ambit and scope of an Amending Act and its retrospective operation m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant: (i) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what it was the legislature contemplated. (p. 388) The rule against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right. (p. 392) ( Emphasis Supplied ) ➢ From above judgments, it seems that if new law is made to take care of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the new forum even if his cause of action or right of action accrued prior to the change of forum. He will have a vested right of action but not a vested right of forum. If by express words the new forum is made available only to causes of action arising after the creation of the forum, then the retrospective operation of the law is taken away; Otherwise the general rule is to make it retrospective. The expressions arising out of an accident occurring in Sub-section (1) and over the area in which the accident occurred , mentioned in Sub-section (2) clearly show that the change of forum was meant to be operative retrospectively irrespective of the fact as to when the accident occurred. To that extent there was no difficulty in giving the answer in a simple way. But the provision of limitation of 60 days contained in Sub-section (3) created an obstacle in the straight application of the well-established principle of law. If the accident had occurred within 60 days prior to the Constitution of the Tribunal then the bar of limitation provided in Sub-section (3) was not an impediment. An application to the Tribunal could be said to be the only remedy. If such an application, due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s challenged who but the members of the judiciary must decide it. If all the Judges are disqualified on the plea that striking down of such a legislation would benefit them, a stalemate situation may develop. In such cases the doctrine of necessity comes into play. If the choice is between allowing a biased person to act or to stifle the action altogether, the choice must fall in favour of the former as it is the only way to promote decision-making. In the present case also if the two Election Commissioners are able to reach a unanimous decision, there is no need for the Chief Election Commissioner to participate, if not the doctrine of necessity may have to be invoked. (Emphasis Supplied) ➢ We will like into consideration ratio laid down by the Hon ble Supreme Court in the matter of Bijender Singh vs. State of Haryana and Ors. [(2005) 3 SCC 685], wherein it was held that 14. The embargo of giving a retrospective effect to a statute arises only when it takes away vested right of a person. By reasons of Section 20 of 2000 Act no vested right in a person has been taken away, but thereby only an additional protection had been provided to a juvenile . (Emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority. Explanation. For the purposes of his sub-section, the expression professional or other misconduct shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949. (Emphasis Supplied) ➢ Thus, it becomes clear that under Chartered Accountants Act, 1949, the members of ICAI could be debarred for any period including for life, thereby causing lifelong punishment to erring Chartered Accountants. On the contrary, NFRA has limited scope of debarring the guilty Chartered Accountants or the firm for maximum 10 years of debarment. This clearly is lesser penal provision than as available to ICAI under Chartered Accountants Act, 1949. ➢ From above judgements, following clear ratios are noted for deciding on the issue of retrospectivity. These are as follows :- (i) Change in forum due to change in law has no bar on being implemented with retrospective effect. (ii) The litigant has vested right in action but does not have any vested right on forum. (iii) Retrospective application in such pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Executive Body, NFRA comprising of Chairperson and two full time Members violating principle of natural justice. The Appellants submitted that under Section - 132(1A) NFRA shall perform its function through divisions as may be prescribed and since divisions have not been prescribed for NFRA by the legislative, NFRA cannot function at all, until such divisions are set up. ➢ However, during final hearings, on a pointed query by this Appellate Tribunal to the Appellants regarding specific amendments in the NFRA Rules, 2018 regarding constitution of division, the Learned Counsel for the Appellants conceded that this point was missed by them earlier and accepted that the Division of the NFRA has duly been constituted in Rule 2(g) of the NFRA Rules, 2018. However, the Appellants stated that the process followed by the NFRA, although legally complied but still could not be considered as in compliance with principal of natural justice in so far as there has not been a proper separation of powers in investigation, prosecution and adjudication by the NFRA. ➢ On the other hand, the Respondent denied the averments of the Appellants that NFRA violated principles of natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [(1987) 2 SCC 74], which held as under :- 15. It is not disputed that the plea of prejudice or failure of justice is neither pleaded nor proved. Not only that even the judgment of the High Court does not indicate any possibility of prejudice or failure of justice. learned Counsel appearing for the respondent also did not suggest any possibility of prejudice or failure of justice. Under these circumstances therefore the view taken by the High Court does not appear to be correct in view of the language of Section 462 read with Section 465. The judgment of the High Court is therefore set aside. The direction of remand made by the High Court is also quashed. It is unfortunate that these matters pertaining to incidents of 1980 should not have been disposed of till today and that the matter should have remained pending on such technical grounds for all these years. We therefore direct that the appeals be remitted back to the High Court so that they are heard and disposed of on merits as expeditiously as possible. (Emphasis Supplied) ➢ From above, it becomes clear that matters cannot be allowed to be avoided only on pure technicalities and there may not be any prej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Branch. This issue, itself, may have several related issues deserving consideration for clarity and for helping us to reach final logical and informed outcome. Thus, we may prefer also to deal with following related points while considering this issue, which inter-alia, includes :- a) Whether the Branch Auditors are independent or subservient to statutory auditors. b) Can Statutory Auditors conduct the audits of branch themselves. c) Whether different criteria and qualification are stipulated for appointment of Branch Auditors vis-a-vis that of Statutory Auditors. d) Aspects of application of SAs to Branch Audit. e) Does audit of branch audit impact quality and output of overall financial audit of the Corporate Debtor. ➢ Since all these are interconnected and also dependent on each other, we will deliberate in conjoint way in subsequent discussions. Definition and scope of Statutory Audit : ➢ Statutory Audit is a legally required review of the accuracy of financial statement of the entity as per relevant statutes applicable to such entities. Such entities as Auditee may include public limited Company, Private Limited Company, Limited Liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as provided in Section 143(1) 143(4) are on the company's auditor and not on the Branch Auditor. (Emphasis Supplied) ➢ Analysis :- After careful reading Section 143(8) along with Section 149 of Companies Act, 2013, (noted in earlier discussion ) it appears that the process of appointment of Statutory Audit and Auditor for the branch audit remains the same. In other words, whatever process is followed for appointment of Statutory Auditors shall also be applicable regarding appointment of Branch Auditors. On the other hand, Statutory Auditor is required to deal with the Branch Audit Reports received from the Branch Auditor, if appointed other than the Statutory Auditor himself, in preparing an overall Auditor Report of the company. No prescribed manners or procedure for the same has apparently been laid down and it is left to Statutory Auditors to take care of such Branch Audit Reports suitably. Therefore, complete freedom has been given to Statutory Auditor to decide the reliance and the impact of Branch Audit Report on the overall audit of company accounts. While doing so, he may incorporate the observations regarding outcome of Branch Audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial information of the branches of DHFL as on 31st March, 2018 were true and fair for different branches in similar manner. ➢ In terms of para 2 of SA 200, the principles and procedures laid down in the SAs including professional skepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence-gathering procedures and reporting are all applicable in the branch audit as well, being an audit of historical financial information. Branch auditors appointed under section 143(8) read with Section 139 of the Companies Act, 2013 are statutorily required to comply with the SAs since section 143(9) requires every auditor to comply with the SAs. We have already noted from the averments of the Respondent that the Appellants themselves admitted that Overall audit strategy and development of an audit plan depends on the nature and scope of every audit assignment and risk of material misstatement, perceived by the auditor . This is not in sync with appellant's contention that he had a properly documented audit plan available in the audit file for previous years. Therefore, docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutory Audit. ➢ Section 22 read with Clause 9 of Schedule I of the Chartered Accountants Act, 1949, required appellant to ensure that provisions of Section 143(8) read with Section 139 of the Companies Act, 2013 are complied with, which was not done by the Appellant, hence the Appellants were rightly held guilty of professional misconduct on this account. ➢ To sum up on various sub issues as discussed in preceding paragraphs we observe the following:- Branch Auditor has specific role to perform with reference to Audit of the Branch and to that extent he may be treated as sub-servient to Statutory Auditor since he submits the Branch Auditors Report to the Statutory Auditor who incorporates suitably in its comprehensive audit report of the company. As regards issue framed regarding as to who has to audit branches, if the Statutory Auditor can perform duties of Branch Auditor himself, the answer is clear and positive that the Statutory Auditor can conduct the auditor of all branches or some of the branches himself else other qualified to be auditors and so appointed can conduct Branch Audit. As regards qualification required for appointment of Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation made by NFRA. As per the proviso to Section 143 (10) until any auditing standard are notified, any standard or standards of auditing specified by ICAI shall be deemed to be auditing standard. ➢ It is further noted that the Accounting Standards and Auditing Standards have been defined in the Companies Act, 2013 and both sets of standards are to be mandatorily followed by all stakeholders including the companies and the Chartered Accountants. Thus, we are of the clear opinion that the Appellants as Auditors were duty bound to follow these standards which they alleged to have been breached in respect of SA 210, SA 230, SA 315, SA 320, SA 330, SA 700 along with few other paragraphs of other SAs and Section 143(8) of the Companies Act, 2013. ➢ In view of the legal position the SAs are mandatory and not as advisory or a guidance note to auditors. Issue No. (VI) What is professional misconduct for member of ICAI and legal provisions. ➢ NFRA has been empowered to investigate either suo-moto or on a reference made to it by Central Government to investigate into the matters of professional or other misconduct committee by any member or firm of CA s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct. Thus, there are total 19 deemed misconduct under Schedule I. (B) Schedule II Part 1 relates to Professional misconduct in relation to Chartered Accountants in practice, where Chartered Accountants is deemed to be guilty of professional misconduct in 10 types of deemed professional misconduct. Part 2 of Schedule II relates to Professional misconduct in relation to Members of institute generally and describe four types of misconduct, whereas Part 3 of Schedule II describes other misconduct in relation to Members of institute generally. ➢ Chapter V of Chartered Accountants Act, 1949 on misconduct consist of two sections, namely, Section 21 and Section 22. Section 21 describes disciplinary directorate and empowers the Council of ICAI and to establish disciplinary directorate headed by Director (Discipline). According Section 21(3), where the Director Discipline is of opinion that Member is guilty of any professional or other misconduct mentioned in Schedule I , he is duty bound to place the matter before the Board of Discipline and where Director Discipline is of opinion that member is guilty of professional or other misconduct mentioned in II Schedule or bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of Section 132 of the Companies Act, 2013. ➢ It will be worthwhile to note that unlike differentiation based on Schedule I and Schedule II with reference to Section 21 and 22 of the Chartered Accountants Act, 1949, for NFRA there is no such distinction and can look into matters which are covered under Section 22 which automatically refer to all Schedules of Chartered Accountants Act, 1949, meaning Schedule I and Schedule II on comprehensive basis. Thus, the powers of NFRA are more and wider than available to ICAI, as discussed in preceding paragraphs. ➢ On a gross and broader basis, it can be inferred that the misconduct as referred in Schedule I are of lesser gravity and more related in pattern of practice or remunerations or soliciting work or engaging in the provision or occupation prescribed by the Counsel etc. ➢ On the other hand, the Schedule II of Chartered Accountants Act, 1949 are of more serious nature relating to disclosing confidential information, misconduct regarding examination of financial statement failure to disclose material facts which have could impact on true and fair picture of financial statement, failure to report material m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate action being taken by the High Court. It was held that though the definition of the material expression used in Section 21(1) refers to the acts and omissions specified in the schedule, the list of the said acts and omissions is not exhaustive; and in any event, the said list does not purport to limit the powers of the Council under Section 21(1), which may otherwise flow from the words used in the said sub-section itself. It was held that it would not be right to hold that such disciplinary jurisdiction can be invoked only in respect of conduct falling specifically and expressly within the inclusive definition given by Section 15. Members of the Institute are bound to act in a manner consistent with the good reputation of the profession. They should refrain from any conduct which might bring discredit to the institute. Members should be guided not merely by the terms, but also by the spirit of the Code of Conduct and the fact that particular conduct does not receive mention does not prevent it from being unacceptable or discreditable conduct, thus making a member liable to disciplinary action. After all, Code of Ethics draws community ethics and moral principles into t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thoroughly verify statements made by the management of a company as explanations for their balance sheet. Auditors are thus required to strictly comply with SAs, violation of which may result into punishment and penalty. ➢ The significance of the SAs becomes critical for maintenance of investor confidence, as audited financial statements are necessary inputs for any decision, investors make. Auditors are thus entrusted with duty to calibrate their approach based on what they judge to be the significance of the audit operation. ➢ SAs are issued based on International Standards on Auditing (ISAs) issued by International Federations of Accountants (IFAC). ➢ These Standards in India are issued under the authority of the council of the ICAI. Section 143 (2) of the Companies Act 2013 requires the auditor to ensure compliance with these SAs. ➢ We note that the standards on auditing have been divided into 6 groups having 38 standards as detailed below. 100-199: Introductory Matters (Nil Standard) 200-299: General Principles Responsibilities (9 Standards) 300-499: Risk Assessment and Response to Assessed Risks (6 Standards) 500-5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t least 10 other standards such as SA 240, SA 300, etc. emphasize on the need for maintaining professional skepticism while conducting the audit. (iii) Professional Judgement : An audit requires the auditor to perform procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion. The auditor applies professional judgement in deciding which procedures are to be performed. This requires the auditor to rely on their knowledge, training and experience and professional skepticism. (iv) Materiality : The standards on auditing refer to the concept of materiality. Information is considered material if its omission or misstatement has the potential to influence the decisions of users taken on the basis of the financial statements. Materiality is relative to the size and prevailing circumstances of companies. Determining materiality involves the exercise of professional judgment by the auditor. (v) Audit Evidence : Standards on auditing in the series 500-599 provide for obtaining sufficient and appropriate audit evidence. This includes external confirmations, sampling, specific are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformance of Risk Assessment Procedures) vii. SA 450 (Absence of documentation of misstatements) viii. SA 500 (Non evaluation of reliability of info produced by the company) ix. SA 520 (Absence of Analytical audit procedures) x. SA 530 (Non determination of sample size and sample design) xi. SA 700 (For forming a baseless audit opinion by not complying with the SAs) Violation of SA- 200 210 :- ➢ SA 200 is about Professional Skepticism and SA 210 relates to agreeing to terms of arguments. ➢ The Appellants submitted that as regards alleged violation of SA 210, it is wrong to state that the Appellants failed to comply with the requirements of SA 210 Agreeing the Terms of Audit Engagements . It is the case of the Appellants that there was no negligence in complying with the provisions. The Appellants emphasised that SA 210 deals with recurring audits and in such audits, the auditor is required to assess whether there are circumstances that require the terms of the audit engagement to be revised and whether there is need to remind the entity of the existing terms of the audit engagement based on following factors: i. Any indication that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, etc., and thus, there was no violation by the Appellants of SA 200 SA 210. The Appellants also submitted that they were mainly Branch Auditors their role was specific and confined. The Appellants were not involved in expressing their opinion on true and fair picture on the financial statements of DHFL. ➢ Per contra, it is the case of the Respondent/ NFRA that the principles and procedures laid down in these relevant SAs including professional skepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence-gathering procedures and reporting are all applicable in the branch auditors as well, being an audit of historical financial information. Branch auditors appointed under section 143(8) read with Section 139 of the Companies Act, 2013 are statutorily required to comply with the SAs since section 143(9) requires every auditor to comply with the SAs. Thus, even if the opinion was not expressed on the true and fair view of financial statements of the Company, opinion was expressed on the true and fair view of the branches based on the financial information related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the objective and scope of the audit, thereby violating SA 200 itself. ➢ It is the case of the Respondents that in Para 13 of SA 210, it clearly states that on recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement. The Respondent stated that the requirement to issue an engagement letter is not limited to initial appointment only as perceived by the Appellants and therefore, communication sent by the Firm on 12.09.2017 does not fulfil the auditor responsibility in terms of SA 210 as the communication was deficient in terms of a proper description of the objective of the audit, the responsibilities of the auditors and the management and the applicable financial reporting framework. ➢ During averments, we came to note that there were no documentation in the audit files or in the Supplementary Audit Files to support the Appellants claim that assessment of Internal Control System was actually performed for the subject matter audit. Further, mandatory documentation requirements in the present case did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with due diligence as seen from the Loan Verification Certificates, Detailed Loan Verification Sheets, including KYC and Money Laundering properly signed with name of personnel preparing the sheets, Verification of Employee Reimbursement Expenses, Bank Reconciliation Statements, verification of TDS, Service Tax compliances. It has also been stated that the EPs completed task of cross-verification of closing balances of cash deposited in bank accounts diligently and similarly conducted fixed asset verification properly. ➢ It is case of the Appellants that NFRA has taken stand that the significant change necessitated the Appellants for revisiting the audit engagement terms including the Appellants preparing Audit documentation afresh due to the fact of appointment of CAS as new statutory and Branch Auditors in F.Y. 2016-17. The Appellants submitted that nowhere in SA 230, it is mentioned that change of statutory auditor of the Company is a significant change that requires a branch auditor to revisit the terms of their audit engagements. ➢ It has been clarified that SA 230 describes Auditor's responsibility where the audit to be conducted is of Financial Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er documents. The Respondent empathetically stated that such claims of the Appellants should not be accepted in view of the Duly Notarised Affidavits issued by the Appellants certifying that The Audit File(s) submitted by me/my Audit Firm to NFRA is complete in all respects as stipulated in the Standards on Auditing (SA) and no information as required by the SAs is omitted from such files . The Respondent further supplemented the arguments that the fundamental stipulation of SA 230 is that the auditor shall assemble the audit documentations in one audit file (and not multiple audit files of different years). Hence, it is the case of the Respondent that the Appellants clearly violated SA 230 making them responsible for professional misconduct. ➢ The Respondent strongly objected to the contentions of the Appellants that low amount of fees is an indicator of lower professional risk associated with the audit. The Respondent stated that this reflect poor understanding of the Appellants. Moreover, the audit plan submitted by the Appellants to the NFRA were not forming part of the Audit File for 2017-18. Such contentions of the Appellants are against the fundamentals of SA 230 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this stage the Appellants cannot go back and avoid the responsibility. Similarly, this Appellate Tribunal cannot accept the argument of the Appellants that lower fee received by the Appellants meant lower responsibility. ➢ Based on above analysis, we find suitable logic in Respondent arguments and find that the absence of basic documents here, will hold the Appellants responsible for violation of SA 230. Violation of SA 300, 315, 320 330 :- ➢ SA 300 deals with the Auditor s responsibilities to plan an audit of financial statements. The fundamental objective of SA 300 is that the Auditor plan the audit so that it audit will be performed in an effective manner. It includes involvement of key engagement team member, preliminary engagement activity, proper planning of audit alongwith suitable documentation. ➢ This enable the Auditor to design detect risk of material misstatement and to reduce same to an acceptable low level. This also help the Auditor to detect fraud or error by the Company. ➢ SA 315, prescribes for Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment, includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 315, SA 320 SA 330 for determining materiality, performance materiality and documentation thereof. The Respondent emphasised that the replies of the EP's showed disregard for professional standards and absence of professional behaviour on EP's part as proper determination, application and revision of materiality are very basic to an audit which were not followed by the Appellants. ➢ The Respondent refuted the contention of the Appellants that Elements of risks to the group (company) as a whole from the financial reporting point also was considered as evident from Annexure IX to the Auditor's Report for each branch . The Respondent stated that this is without any basis in the absence by the Appellants of any working papers to support mandatory documentation requirements of SA 315, SA 320 and SA 330. ➢ The Respondent contested the Appellants arguments regarding not violation of various SAs and further submitted that without any working papers in the Audit Files by the Appellants to satisfy the mandatory documentation requirements of SA 315, 320 and 330 for which compliance is required to be demonstrated by documents included within the audit files. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent amplified its stand that Branch Auditors are responsible for compliance of SAs and the Appellants plea of no role or limited role is lame excuse. ➢ The basic plea of the Appellants is that being branches, the trial balances and other financial statements of branches were not amenable for any type of misstatements and therefore there was no scopes for the Appellants to point out the same. We are afraid that this is not true in overall scheme of system as the Appellants were conducting Branch Audit of 17 Branches of DHFL. The financials of the Branches do affect the financial of the company and the same is true for Audit of Branches. ➢ We also note that in absence of detailed documentations by the Appellants, the defence taken by the Appellants are not convincing. We tend to agree with the Respondent. Violation of SA 500 ➢ The requirement of Para 6 of SA 500 is that the auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. ➢ The Impugned Order finds that the Appellant has failed to comply with SA 500 in not designing and performi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of audit of the Company s branch done by the Appellants, the scope of work was limited to auditing the Trial Balance of the branch, which did not reflect any operating assets or liabilities attributed to the Branch by virtue of centralised ERP system followed by the Company. Therefore, neither any financial statements had been prepared for branches, nor was there any case to form any overall conclusion as provided in SA 520. Further, items that mattered for the financial statements of the Company, carried from the Trial Balance of the branch, were insignificant. In such situations, because there is no room for use of substantive procedures by the auditor, SA 520 has no application. Hence the allegation is misconceived. ➢ The Respondent stated the Appellants were responsible for non-compliance SA 530 which relates to the determination of sample design, sample size and required audit procedures. The Respondent assailed the EP who submitted that the basis of selection of sample was defined in the appointment letter itself, and the skills of judgment and competence of the auditor were applied to draw the required sample data. ➢ The Respondent stated that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llants pointed out that the basis of selection of sample was defined in the appointments letter itself, and the skills of judgment and competence of the auditors were applied to draw the required sample data and therefore, NFRA misconceived on false assumptions, without appreciating the facts on records. ➢ Per contra, it is the case of the Respondent that there is no evidence that any of the sampling and the related procedures as detailed in SA 530 have been complied with by the Appellants while executing the audit including for selection of random loan accounts to be reviewed, while the audit opinion is based on sample testing. In the absence of any evidence to show compliance with the determination of sample design, sample size and audit procedures performed on it, the contentions of the Appellants are without any basis. The Respondent also castigated the pleas of the Appellants that the basis of selection of sample was defined in the appointment letters itself. The Respondent stated that in the appointment letters nowhere specified any criterion for selection of random loan accounts for verification. The Respondent refuted that the Appellants claim that the audit fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CAS. The Appellants, as a branch auditors, had limited scope of work - to provide Trial Balance after audit apart from certain predefined annexures. Therefore, the allegation with respect to the scope of SA 700, was based on incorrect perception of the relevant legal provisions and facts of the case presented above. ➢ It has been alleged by the Appellants that the Respondent has cherry picked stray statements from the Appellant's audit report and read them without any context. The final certification is evidently subject to the remarks made in other parts of the certificate and the incorporation of such remarks in the certificate itself indicates that the proper process of examination of the loan documents had been carried out by the Appellants. Moreover, the findings that there was absence of materiality levels documented in the audit file and that there was no assessment of the risk of misstatements and test of controls were also unfounded. ➢ Per contra, the Respondent denied all averments of the Appellants regarding non-violation of SA 700. The Respondent also assailed assumptions of the Appellants that their role was confined to only Branch Audit and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d use of centralized ERP by DHFL, we cannot ignore the facts that for all such loan accounts the respective branches were directly involved. It is not difficult for us to imagine the adverse impact of non-adherence of SA and non expressing of correct opinion on financial statements of DHFL, when such large loans are with the domain of Branches directly or indirectly. The Branch Auditors cannot absolve themselves of their responsibilities. ➢ The reply of the EP regarding their non-violation of SA 700 cannot be accepted since it is apparent from the Trial Balance certified by the EP that the loans were primarily appearing in the branch's Trial Balance and then transferred to the head office through entries in the branch books. The EP's claim in the annexure that rectification entry was recognized in books in the next financial year (i.e. on 02.04.2018) is also not supported by any evidence in the audit file. Hence, in the absence of materiality levels documented in the audit file, the pleadings of the Appellants are not convincing. ➢ We also note that NFRA did not find any documentation evidence from the Appellants to have complied with requirements of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the interest of CA profession, to ensure that an incoming auditor ascertains himself before accepting his appointment as an auditor of a company, that an existing auditor was not removed without following due process as laid down in Section 225. The Appellants submitted that, therefore, the application of Clause (9) has altogether a different purpose and it must be in the context of a grievance by a previous auditor or by a shareholder, unlike the context in which NFRA has applied the provision against the Appellant. ➢ This Appellate Tribunal finds the code of ethics to be very important to any profession to maintain high integrity and high standards, it expects its members to follow to keep public trust. In this regard, we find the judgment in the matter of Institute of Chartered Accountants of India Vs. Vivek Kapoor Ors. [(2016) SCC OnLine P H 7501]. The relevant portion reads as under :- 15. International Federation of Accountants in its Code of Ethics had given great importance to public interest. It was framed with objectives of credibility, professionalism, quality of service and confidence keeping in view fundamental principles of integrity etc. 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RA can impose fine of :- 132. Constitution of National Financial Reporting Authority- (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall (c) 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 (II) 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 engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority. Explanation. For the purposes of his sub-section, the expression professional or other misconduct shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949. (Emphasis Suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction after expiry of thirty days from the order, unless order indicate otherwise... 21. In view of the foregoing discussions and conclusion, we are of the view that filing of the Appeal by the Appellant(s) with deposit of 10% of the penalty shall have no effect on the order of 'debarment' passed against the Appellant(s) under Section 132(4)(c) and under head (B). Order of 'debarment' shall continue to operate unless an order is passed by the Appellate Tribunal. (emphasis supplied) ➢ We will also add that the above judgment of this Appellate Tribunal has already been challenged in the Appeal by the Appellants with a prayer to grant stay and the Hon ble Supreme Court of India in Civil Appeal No. 4606/ 2023 has not granted the stay and the Appeal is under consideration by the Apex Court. Final Conclusions : 87. We feel that it is of utmost importance that Auditors realise their responsibilities which is necessary not only to the company but also to the public. In view thereof, giving effect to the Impugned Orders which highlights the professional misconduct and other misconduct on the part of the appellant vis- -vis a public listed co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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