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TMI Blog2024 (4) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. HELD THAT:- EP and PHD committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 5 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a CA is guilty of professional misconduct when he 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 - This charge is proved as PHD and EP failed to disclose in their report the material noncompliances the Company made. EP and PHD committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 6 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a CA is guilty of professional misconduct when he fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity - This charge is proved as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was conducted as per SAs. Thus it is concluded that the charges of professional misconduct in the SCN, as detailed above, stand proved based on the evidence in the Audit File, the audit reports on the standalone financial statements and consolidated financial statements for the FY 2018-19, the submissions made by EP, EQCR Partner and PHD and the Annual Report of RCL for the FY 2018-19. Sanctions and penalties - HELD THAT:- Section 132 (4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law. Because professional misconduct has been proved and considering the nature of violations and principles of proportionality, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, it is ordered: a. Imposition of a monetary penalty of ₹3 crore (Rupees Three Crore) on the Audit Firm M/s Pathak H.D. Associates. b. Imposition of monetary penalties of ₹1 crore (Rupees One Crore) and ₹50 Lakh (Rupees Fifty Lakh) respectively on EP CA Parimal Kumar Jha and EQCR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved prima facie that there are certain non-compliances with the Act, the Standards of Auditing (SA) and the Code of Ethics, 2009, issued by ICAI. Accordingly, on the satisfaction that sufficient cause exists to initiate action under Section 132(4) of the Act, the subject matter SCN was issued to the Auditors. 2. As per the Consolidated Financial Statements for FY 2018-19, RCL had loans from Banks of around ₹12,000 crore and other external borrowings of around ₹32,000 crores, consisting of debentures, commercial papers and pass-through certificates. RCL was a Core Investment Company (CIC) investing primarily in its group companies. RCL used the above loans and borrowing to extend loans and investments to other group companies. PW reported suspected fraud regarding loans and investments amounting to approximately ₹12,571 crore to some group companies. 3. Despite the reporting of suspected fraud and the resignation by the other joint auditor (PW), the Auditors did not perform adequate procedures as required by the SAs. The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹6557 crore (net of impairment) disclosed in the financial statements was doubtful and hence the management s assertions of the value and rights of these loans were materially misstated in the financial statements, which PHD failed to report. Also, the actual valuation of investments, the rationale for sanctioning loans and investments to potential non-creditworthy entities and the adequacy of provisions remained unverified in all cases. These factors cumulatively contributed to the ROMM due to fraud, which PHD ruled out without adequate audit procedures. Consequently, the audit opinion of PHD confirming the management s assertions of a true and fair view of the financial statements is without adequate basis. (Details in Section C4 of this order). e. PHD failed to notice that the loans amounting to ₹6557 crore (net of impairment) were sanctioned by RCL violating its lending policy and also failed to examine the fraud risk factors. It failed to identify and respond appropriately to the risk of material misstatement due to fraud in management override of controls and revenue. (Details in Section C5.1 to C5.3 of this order). f. PHD failed to evaluate the adequacy of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs at the Annual General Meeting of the Company held on 27.09.2017 and 26.09.2017. PW filed form ADT-4 with the MCA as per the provisions of section 143(12) of the Act and resigned from the audit. Thus, the audit report for the FY 2018-19, dated 14.08.2019, was signed only by PHD. The audit Report contained an Emphasis of Matter paragraph, referring to the matters reported by PW under section 143(12). The EoM stated that Based on the facts fully described in the aforesaid note, views of the Company, in-depth examination carried out by the independent legal experts of the relevant records, there were no matters attracting the said Section. 8. We suo motu decided to examine the audit evidence that led PHD to issue the above report and called for the Audit File 3 and other information from the Audit Firm and EP CA Parimal Kumar Jha (Membership No. 124262). On 23.12.2021 the Audit Firm requested an extension of time for submission of requisite documents and an extension of time up to 07.02.2022 was allowed. The Audit Firm submitted the Audit File and other documents electronically through File Transfer Protocol (FTP) on 07.02.2022. An examination of the Audit File, annual reports of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial to negate the expressions of an opinion; and e. Failure to invite attention to any material departure from the generally accepted procedures to audit applicable to the circumstances. C. MAJOR LAPSES IN THE AUDIT 12. We have examined in detail the written replies to the SCN, and the oral submissions made by the Auditors to each of the omissions and commissions leading to the above-mentioned charges as per the SCN. The Auditors have denied all the charges mentioned in the SCN. Only the charges that are proved have been included in this Order. C.1. Violations of the Responsibilities of Joint Auditor 13. PHD and PW were appointed as joint statutory auditors of RCL for a term of 5 consecutive years at the Annual General Meeting of the Company held on 27.09.2017 and 26.09.2017. As per the agreement between the joint auditors, made as per SA 299(Revised) 4 there was no division of audit work among the joint auditors. Hence both the joint auditors were jointly and severally responsible for the entire audit work. While PHD was functioning as a joint auditor, PW brought some significant matters to PHD s notice through various communication 5 starting from the letter dated 24.04.2019. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Revised) PHD was required to agree or disagree with the significant observations raised by PW when they were brought to their notice. However, the Auditors failed to show any evidence in the Audit File of performing any audit procedures to examine and conclude these matters while it was functioning as a joint auditor. c. PW s letters dated 24.04.2019 and 14.05.2019 regarding loans and investments were detailed and self-explanatory. The final observations of PW include unresolved issues regarding recoverability, end-use, valuation, unusual mode of transactions and internal control matters. As per the requirements of SA 299 (Revised), EP was required to perform audit procedures and come to an independent conclusion regarding the significant matters. EP examined the issues only after the audit committee specifically asked PHD on 12.06.2019 to examine the issues, i.e. one day after PW filed form ADT-4 and resigned from the Company. From 24.04.2019, when the issue was first raised by PW, till 12.06.2019 EP did not perform any audit procedures on these matters as is evident from the Audit File. There is no evidence in the Audit File that the Auditors disagreed with these observations, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d such a report. EP also argues that PW did not raise such concerns in the previous financial year or during the limited review up to the third quarter of FY 18-19. According to EP, the conclusion of PW appears to have been influenced by media news and are unsustainable . The Audit Firm goes on to say that it also appears that PW was finding an excuse to withdraw from the engagement and found an easy route by filing under 143(12) and resigned .. . We observe, without any comment on the merits of the actions of PW, that the replies of the Auditors are a serious deviation from the fundamental tenets of professional skepticism and professional behaviour 10 required of an auditor as per SA 200 and the Code of Ethics 2009. PHD was the statutory auditor appointed under the Act and was responsible for carrying out the audit as per SAs and the Act, and reporting whether the financial statements and accounts represented a true and fair view of the affairs of the Company. Examining and commenting on the conduct of the joint auditor, who is legally on the same footing as that of PHD, is beyond the scope of section 143 of the Act and the SAs. 20. Thus, based on the above, it stands proved that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the Audit Committee requesting them to perform what was in any case their duty as statutory auditor of the Company. It further submits that the minutes of the meetings dated 12.06.2019 and 25.06.2019 clearly state that the Audit Committee has conducted a detailed examination of matters. Also, the Board of Directors have taken various initiatives such as legal opinions, before concluding the matter. 23. We examine the detailed replies and observe that EP was required to independently form an opinion on the true and fair view of the financial statements. There is a fundamental difference between the statuary auditor reviewing the work of the preparers independently as compared to, the statutory auditors providing inputs for the company s records and later on reviewing the same. The financial statements included classes of transactions and account balances arising out of the transactions reported by PW. The financial statements also included a material disclosure 14 that the matters reported by PW do not attract section 143(12). Since this disclosure and the related account balances were significant, EP needed to conclude appropriately on the true and fair nature of the numbers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here were no violations attracting section 143(12) of the Companies Act, 2013. (Emphasis supplied by NFRA). The Board acknowledged the role of PHD in this disclosure. c. The above conclusion of EP, as acknowledged by the Audit Committee and the Board, appeared in the financial statements as a material disclosure as follows: Note 41 (a) Standalone Financial Statements (SFS): The Company s previous auditor, after resigning from the office in June 2019 submitted a report under Section 143(12) of the Companies Act, 2013 with the Ministry of Corporate Affairs. The Company has examined the matter and also appointed legal experts, who independently carried out an in-depth examination of the matter and the issues raised therein and have concluded that there was no matter attracting provisions of Section 143(12) of the Companies Act, 2013 . The matter is under consideration with the Ministry of Corporate Affairs . (Emphasis supplied by us) d. This financial statement was then audited and an EoM paragraph was included in the Audit Report referring to the above disclosure note 41(a) by PHD. The EoM para reads as- We draw attention to Note 41(a) of the Standalone Ind AS financial statements re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audit Committee asked them to give a conclusion, even though it was the statutory duty of the auditor to examine and agree or disagree with those observations as per the requirements of SA 299(Revised). The Board or Audit Committee also did not independently form any views on the merits of the allegations raised by PW and went by the conclusions of the PHD. At this juncture it would not be out of place to mention the sequence of events, which is as follows: 24.04.2019 PW sent a letter highlighting its observations which later formed the basis of fraud reporting by PW under section 143(12) of the Act. On 11.06.2019, PW resigned as a joint statutory auditor of the Company. On 12.06.2019 the Audit Committee asked PHD to look into the issues raised by PW and provide their well-considered view. on 25.06.2019 PHD concluded that no issues were attracting Section 143(12) of the Act and communicated the same to the Audit Committee. The Audit Committee recorded the conclusions in its minutes, which was submitted to the Board. On 07.08.2019 RCL obtained legal opinions, concluding that there were no facts, circumstances and observations set out in various letters issued by PW which were adequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audit Committee and the Board seeking their views within 45 days and then file the report in the form ADT-4. All these stipulations when read together make it clear that the reporting on fraud in the course of performance of duties as an auditor is applicable when the auditor has reason to believe and has knowledge that a fraud has occurred or is occurring based on evidence obtained and the professional judgements made. Once it is reported to the MCA, the legal determination of the fraud and admitting or ruling out fraud is a regulatory matter. Neither the Company nor the auditor is competent to make a conclusive legal determination 17 of a statutory matter reported by the auditor as per his evidence and mandate provided in the Act. The normal course of action in this situation for any prudent Company could be initiating an independent investigation into the alleged matters to bring out the truth. However, the points raised by the PW were not responded to by the Audit Committee and the Board within 45 days following which PW reported the matter under section 143 (12) and also resigned on 11.6.2019. The Audit Committee and the Board thereafter asked the PHD on 12.6.2019 to examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion of the legal experts, that there were no matters attracting section 143(12) was not based on the merits of the issues raised by PW, instead, it was based only on the correspondence between PW and the Company. Also, although it is the admitted position of EP that he has not relied on legal opinions, however, the EoM shows his reliance on the legal opinion because it talks about the examination by legal experts. Hence, this representation in the EoM is misleading for the users of the financial statements and goes to show the unprofessional behaviour of the Auditors. 29. Notwithstanding the above misrepresentation in the EoM, it is also not in accordance with the requirements of the standards. As per Para 8 of SA 706 (revised if the auditor considers it necessary to draw users attention to a matter presented or disclosed in the financial statements that, in the auditor s judgment, is of such importance that it is fundamental to users understanding of the financial statements, the auditor shall include an EoM paragraph in the auditor s report, provided the auditor would not be required to modify the opinion in accordance with SA 705 (Revised) 19 as a result of the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -off of the company s assets due to the dubious nature of the loans granted, litigation expenses, compliance cost, loss of goodwill, action by lenders etc. There is neither disclosure in the financial statements of an estimate of such financial impact nor a statement that such an estimate cannot be made. There is no evidence in the Audit File of EP s examination of any of the above-mentioned matters, which shows gross negligence by EP. 31. Thus, the EoM was based on matters which were not adequately disclosed in the financial statements. Apart from referring to Note 41(a) the EoM also contains PHD s finding (which was already documented in the WP well before the Board noted this) that the matters reported by PW do not attract Section 143(12). The EoM did not mention that the audit opinion is not modified in this regard. 32. The above actions of PHD violate SA 706(Revised). Because of these violations, the Audit Report provided a misleading impression to the users. As demonstrated by the Audit File, neither RCL nor PHD fully examined the issues raised and reported by PW to conclude that there was no fraud. 33. Based on the above, the charges of issuing a misleading EoM without adequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues raised by PW. 37. We have examined the replies and the work of the Auditors concerning the major observations raised by PW. The major issues raised by PW and the conclusions documented by EP in his presentation to the Audit Committee 21 are as given in the following table, with emphasis added by us where EP agreed and noted the same observations as PW. Sl. No. Issue Raised by PW PHD s Conclusions 1. As per the latest available financial statements of the borrower, the net worth of the entities was negative. The audit report on the financial statements of the borrowers carried an EoM on the going concern assumption. (PW has given a list of 13 borrowers aggregating to approximately 12,571 Crore) Out of 13 entities mentioned by PW, 11 had negative net worth, out of which 7 entities have issued CCDs to RCL. If these CCDs are considered equity instruments, then the net worth would become positive. In 1 case exposure of ICD is ₹581 crore, where the net worth is negative ₹7 crore. In the case of the remaining 3 entities total exposure is ₹44 crore, and negative net worth is in lakhs. 2. As per the latest available financial statements of the borrowers, the debt-equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minimal . 7. During the year, the Company sold its investment in CCDs (face value ₹2160 crore) of Reliance Land Pvt Ltd at a gain of ₹827 crore. Such investment was considered to have a fair value of ₹1,333 crore as per the restated Ind AS financial statements as at 31-03-2018. The said CCDs were sold to Reliance Value Services Pvt Ltd vide agreement dated 17-09-2018, at its face value. During interim testing, PW observed that the Company has received ₹2,270 crore (i.e. face value of ₹ 2,160 crore and interest of ₹ 110 crore) in 22 tranches of ₹100 crore each and one tranche of ₹70 crore on 29-09-2018. Further, while testing new loan disbursements by the Company, it was observed that the Company, on the same date, had disbursed loans to the following parties. Reliance Digitech Limited - Loan disbursed- ₹ 1,170 crore (11 tranches of ₹100 crore each and 1 trench of ₹70 crore) Reliance Venture Asset Management Pvt Ltd- ₹1,100 crore (11 tranches of ₹100 crore each) On verification of the relevant bank statements, we have observed that bank statements reveal the ICDs have been given to Reliance Digitech and R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the recoverability of all these loans. The above and the other factors evidence credit impairment of these loans. But EP conducted no substantive audit procedure or adequate verification to rule out the non-recoverability of these loans; nor was adequate provisioning done. Instead, EP has mentioned in his reply that he relied on comfort letters provided by the promoter group companies, Reliance Innoventures Private Limited and Reliance Infrastructure Limited, in support of the recoverability of these loans highlighted by PW as being impaired. We note that in the WP 24 titled closure document, it is documented that the financial strength of these promoter group entities had weakened significantly and they were under stress hence reliance had not been placed 25 on the comfort letter while evaluating the recoverability of loans. Similarly, the WP exposure analysis , relied on by EP for the value of the loans and end use, evidences the irrecoverable loans as most of the loans are used for debt servicing by credit-impaired entities. Moreover, not even in a single case did EP document the ultimate utilisation of funds to understand the exact business purpose and the ultimate beneficiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use details of 3 borrower entities 28 . The end use was documented as debt servicing/repayment, investments, Opex and onward lending. However, the business activities of none of the borrowers were documented to confirm whether the loans sanctioned were utilised for genuine business purposes. As per the WP, out of ₹6577 crore of loans, ₹6252 crore is shown as utilised for debt servicing or repayment. These are potential cases of the evergreening of loans where the previous outstanding loans were repaid out of new loans sanctioned. There is no examination of the bank statements to rule out the possibility of evergreening, despite the indications of circular transactions noted by PW. For all the 3 borrower entities mentioned in the WP 29 the CCDs earlier advanced by the Company were completely written off, yet new loans were sanctioned in the FY 2018-19 pointing to their future non-recoverability. EP s contention that borrower entities have not made continuous default in repayment of their obligations except for delays of few days is misleading. Contrary to this statement, the Audit File records that there were significant delays, not just a few days , in servicing interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither due to fraud or error, is therefore without adequate basis since there is no sufficient evidence showing that the loans of ₹6557 crore (net of impairment) disclosed in the financial statements are fairly presented and are fully recoverable. Consequently, the opinion of PHD confirming the management s assertions is without adequate basis. Hence, the charges mentioned in para 34 and 35 above are proved. 41. Such lapses in adequately responding to audit risks are viewed seriously by international audit regulators. In the matter of Ciro E. Adams, CPA, LLC, and Ciro E. Adams, CPA 32 , the US audit regulator PCAOB imposed sanctions on an auditor for failure to obtain sufficient appropriate audit evidence supporting significant accounts, including accounts designated as a fraud risk or significant risk and not complying with multiple PCAOB auditing standards. The sanctions included censuring the Firm and Ciro E. Adams (Adams), revoking the Firm s registration, barring Adams from being an associate person of a registered public accounting firm, and requiring Adams to complete 40 hours of continuing professional education and a civil money penalty of $40,000. C.5. Other Omission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deviations. The policies and procedures set by those charged with governance form the basis of the internal controls of a Company. Such deviations from the policy are evidence that the internal controls over loan sanction and monitoring were not functioning properly in the Company. These deviations also indicate management override of controls in loan sanctioning and hence a fraud risk. A qualified opinion under ICFR does not absolve EP of his responsibility to report on this non-compliance. On the contrary, it shows that weaknesses in loan sanctioning and monitoring were overlooked by EP who chose to take refuge under the qualified opinion in ICFR which mentions only a weakness in loan documentation. c. EP responded that the Lending Policy is a management decision and that the auditor has no role in its verification, is misplaced and shows a poor understanding on his part, of the requirements of the Standards and the Law. Section 143(1)(a) of the Act requires the auditor to inquire into whether loans and advances made by the company 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 . Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inced the Auditors by rationalising this fully illegal accounting treatment which flays the standards in this regard. No Standard of Accounting permits a loan taken from and given to separate legal entities to be netted off in the balance sheet. Such a practice would lead to gross misstatements of accounts and any explanations and rationalisations for the same are indications of fraud risk factors as explained in SA 240. The replies of EP and the facts show the absence of due diligence and gross negligence. Despite the presence of a report under Section 143(12), these factors did not prompt EP to revise the risk assessment or perform additional procedures to rule out the existence of any material misstatements due to fraud or error, such as the authenticity of the confirmations or validity of the charges in all the cases. Thus, EP ignored the contradictory evidence and did not perform any further procedures to confirm the facts in accordance with the requirements of para 26 of SA 330 and failed to obtain sufficient appropriate audit evidence as required by SA 500 to support the audit opinion. 49. Thus, the charge of non-compliance with requirements of para 26 of SA 330 of analysing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of CCD above fair value, noted by both PW and PHD. RCL sold its investment in CCDs (face value ₹2160 crore, fair value of ₹1,333 crore) of Reliance Land Pvt Ltd at face value to Reliance Value Services Pvt Ltd, showing a gain of ₹827 crore. The transaction amount was then transferred by RCL through multiple layers in multiple tranches, on the same day, between several group companies under different contexts. EP stated that Reliance Land Limited was in the process of getting its equity shares listed in the stock exchange. In view of the above, the investment by RCL in Reliance Land Limited had to be restructured by sale of CCD to another group company and the same was done at the face value. The matter was discussed with the management as well as the audit committee and was not considered as a transaction at unusual value . This reply, which merely refers to the discussion with the management and the Audit Committee without detailing what was discussed and without disclosing why a prima facie unusual transaction (sale at 1.62 times the fair value and transfer in multiple tranches on the same day) was not considered so, indicates that the transaction was rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal etc. to ascertain management override of controls. There is an absence of the procedures prescribed in Paragraph 32 of SA 240 such as testing of journal entries and other adjustments throughout the period, retrospective review of management judgements, evaluation of their business rationale etc. The Auditors claim to have performed these but the same is not evidenced in the Audit File. 55. Thus, the charge of noncompliance with Paragraphs 26 and 31 of SA 240 and Paragraphs 26 and 27 of SA 330 regarding failure to identify and respond appropriately to ROMM due to fraud in management override of controls and revenue stands proved. This has resulted in the issue of an audit opinion without sufficient appropriate audit evidence. All the charges in paragraph 50 above thus stand proved. 56. Such lapses in the audit of revenue and the absence of professional skepticism are viewed seriously by audit regulators across the world. In the matter of Haynie Company 39 , the US audit regulator PCAOB imposed sanctions on an auditor for failure to appropriately evaluate whether the revenue is reported in conformity with the applicable financial reporting framework. The sanctions included censur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EP to test the ECL as per the requirements of the standard. However, there is no original work by EP other than noting down 42 the ECL model of the Company and doing mathematical calculations. For instance, we note the following deficiencies in this regard . ECL is an estimate. All estimates have some uncertainty which is one of the risk factors that an auditor considers when evaluating risks of material misstatement posed by a particular estimate. Due to the forward-looking nature of the estimates of ECL, the risks related to uncertainty associated with estimation assume enhanced importance. Companies should have a wellcontrolled, well-documented process in place that enables them to have a consistent unbiased approach to uncertainty due to estimation and the selection of the point estimate within the range of reasonably possible outcomes. The auditor is required to extensively test these processes as part of control testing, which is absent in this case. There is no evaluation as to whether the management s decisions on the range of scenarios and the weightage given to these scenarios capture the appropriate extent of ECL required by Ind AS 109. There is no examination of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te explanation for the exposure in Crest as the corporate guarantee of Reliance Infrastructure Limited is not acceptable considering the Company itself is under stress. Hence request you to provide some other comfort or else make adequate provision in the books of account . In the same WP, the Minutes of Meeting held on 13.08.2019 notes that considering the stress of Reliance Infrastructure Limited, the Company has entered into an MoU towards acquisition of the assets of Crest to the extent of ₹1,500 crore, and that the Company has got the assets of Crest valued by a registered valuer, which shows a value of assets of more than ₹15,000 crore. Thus, management is confident of recovering the entire exposure . In this regard, Paragraph 9 of SA 500 requires an auditor to sufficiently evaluate the reliability of any information provided by the auditee company before the use of such information for purposes of audit. However, EP did not perform sufficient audit procedures to test the adequacy of the information provided by the Company. The MoU entered between RCL and Crest Logistics, relied upon by EP, does not document as to which assets, out of the total of assets valuing & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rore on overstatement of interest income 48 . Had the proper test of design, implementation, and operating effectiveness of internal controls on ECL been done, the opinion on internal financial controls over financial reporting would have been adverse. 61. Thus, the entire work relating to the audit of ECL was grossly inadequate and the audit opinion issued was misleading. EP failed to report the understatement in provisions leading to the overstatement of profits in the financial statements. Accordingly, the charges in paragraph 57 above are proved. 62. Such lapses in challenging the management and absence of professional skepticism are viewed seriously by audit regulators across the world. In the matter of K.R. Margetson Ltd. and Keith R. Margetson 49 , the US audit regulator PCAOB imposed sanctions on an auditor for failure to appropriately evaluate the reasonableness of a discount rate used in developing the valuation estimate. The sanctions included revocation of registration of the firm, restrictions in acting as EP and a civil money penalty of $30,000. In the matter of Martin Lundie, CPA 50 (Partner, EY Canada), PCAOB imposed sanctions for failing to sufficiently test the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CR Partner did not do. As per SQC 1 and SA 220, EQCR is an objective evaluation of the significant judgements made by the ET, and the conclusions reached in formulating the auditor s report. It is not an audit of the financial statements. Hence the basis of conclusions documented by the ET regarding various aspects of the audit alone cannot form the basis of conclusions by the EQCR Partner. He needs to apply his objective wisdom to ensure that the ET has complied with all the requirements applicable to the subject matter under review. Thus, the evaluation should be whether the audit procedures performed are appropriate, whether ET had obtained sufficient appropriate audit evidence and whether appropriate conclusions were reached and documented for those audit areas. While doing so, the matters discussed by the EQCR Team with EP, the additional evidence or procedures required by the EQCR Partner etc. shall form part of the documentation so that the work of the EQCR is evidenced and identifiable. Even when the EQCR Partner agrees with all significant matters documented by the ET, there is still a need to document the discussions and procedures of the EQCR and the basis on which the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e requirements of SA 230 and SA 220. Documentation prepared as per SA 230 and specific documentation requirements of other SAs provide evidence that the audit is performed following SAs and the applicable legal and regulatory requirements (Para 2 of SA 230). Thus, specific documentation requirements of any SA alone cannot meet this requirement, since mandatory procedures are prescribed in all the SAs. SA 220 is no exception as far as EQCR is concerned. 66. Thus, we conclude that the EQCR Partner failed to objectively evaluate and question EP when EP failed to meet the relevant requirements of the SAs and violated the Act, and the Code of Ethics in respect of several significant areas. Hence the charges in Paragraph 63 above stand proved. 67. We also observe that such lapses have been viewed seriously by international regulators as well. For example, PCAOB 51 , the US Regulator, charged Grant L. Hardy (CPA) for his failure in connection with his role as Engagement Quality Reviewer ( EQR hereafter) in the audit of financial statements of some of the issuer clients and noted that Hardy violated PCAOB Auditing Standard No. 7, Engagement Quality Review ( AS 7 ) by providing his concurri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act as the auditor of RCL. Hence the report issued by the legal entity, signed by EP, is the primary responsibility of the legal entity issuing the report under the Act. We have proved in the previous sections of this order that the report lacked adequate basis. Hence, apart from the individuals delegated by the firm to carry out this audit, the firm (as the appointed statutory auditor has the primary responsibility) is also answerable for its report issued under the Act, as further explained in the following paragraphs. 71. The requirements of Sub-Sections 9 and 10 of Section 143, SQC-1 54 and SAs, which are subordinate legislations, lay down the following in clear terms: Responsibility for the overall quality of all the audit engagements, by ensuring that the firm's personnel comply with applicable laws, SAs and ethical requirements and issues reports appropriate to the situation, rests with the firm 55 . Within the above framework, the individual engagement partners are personally responsible 56 for the quality of specific engagements to which they are assigned by the firm as per its policies. 72. When a firm is appointed as an auditor under Section 139, all the responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ald Butler, the second partner, supervised by Anderson. The partners were also barred from being associated with a registered public accounting firm. In another case, the PCAOB 58 imposed civil money penalties of $1,000,000 on KPMG India and $75,000 on its partner Lakhani for lapses in audit documentation by the partner, who was an ET member. PCAOB also suspended Lakhani from being an associated person of a registered public accounting firm for a period of one year. 76. The Firm and Engagement Performance Metrics published by PCAOB on October 12, 2022 59 , provides a detailed study of engagement level and firm-level quality matrices. Engagement-level metrics provide information about a particular engagement of the firm, and Firm-level metrics address an audit firm s overall strategy in complementing the engagement-level matrices. The study covers all major jurisdictions, including India, in the world and top tier Audit Firms. The study reveals that many metrics can be applied at both the engagement and firm level and some metrics may only be reported at either the engagement level or the firm level. (Refer to Page 5 of the report). The report lists key Audit Quality Indicators repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This charge is proved as EP and PHD failed to disclose in their report the material misstatements made by the Company as explained in Paras C1 to C5 and C7 above. c. EP, EQCR Partner and PHD committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a CA 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 EP, EQCR Partner and PHD conducted the Audit of a Public Interest Entity in total disregard of their statutory duties, evidenced by multiple critical omissions and violations of the standards. The instances of failure to conduct the audit in accordance with the SAs and applicable regulations, and failure to report the material misstatements in the financial statements and non-compliances made by the Company are as explained in Paras C1 to C7 above. EP, EQCR Partner and PHD committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, it was the duty of the Auditors to conduct the audit with the highest level of professional skepticism and due diligence and report their opinion in an unbiased manner. Despite the resignation of the joint auditor and a reporting of suspected fraud, PHD, EP and EQCR Partner failed to conduct the audit as per standards on auditing. The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditors in disregard of their responsibilities under the Act and SAs. The Auditors also demonstrated recklessness and unprofessionalism by rationalising the actions of the Company, inappropriately evaluation of the work of the resigned auditor, and ignoring the fundamentals of accounting and auditing. Such actions of the Auditors necessitate stricter sanctions and penalties taking into account the letter and spirit of the law. 81. Because professional misconduct has been proved and considering the nature of violations and principles of proportionality, we, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, order: a. Imposition of a monetary penalty of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s responsibilities relating to fraud in an audit of financial statements. 13 Refer para 100.9 to 100.11 and 290.163 of Code of Ethics 2009. 14 Note 41 (a) Standalone Financial Statements (SFS) - The Company s previous auditor, after resigning from the office in June 2019 submitted a report under Section 143(12) of the Companies Act, 2013 with the Ministry of Corporate Affairs. The Company has examined the matter and also appointed legal experts, who independently carried out an in-depth examination of the matter and the issues raised therein and have concluded that there was no matter attracting provisions of Section 143(12) of the Companies Act, 2013. The matter is under consideration with the Ministry of Corporate Affairs. A similar note was available in the Consolidated Financial Statements (CFS) as well. 15 Refer separate charges in the Order regarding violation of SA 706 (Revised) in issuing an EoM. 16 Refer separate charges in the SCN regarding violation of SA 706 (Revised) in issuing an EoM. 17 Refer to Sections 130, 199, 206, 211, 212, 213 etc. of the Act. 18 SA 706(Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report 19 SA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77;1089 crore) minus interest on stage 3 assets (₹131 crore). Refer to WP Expected Credit Loss. 49 PCAOB Release No. 105-2023-023 September 12, 2023. 50 PCAOB Release No. 105-2022-040 December 22, 2022 51 PCAOB release no 105 2015 001 dated 12.01.2015 52 PCAOB Release No. 105-2021-020 December 14, 2021 53 PCAOB release no. I 05-2021-012 dated 29.09 200 I 54 220 - Quality Control for an Audit of Financial Statements, deals with the overall quality of an audit engagement. SA 220 provides that: 2. Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and regulatory and legal requirements; and (b) The reports issued by the firm or engagement partners are appropriate in the circumstances. This SA is premised on the basis that the firm is subject to SQC 1. Standard on Quality Control (SQC) 1 delineates the responsibilities of the Firm regarding audit quality. Audit quality is the foundation of any statutory audit. Further, SAs, such as SA 200, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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