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TMI Blog2024 (1) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... is. We also conclude that the EP has committed Professional Misconducts as defined under section 132 (4) of the Companies Act 2013 in terms of Section 22 of the Chartered Accountant Act 1949 (CA Act) as amended from time to time, and as detailed below: i. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his failure to report the material misstatements and non-compliances of the Company in its Financial Statements, as explained in the paras 24 to 93 above. ii. The EP committed professional misconduct m terms of Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Time Member ORDER In the matter of CA Pankaj Kumar under Section 132(4) of the Companies Act 2013 read with Rule 11(6) of National Financial Reporting Authority Rules 2018 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) No. NF- 20012/2/2022/3 dated 16 June 2023, issued to CA Pankaj Kumar (ICAI Membership No. 091822), partner of M/s SVP Associates (ICAI Firm Registration No. 003838N), who is a member of the Institute of Chartered Accountants of lndia ('ICAI' hereafter) and was the Engagement Partner ('EP' hereafter) for the statutory audit of SRS Real Infrastructure Limited (CIN: L65910HR1990PLC040431) (the Company/SRSRIL), for the Financial Year ('FY' hereafter) 2017-18. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction Background C. Lapses in the Audit D. Articles of Charges of Professional Misconduct by the Auditor E. Penalty Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India's independent regulator, in respect of matters relating to accounting and auditing, of prescribed classes [Rule 3 of NFRA Rules, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or alternative audit procedure to determine the existence and condition of inventory amounting to { l 02.69 crores (13.56 % of total assets) in accordance with the requirements of SA 501 and also failed to modify his opinion with respect to inventory in the audit report for the FY 2017-18 in accordance with the requirements of SA 705 (Para C.4). e. The EP failed to demonstrate compliance with the requirements of SA 700 [SA 700: Forming An Opinion and Reporting on Financial Statements] and SA 705 [SA 705: Modifications to the Opinion in the Independent Auditor's Report] as he gave a Qualified Opinion despite the fact that he was unable to comment upon more than 50% of the total assets of the company which warranted expression of a Disclaimer of Opinion instead of a Qualified Opinion (Para C.5). f. The EP failed to demonstrate compliance with the requirement of the Standards on Auditing concerning the EQC Reviewer (Para C.6). Similarly, the EP failed to: determine materiality (Para C.7); plan the audit of Financial Statements (Para C.8); communicate with Those Charged with Governance (TCWG) (Para C.9 and C.10); and failed to identify and assess the risks of material mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Manu Leasing Limited, is one of the companies within the SRS Group and was incorporated on June 26, 1990. SRS Real Infrastructure Ltd was a public company listed on the Bombay Stock Exchange ('BSE' hereafter) and therefore, falls under NFRA's domain [Vide Rule 3(1)(a) of National Financial Reporting Authority Rules, 2018] . The company was engaged in Real Estate, Trading and Manufacturing of construction material. SRSRIL was required to prepare its Financial Statements ('FS' hereafter) for the FY 2017-18 in accordance with Indian Accounting Standards (' Ind AS' hereafter), as notified by Ministry of Corporate Affairs. 13. The investigation of SFIO revealed that the Company and its group companies had presented falsified Financial Statements containing falsified statement of debtors, adopted the malpractice of round tripping and layering of transactions that resulted in inflated purchases and sales. The investigation revealed inter alia siphoning of funds of Rs.671.48 crore and diversion of funds of 645.86 crore in the Company and its group companies. SFIO accused the auditors of the Company and its group companies under Section 143 [Section 143: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was granted extension till 07.08.2023. Vide email dated 08.08.2023, the EP again requested to extend the time till the end week of August 2023 stating that he did not receive the NFRA email due to change in his email id. The last date for submission of the reply to the SCN was again extended up to 30.08.2023. The EP once again vide email dated 30.08.2023 requested to extend the time till 06.09.2023 stating that he and his legal counsel were busy in preparation of rejoinder before the NCLAT. He was again granted an extension till 06.09.2023. The EP finally submitted the reply vide his email dated 07.09.2023 and refuted all the charges. 19. In his reply dated 07.09.2023, the EP stated that Financial Statements including the Audit Report for the FY 2017-18 were neither adopted in the Annual General Meeting (AGM) nor filed with the Registrar of Companies (RoC) under the Act or with any other authority nr body established under law and had no impact on the public or any stakeholder; and therefore, the proceedings under Section 132(4) against him were not in accordance with the law. In the personal hearing held on 08.12.2023, the counsel of the EP, Advocate Gautam Jain reiterated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of his legal counsels (Advocate Gautam Jain and Advocate Piyush Kumar Kamal). On 28.11.2023, one of the legal counsels of the EP, Advocate Piyush Kumar Kamal again submitted in writing requesting extension for personal hearing citing reason of ill health of Advocate Gautam Jain. It appeared that the EP was deliberately delaying the proceedings on some pretext or the other as he has sought three extensions for submitting his reply to the SCN and three extensions for the personal hearing. While multiple opportunities, had been given to the EP, it appeared that the EP was procrastinating the disposal of the SCN. However, NFRA, in the interest of natural justice, once again granted extension to the EP for a personal hearing that was rescheduled for 08.12.2023. The EP, assisted by his legal counsels' Advocate Gautam Jain and Advocate Piyush Kumar Kamal appeared for the personal hearing held at NFRA on 08.12.2023. 23. We have perused all the material on record including the written responses of the EP. The major lapses include non-assessment of going concern basis, non-evaluation / verification of inventory and the revenue recognized, insufficient audit documentation, inappro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... physical verification of fixed assets and inventories, purchases and sales, sale of property, plant and equipment [Report on Internal Financial Controls attached as Annexure B to the audit report for the FY 2017-18] . 26. lt was observed that despite the presence of significant indicators raising questions about the going concern assumption in preparation of Financial Statements for the FY 2017- 18, no evidence was found of the management's assessment of the entity's ability to continue as a going concern; nor was any evaluation conducted by the EP of such assumption as required by Para 12 read with Para A7 and A9 of SA 570. 27. In response to the SCN, the EP replied that the going concern assessment was not required because: a. As per SA 570, the auditor is required to assess the going concern for a period of next 12 months. In other words, for the audit of FY 2017-18, the applicable period shall be FY 2018-19; and on the date the audit report was signed i.e. 30.03.2019 there were real estate projects running in the impugned Company, including the one with Republic of Congo . b. The Enforcement Directorate (ED) had attached on 08.01.2020 assets worth Rs.460 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thdrawn and dismissed . As can be seen, Hon. NCLT had disposed of this application based on a settlement reached between the company and the operational creditor. This in no way absolves the EP of his duties as required by SA 570 as a statutory auditor. 29. Para A3 of SA 570 is an illustrative list of events/conditions that cast doubt on the ability of an entity to continue as a Going Concern. These indicators include negative operating cash flows indicated by Financial Statements, adverse key financial ratios, substantial operating losses or significant deterioration in the value of assets used to generate cash flows, inability to comply with the terms of loan agreements etc. It is pertinent to note that all such indicators were present right at the beginning of the audit process for the FY 2017-18 and therefore the EP was duty bound to obtain evidence in support of the use of going concern basis and had to evaluate the same to conclude if any material uncertainty existed regarding the Going Concern. However, the Audit File contained no evidence of any such evaluation/testing of appropriateness of the Going Concern basis by the EP. 30. We find the reply and explanation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the engagement, the auditor shall document the reasons for that conclusion. 34. In his written reply, the EP submitted that due to the scaling of the premises of the Auditee by Economic Offences Wing and Income Tax Department he could get hold of certain documents only of the real estate segment and the related supporting documents were not available in a conclusive manner, thus his opinion was qualified in the Audit Report. 35. We find that for the following reasons, the reply and explanation given by the EP arc misleading and an afterthought: i. There is no evidence in the Audit File to show that the EP performed the substantive and analytical procedures to verify the revenue of 29.16 crores recognized from the real estate segment and evaluated the risk of fraud in revenue recognition. There is no evidence in the Audit File to show that the EP performed audit procedures like re-computation of the revenue from the real estate segment, evaluation of audit evidences such as party wise and project wise details of revenue, details of parties with whom agreement to sale / transfer of deed was done and its reconciliation to verify the recognition of revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formed and the date and extent of such review. 39. In his written reply, the EP submitted that the Noticee and its team has maintained audit documentation to arrive at the impugned audit report, the same has been provided to NFRA and where sufficient and appropriate evidence were not available in respect of certain matters, the same has been mentioned explicitly in the audit report. That on being pointed out in the Show cause notice, the Noticee has also observed that there were inadvertent technical breach pertaining to firm's internal audit documentation however, the averments made by NFRA in Para 14 do not have any impact either on the audit report or on the Financial Statements of the company . 40. Our analysis of the EP's reply and other related material shows that: i. The Audit File lacked many significant and critical working papers such as: a. Working papers for setting materiality and performance materiality; b. Auditor's evaluation the appropriateness of management's use of the going concern assumption; c. The composition of the audit team and the reviewing team; d. The details of who performed the audit work, and the date of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y by the national and international regulators as well. For example, in the matter of Bharat Parikh Associates Chartered Accountants, dated 19.03.2019, the US audit regulator PCAOB took a serious view of the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB order states that Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to: (a) understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, and (b) determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review the documentation for each of those audits was insufficient to demonstrate the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, including in those areas of the audits involving significant risks. For the FY 2016 and 2017 Issuer A audits, the documentation also failed to demonstrate who performed the work and the date such work was completed. Additionall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor shall modify the opinion in the auditor's report in accordance with SA 705 [SA 705: Modifications to the Opinion in the Independent Auditor's Report]. 49. In his written reply, the EP responded that he could not get back the possession of certain audit working papers due to scaling of premises by the Economic Offences Wing and the and Income Tax Department. Also, the related supporting documents were not available in a conclusive manner after resuming the work in the second phase. He qualified the same in the Annexure 'A' part of the Audit Report i.e. CARO. 50. Our analysis of the EP's reply and other related material shows that: i. As on 31.03.2018, the inventory amounting to Rs.102.69 crores was reflected in the Financial Statements. This inventory was significantly material as it accounted for 13.56 % of total assets of the company. There is no evidence in the Audit File that the EP performed procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory or performed any alternative audit procedures in case he was unable to attend the physical inventory counting due to the scaling of the premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responded confirmation letters. Therefore, the EP stated that he was unable to comment upon the adequacy of such provision (Para 4(b) of audit report) ii. In several cases, the company had made advance payments or payments to parties in excess of their outstanding balance, for which neither provision had been made nor was any adequate explanation offered by the management of the company. There fore, the EP stated that he was unable to comment on the effect of the same in standalone Financial Statements (SFS) of the Company. (Para 4(c) of audit report) iii. Investment Properties includes a commercial building at SRS Tower, Faridabad having office space valuing 146.41 crores which the company had developed under a development agreement with SRS Automotive Components Private Limited, a subsidiary of SRSRIL. As management failed to provide any agreement, the EP stated that he was unable to comment upon the amount capitalised as building. (Para 4(e)of audit report) 55. Responding to the charge, the EP replied that NFRA had taken a strict and technical approach, that there was adequate and sufficient warning and intimation in the auditor's report, and that the breach may at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no formal appointment of an EQC Reviewer, however audit observations on significant matters were discussed with other fellow members of the firm. He also stated that any deviation from the SA 220 is a technical breach and cannot be said to be professional misconduct without any ill motive. 61. The reply of the EP is unacceptable. In the statutory audit of SR.SR.IL, a listed entity, the EP was duty bound to determine that an EQC Reviewer had been appointed. The EP admits that there was no formal appointment of an EQC Reviewer. There is no evidence in the Audit File that the EP had discussed/consulted the significant matters, judgements and conclusions with the EQC Reviewer or even with any other person in the firm. There is no evidence in the Audit File of any final clearance or approval from the EQC Reviewer before signing of the audit report by the EP. 62. In the audit of Financial Statements of a listed entity, the role of an EQC Reviewer is important for ensuring quality, as the EQC Reviewer evaluates the significant judgments made by the engagement team, reviews the engagement team's evaluation of firm's independence, checks whether the appropriate consulta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Paras 10 and 11 of SA 320 (which are statutory in nature under the provisions of Section 143(10) of the Act) makes it clear that the requirements part of the SAs are mandatory. 69. The EP's assertion that non-determination of materiality is a mere technical breach cannot be accepted in the light of the requirement of the SAs. Examination of the Audit File revealed that the EP did not even determine materiality or performance materiality in the audit of Financial Statements of SRSRIL. We emphasise that materiality is one of the most important concepts in the audit of Financial Statements. Where material information is omitted or misstated, the Financial Statements will not be in compliance with the requirements of the SAs and therefore of the Law, as Section 143(9) of the Companies Act, 2013 requires the auditors to comply with the SAs. 70. As there is no working paper in the Audit File evidencing determination of materiality by the EP, we conclude that the EP has failed to adhere to the mandatory requirements of determining Materiality in accordance with SA 320 and falsely stated in his report that he had conducted the audit in accordance with the SAs specified under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppened on a regular basis. 77. It is clear from the Audit File that the EP failed to identify TCWG and understand it's importance as a body that has the responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity which includes overseeing the Financial Reporting process. The reply of the EP indicates his casual and unprofessional approach in performance of the audit as there is no evidence in the Audit File that the EP communicated with TCWG. 78. In the light of above, we conclude that the EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG and consequently, failed to comply with the requirements of SA 260. 79. Failure to appropriately communicate with Audit Committee (which is a part of the TCWG) has been viewed seriously by international regulators too. For example, PCAOB, the US Regulator, charged the public accounting firm L.L. Bradford Company, LLC (Audit Firm) for its failure to communicate with the audit committee during the audit of WebXU lnc.'s ( WebXU ). It stated that the Firm also violated a PCAOB rule that requires a regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by gaining understanding of relevant industry, applicable regulatory structure etc and Para 32 of SA 315 requires the EP to document the discussions, the risk assessments and the understanding obtained regarding the key aspects of the entity. 86. Responding to the charge, the EP replied that the procedure required by SA 315 is inherent part of audit and takes place in regular course; and that merely finding a bare non-performance or some default in performance without establishing any ill motive does not constitute professional misconduct. 87. There is no evidence in the Audit File regarding performing any risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatements at Financial Statement and Assertion levels and his audit responses to such risks, gaining understanding of the entity, etc. 88. In the light of the above facts and circumstances, we conclude that the EP has been grossly negligent in the conduct of his professional duties and made false declaration in the audit report regarding the true and fair view of the Financial Statements as he failed to comply with the requirements of SA 315. 89. Such lapses ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled below: i. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties . This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his failure to report the material misstatements and non-compliances of the Company in its Financial Statements, as explained in the paras 24 to 93 above. ii. The EP committed professional misconduct m terms of Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ''fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt from the fact that a minimum punishment is laid down by the law. 98. Section 132(4) (c) of the Companies Act 2013 provides that National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for: A) imposing penalty of (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms; (B) debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of Financial Statements or internal audit of the functions and activities of any company or body corporate; or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority. 99. The professional misconduct of CA Pankaj Kumar has been detailed in the foregoing paragraphs of this Order. Considering the nature and seriousness of the violations and principles of proportionality, we, in exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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