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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 ..... vided into the following sections: * Executive Summary * Introduction and Background * Major Lapses in the Audit * Findings on the Articles of Charges of Professional Misconduct * Sanctions and Penalties A. EXECUTIVE SUMMARY 1. Reliance Capital Limited (RCL hereafter), a company listed on the Bombay Stock Exchange, engaged in financial services, was jointly audited by M/s Price Waterhouse & Co LLP (PW) and M/s Pathak HD & Associates (PHD) for the Financial Year 2018-19. The Director General of Corporate Affairs (DGCoA), Ministry of Corporate Affairs (MCA), Government of India, vide its letter dated 29.05.2020 informed the National Financial Reporting Authority (NFRA) that PW had resigned from the audit, without issuing an audit report for FY 2018-19 and filed a report to MCA under section 143(12)1 of the Companies Act, 2013 (the Act) on 11.06.2019. On examination of the matter, it was found that while the ex-auditor PW had filed form ADT-4 with MCA, reporting suspected fraud in RCL, the audit report for the FY 2018-19 issued by PHD on 14.08.2019 stated2 that there were no matters attracting Section 143(12). Hence, we suo motu examined the Audit File of PHD also, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the letter dated 24.04.2019. These matters included potentially irrecoverable loans and investments amounting to approximately Rs.12,571 crore to group companies portrayed as recoverable. However, PHD failed to carry out any independent procedures on these matters and discharge the responsibilities of a joint auditor in this regard. (Details in Section C1 of this order). b. PHD indulged in self-review by preparing material information for the financial statements of the Company, which subsequently became the subject matter of their audit opinion, and thus violated the Code of Ethics and SAs. (Details in Section C2 of this order). c. PHD used the Emphasis of Matter (EoM) para in its audit report in which it concluded that there were no matters attracting section 143(12). The EoM para was in non-compliance with the SAs and was misleading for the users of the financial statements. (Details in Section C3 of this order). d. PHD concluded without any regard to the merits of the transactions that there were no matters attracting section 143(12). Despite the evidence of documented irregularities in RCL EP did not question the management. In the absence of tests and evidence, the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACKGROUND 6. NFRA is a statutory authority set up under Section 132 of the Act to monitor the implementation of the auditing and accounting standards and oversee the quality of service of the profession associated with ensuring compliance with such standards. The statutory Auditor, appointed by the members of the company under section 139 of the Act is bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the SA and the Code of Ethics, the violation of which constitutes professional misconduct. NFRA has the powers of a civil court and is empowered under Section 132(4) of the Act to investigate the prescribed classes of companies and impose penalties for professional or other misconduct of the individual members or firms of chartered accountants. 7. The DGCoA, MCA, Government of India, vide its letter dated 29.05.2020 informed NFRA that the ex-auditor (PW) of RCL had filed a report to MCA under section 143(12) of the Act on 11.06.2019 and resigned from the audit engagement on the same date without issuing an audit report for FY 201819. While examining the matter, it was observed that PHD and PW were appointed as joint statutory auditors of RCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinued on 21.02.2024 through Video Conferencing. The Auditors i.e. the firm, EP and EQCR submitted a written summary of their submissions made during the personal hearing, along with copies of the documents relied upon, on 01-03-2024. All the written and oral submissions have also been examined in detail before issuing this Order. 11. Given the actions and omissions as auditor, leading to their apparent failure to comply with the Act and the Standards of Auditing, the Audit Firm, EP and EQCR Partner were charged with professional misconduct, as conceived in Section 132(4) of the Act of : a. Failure 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 the statutory auditors are concerned with that financial statement in a professional capacity. b. Failure to report a material misstatement known to him to appear in a financial statement with which EP is concerned in a professional capacity. c. Failure to exercise due diligence and being grossly negligent in the conduct of professional duties. d. Failure to obtain sufficient information which is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of debentures, commercial papers and passthrough certificates. RCL was a Core Investment Company (CIC) investing primarily in its group companies. On 11.06.2019 PW resigned without issuing an audit report and filed form ADT-4 with the MCA as per the provisions of Section 143(12) of the Act, (i.e., reporting of suspected fraud in the Company). Before the resignation, PW issued a letter dated 24.04.2019 to the Company, copied to the Audit Committee and PHD, regarding its observations concerning loans disbursed, investments, and disposal of Compulsory Convertible Debentures (CCDs) of group companies having a cumulative carrying value of approximately Rs.12,571 crore. This letter formed the key basis for PW's reporting of fraud under section 143(12) of the Act. Following this communication, PW and RCL exchanged various communications7 culminating in the report under 143(12) by PW on 11.06.2019. PHD was copied in these communications. These Group Companies, reported by PW, had serious credit impairment. Many of these group companies used the money to invest in or lend to other group companies with similar credit impairment. The business rationale and recoverability of these loans were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 019, the date on which the Audit Committee asked PHD to examine the matters raised by PW. This conduct of the Auditors is a violation of paragraph 14(c) SA 299 (Revised). 18. The Audit Firm's claim that they revised the audit strategy on 11.06.2019, before the Audit Committee meeting on 12.06.2019, is contrary to the facts recorded in the Audit File. The WP8 relied upon by EP is dated 12th June 2019 and it specifically mentions that "After discussion with the Audit Committee in their meeting held on June 12, 2019, we conducted a review of the matters raised by PWC in their letter dated May 14, 2019, issued to the management of the Company as part of our audit procedures." Thus, it is clear from the WP that the Auditors revised the audit strategy and purportedly reviewed the matters raised by PW only at the instance of the Audit Committee. A planning meeting9 with the audit team was held on 11.06.2019, only after PW resigned. Before PW's resignation neither did EP make any effort to perform audit procedures to evaluate the observations raised by PW, nor was the EQCR partner apprised of the matter. 19. One of the key contentions of EP is that PW did not share the basis/ration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2013, PHD concluded that, in their opinion, the transactions referred to in the PwC letters do not trigger the provisions of section 143(12) of the Companies Act, 2013." (Emphasis supplied by us). This was based on a presentation made by EP to the Audit Committee, affirming that the transactions referred to in the PC letters do not trigger the provisions of section 143(12). Before this date, there was no evidence of any independent view taken by the Audit Committee or the Board regarding these transactions, despite receiving various communications from PW since 24.04.2019. This conclusion of PHD is reported in the Director's report and financial statements, which in turn were audited and reported (including an EoM referring to the same disclosure) by PHD. In light of the above, EP and PHD were charged with preparing material information for the financial statements of the Company, which subsequently became the subject matter of their audit opinion, amounting to self-review. 22. EP denied the charges. He submitted that there is no self-review since they were expected to examine the matters even if the Audit Committee had not requested them to examine it. EP's submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(12). Before this date, there is no evidence of any independent views by the Board or Audit Committee, which is mandated under Section 177 of the Act to inter alia perform scrutiny of intercorporate loans and investments, valuation of the assets of the company wherever it is necessary, evaluation internal financial controls and risk management system etc. At this juncture, it is crucial to note the requirements under Rule 13 of the Companies (Audit and Auditors) Amendment Rules, 2015. Neither the Board nor the Audit Committee replied to PW after it sent multiple correspondences specifically referring to Section 143(12). The time limit for a reply expected in this case is 45 days as stipulated in sub-rule (2) of Rule 13. But there were no replies from the Audit Committee or Board. b. The Company then disclosed in the Directors Report that "The company did not agree with the reasons given by PWC for the resignation which were grossly inadequate. The observations given by PWC were examined by the continuing Statutory Auditor of the company. As per the report of the continuing Statutory Auditor, the provisions of section 143(12) of the Companies Act, 2013 did not get triggere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion was called for to determine whether the facts, circumstances and observations set out in various letters issued by PW were adequate and appropriate for invocation of the provisions of Section 143(12) of the Act. Thus, the Audit Committee as well as the Board's views on the merits of the transactions were solely based on the conclusions communicated by PHD on 25.06.2019. * As confirmed by EP in his reply, the draft note (finally appearing as Note 41(a) in the Standalone Financial Statements (SFS)) was given by the Company to the Auditors only on 13.08.2019 i.e. after EP gave his conclusion on 25.06.2019 that provisions of Section 143(12) of the Act are not attracted in the matter. As explained in paragraph 23(a) above, there was no independent view by the Board or Audit Committee and no disclosure note was made by the management regarding this matter earlier than this date. Thus, there is no evidence to claim that the disclosure note was not based on PHD's conclusion of the matter. Finally, we note that Auditors audited the same disclosure and stated in its audit report, in the form of an EoM15 that there was no matter attracting section 143(12) of the Act. This clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e" (discussed in more detail in Sections C1 and C.4). Ultimately the same conclusion appeared in the Board's Report with acknowledgement of its origin to PHD. It is also disclosed in the Financial Statements in the form of a material assertion. Finally, PHD audited the same disclosure, based on its own opinion, and provided its audit opinion, in the form of an EoM 16 that there was no matter attracting section 143(12) in the PW observations. The draft note containing the above disclosure was included in the draft financial statements by the management only one day before the signing of the audit report. Thus, it is evident that the disclosure note emanated from information originally prepared by EP. * Reporting under Section 143(12) is a duty cast on the auditor. Section 143(12) mandates that if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government. Further, Rule 13 of the Companies (Audit and Auditors) Amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the disclosure made by the management (which itself was based on the Auditor's examination). Thus, the actions of PHD amount to self-reviewing the financial statements. Hence the charges in para 21 are established. C.3. Use of Emphasis of Matter (EoM) 26. As explained above, EP used an emphasis of matter paragraph in their audit report to state that the report filed by the resigned joint auditor does not attract section 143 (12). EP also documented in the Audit File that the PW's reporting was unwarranted. Its replies to the SCN also underline the same. In this regard, EP and the Audit Firm were charged with issuing an EoM without basis and in violation of Paragraph 8 of SA 706 (Revised). 27. EP denied the charges. On examination of the detailed replies and evidence, we observe the following. 28. In the backdrop of the sequence of events mentioned in paragraph 24(c) above, we now examine the EoM and its shortcomings from the perspective of compliance with the standards. A plain reading of the EoM (quoted in paragraph 23(d) above) shows that the Auditors are taking refuge under the legal opinion for determining that section 143(12) was not attracted. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propriately presented or disclosed in the financial statements. The subject matter in note 41(a) was a subsequent event after the reporting period and hence covered under Ind AS 1020. This standard requires disclosure for nonadjusting events or adjusting the amounts recognised in its financial statements to reflect adjusting events after the reporting period. The reporting of fraud is normally an adjusting event. However, the Company disclosed its judgment that the matter was not reportable under section 143(12) and hence treated it as a non-adjusting event. The disclosure notes identify two events, i.e. the reporting of fraud by the previous auditors under section 143(12) and the initiation of regulatory action by the MCA. Ind AS 10 requires disclosure of the nature of the event and an estimate of its financial impact or a statement that such an estimate cannot be made. However, the note to the financial statements does not give the nature of these two events, such as the subject matter of the report under section 143(12) and the nature of the action initiated by MCA. The nature and impact of the issues raised by the previous auditor were the crux of the matter and critical. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis. * Failure to assess the end use of loans to understand any issues relating to their recoverability. There is no evidence of independent verification of whether loan funds were used by the borrowers for the same purpose as disclosed by the borrowers at the time of sanction of the loan. Therefore, EP and PHD were charged with failure to comply with Paragraphs 22, 30, and 33 of SA 240. 35. As explained in the previous paragraphs of this Order, Auditors formed a conclusion that the matters reported by PW do not attract Section 143(12) of the Act. Without prejudice to our observations above, we note that the statutory duties of the auditor require them to form an opinion on the financial statements as a whole, including the effect of the matters brought to the notice by the erstwhile joint auditor. We also note that EP formed a conclusion on these matters without performing adequate audit procedures and obtaining sufficient appropriate audit evidence as required by SAs. 36. EP's submission in this regard is that all the observations raised by PW were present in the earlier years as well. According to EP, his observations were based on a thorough and objective examination of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 019". 5. Credit Appraisal Memo (CAM) does not adequately cover the credit assessment of the borrower entity and the basis of granting the loan. * CAM does not contain appraisal notes of these loans. The Repayment capacities of the borrowers were not analysed. The loan amount sanctioned is disproportionate to the financial strength of the entity. * All the loans are given for general and corporate purposes. The purpose of the loan is onward lending, however, no assessment of the ultimate borrower is done. * Delays have been observed in servicing interest and principal repayment by the borrower. Despite the delays mentioned above, the Company continued to disburse loans to the borrower. The risk analysis section of CAM does not contain in particular the risk involved in the lending and mitigation policies for those risks. * While sanctioning the loans, the liquidity of the underlying assets has not been considered. * ICDs have been given even in cases where there were material provisions made in the case of investments in CCDs of these entities. 6. Based on the latest available financial statements of the borrower: (i) There is no employee cost. (ii) Major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s categorisation as debt due to the absence of a strict fixed-tofixed ratio, this classification pertains only to "surface representation". We observe that as per Ind AS 32, the contractual terms of the CCDs shall be assessed to find out the substance of the transaction, rather than its legal form, to determine whether it is a financial liability or an equity instrument. Thus, the presentation of the financial instruments is also as per the principle of substance over form. Further, if as per the terms of the contract, CCDs are classified as a compound instrument then the full amount cannot be considered as equity23. The value will have to be split between the debt and equity components. There is no evidence of such an assessment done by the Auditors. Thus, EP's conclusion that "If these CCDs are considered as equity instruments, then the net worth would become positive" is baseless. This observation of EP gives only a possibility (use of "if" condition), and not a professional judgment and conclusion based on recorded evidence to support the audit opinion. * Regarding the credit impairment of the borrowers (sl. no. 1 and 2 in the table above) we observe that out of the 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e received directly from the borrowers. Thus, the balance confirmations were not in compliance with the requirements of SA 50526. Notwithstanding the above, it must be noted that receiving balance confirmation does not evidence the recoverability of the loan, which was the core issue pointed out by PW in its letters. Further, the documents given by EP along with his reply do not form part of the audit file and hence cannot be entertained. * Regarding the creation of charges on assets by the borrower entities (sl. no. 4 in the table above), we observe that there is no adequate evidence in the Audit File that the assets on which the charges are stated to be created existed in the books of the borrower entities. Also, there is no assessment of whether the value of the assets on which the charge has been created covers the full value of loans taken from RCL. Since the assets on which charges were created were in the form of loans and investments in credit-impaired entities, EP was required to assess the value of those investments to conclude that charges were appropriate. 39. Apart from the above, we observe the following deficiencies also in the overall work of the Audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and investments and had minimal capital, the Auditors have not performed any audit procedure to rule out the possibility that the loans and advances and investments were not being made in companies, that are like shell companies established to route the funds to other entities. Serious issues of credit impairment, and going concern issues relating to the borrowers were completely ignored by the Auditors, despite the red flags raised by the joint auditor before resignation. This indicated gross negligence and noncompliance with the statutory duties of an auditor. 40. All of the above shows that EP neither did adequate audit procedures, nor challenged the management on the irregularities in the sanction of loans, and reached a conclusion that the issues raised by PW were not attracting the provisions of section 143(12) of the Act. In reaching such conclusions the Auditors violated the applicable SAs as well. In the absence of tests and evidence, there was no assurance about the recoverability of the loans and hence the management's assertions about the value and rights of these loans were materially misstated30 in the financial statements, which PHD failed to report. Also, the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Reporting (ICFR). 44. In this regard we observe as follows: a. In the WP "Audit Planning Memorandum" EP identified Loans as a Significant Risk/Fraud Risk. A review of the Lending Policy was one of the audit procedures planned to address the risk. Accordingly, EP documented the Lending Policy. The testing of compliance with the policy by EP was limited to loan approval by the authorised officer as per the policy. We note that the Lending Policy34 of the Company states that "The lending would be based on the Company's judgement on, ability to pay, logical reasons for why the borrower has opted for the Company, the possibility of recovery on time, opportunities, future potential etc......The basic financial ratio, diversification of earning, alternate source of repayment, borrowers' trade cycle, market reputation, and capital structure, would be considered either on a discrete or aggregate basis. While the financials would be taken into consideration in making the judgement, the same would not be the sole criterion for sanction or otherwise. Thus, the Company would go beyond numbers while extending any financial assistance. The probabilities and the reasons for which repayment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd adequate provisions needed to be made in the accounts where necessary. Not evaluating this work of the auditee shows gross negligence and a lack of professional skepticism on the part of the Auditors. 45. In light of the above, all the charges in paragraph 42 of failure to obtain sufficient appropriate audit evidence regarding compliance with lending policy stands proved. C.5.2. Direct Confirmation 46. EP and PHD were charged with non-compliance with requirements of para 26 of SA 33035 in analysing contradictory audit evidence. While it was documented36 that the ICD given by RCL amounting to Rs.581 crore was not reflected in the books of Reliance Integrated Services Limited (RISL), there was a balance confirmation for this amount documented in the Audit File. 47. EP submitted that the matter was conveyed to the Company and the Company informed that RISL netted off the loan from RCL and the onward lending it made to Reliance Communications and it is a matter of presentation only. This is a post-dated rationalisation and cannot be accepted for the reasons discussed below. 48. We observe that the total balance sheet size of RISL for the FY 2017-18 was only R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply with Paragraphs 26 and 27 of SA 330. 51. In response to the above EP submitted that he had applied all the required procedures during the audit to ascertain whether there was a management override of controls. EP submits that the WPs37 clearly state that revenue has been considered as a significant risk/fraud risk. Further, he states that irrespective of the risk the ET carried out an in-depth examination of records of the Company to comply with the SAs. 52. We find that there is no identification of fraud risk in revenue and management override of controls. There is no WP to identify or rebut risks of fraud in revenue or respond appropriately to risks of fraud in revenue and management override of controls. There is no compliance with Paragraph 32 of SA 240 such as proper testing of journal entries, reviewing accounting estimates for biases or evaluating whether the circumstances producing the bias. The substantive tests claimed to have been performed are limited to noting down the management submissions and records produced by the entity. Audit procedures responsive to a fraud risk are much more intensive than other procedures. The replies of EP show the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor is required to evaluate whether the business rationale (or the lack thereof) of unusually significant transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets. The sale of CCD at a value more than its fair value (1.62 times), and then the transfer of funds between multiple entities in multiple tranches on the same day was an unusual transaction. Despite this, the Auditors did not raise any queries or do any independent examination. Thus, the Auditors were grossly negligent and lacked professional skepticism. 54. In another instance, even though the Credit Appraisal Memo (CAM) of group companies was recorded in the Audit File, PHD failed to perform any audit procedures to obtain sufficient appropriate audit evidence to rule out management override of controls. In the CAM of Crest Logistics38 , for instance, the loan was sanctioned for Rs.511 crore at 11% interest, while an exposure of Rs.1368 crore was already outstanding. It was also noted that the PAT for three FYs ending on 31st March 2013, 2014 and 2015 are negative, lowest loss being Rs.702 crore. Interest was payable annually. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58. In response to this charge, EP submitted that the audit procedures performed were adequate as per SAs. He stated that the values of loans appearing in the financial statements at the year-end were compared with the valuation report provided by the independent valuer which is more than the values reported in the financial statements. This, in his opinion, ruled out the possibility of management bias, thus confirming the reliability of ECL. 59. This stand of EP shows an absence of professionalism and gaps in his knowledge of the matter. The factors determining ECL are detailed in Ind AS 10940. The asset-based approach to valuation (as is found in the valuation report) focuses on a company's net asset value (NAV), or the fair market value of its total assets minus its total liabilities, to determine what would be the cost to recreate the business. There is no evidence that it captures the future income, the possibilities of loss, expected cashflows, or credit concerns of the business. ECL, on the other hand, estimates the expected credit losses that result from default events that are possible within 12 months (in a 12-month ECL scenario) or the expected credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Reliance Digitech Ltd 1,589 1 54 4. Reliance Alpha Services Pvt Ltd 1,107 2 43 5. Reliance Integrated Services Pvt Ltd 581 3 581 6. Reliance Unicorn Enterprises Pvt Ltd 69 2A 31 7 Reliance Media Works Financial Services Ltd 40 1 1 8 RPL Solar Power Pvt Ltd 31 1 1 9 RPL Sunlight Power Pvt Ltd 12 1 0 10 Reliance Broadcast Network Ltd 1 1 0 TOTAL 8,936 2,524 * We observe that Ind AS 109 prescribes a 3-stage model for the classification of loans (refer to paragraphs 5.5.3, 5.5.5, 5.4.1, B5.5.33 and other relevant paragraphs of Ind AS 109). The notes to accounts43 and Key Audit Matters disclose a three-stage distribution of loans as per Ind AS 109. However, as evidenced in the table above, the Company adopted an intermediary stage- viz., stage 2A for certain assets. It was seen that the assets categorised at stage 2A had the characteristics of stage 3 assets which require provisioning of 100%. Finally, these assets were disclosed under stage 2 in the financial statements, resulting in material misstatements in the disclosures, prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and hence not justified. * Past trends as well as forward-looking information are to be used by the management for making judgements about the assumptions regarding rates of Probability of Defaults (PD) and Loss Given Default (LGD). There is no evidence as to what forward-looking information was used by the management. The WPs45only document that PD and LGD are as per past trends and historical recovery data, without even mentioning what data has been used to derive past trends. EP's contention that LGD is worked out based on prospects of recovery and its present value is vague and without any supporting evidence. * For stressed assets it is documented in the WP titled "Expected Credit Losses" that management uses a different approach by using expected cash flows. The WPs do not document the expected cash flows and how and on what basis the management arrived at those cash flows. Entities like Crest Logistics & Engineers Pvt Ltd, Reliance Venture Asset Management Pvt Ltd, Reliance Digitech Ltd etc. had negative characteristics like recurring losses, negative net worth etc. and the CCDs issued to them were entirely written off by RCL. The loans given to these e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... QCR) 63. The EQCR partner was charged with the failure to exercise due diligence to obtain sufficient information to objectively evaluate the significant judgments of the ET and conclusions reached by them and thus failed to perform his duties as mandated by SA 220 and SQC 1. 64. In response to the above the EQCR Partner endorsed all the replies provided by EP and PHD and submitted that the EQCR Partner is not a part of the ET. Being an evaluation function, the EQCR process involves the review of selected work papers prepared by the ET and discussion with the ET to obtain clarifications. The EQCR Partner has to provide his objective view on the judgements made by ET. According to the EQCR Partner, he does not have any role or right to exercise his professional judgment. The role of EQCR is to evaluate the judgements made on significant matters arising during audit engagement and not to provide his view or professional judgements on those matters and he is not bound by SA 230. 65. We examine in detail the written replies to the SCN, and the oral submissions made by the EQCR partner and observe as follows: * The very fact that the EQCR Partner agreed with all the omissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies provided by EP. However, the subject matter of discussions and documentation, at no stage, included the serious omissions made by the ET regarding PW matters, the absence of adequate provisions, the inappropriateness of the EoM and the material misstatements in the financial statements. Similarly, an examination of whether the ET's work complies with applicable SAs and Ind AS is also absent. * The EQCR Partner submits that the documentation requirements of SA 230 do not apply to his work. This contention is misplaced. The documentation requirement in Para 25 of SA 220 is specific to SA 220. Nowhere in the SAs or SQC 1 does it state that the documentation requirements of Para 73 of SQC 1 and Para 25 of SA 220 (both the requirements are similar) are the ONLY documentation requirements that the EQC Reviewer shall follow. SA 230 explicitly states in para 1 that the specific documentation requirements of other SAs do not limit the application of SA 230. As per SA 230, Audit documentation serves several purposes including evidence that the audit is planned and performed in accordance with the SAs. Therefore, performance by the EQCR of the mandatory requirements of SA 220 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing an associated person of a registered public accounting firm for 1 year. 68. PCAOB in the matter of Cheryl L. Gore, CPA and Stanley R. Langston, CPA, charged52 Stanley R. Langston (CPA) for his failure in connection with his role as Engagement Quality Reviewer in the audit of financial statements of some of the issuer clients and noted in its order dated 14.12.2021 that "Langston violated AS 1220, Engagement Quality Review, by providing his concurring approval of issuance of the Firm's audit reports without performing the required engagement quality reviews with due professional care." For this misconduct, PCAOB imposed restrictions on Langston, barring him from being an "engagement partner" or EQC Reviewer for 1 year and also imposed a monetary penalty of $10,000. Furthermore, in another case, PCAOB found53 that Donald R. Burke, CPA, failed to evaluate properly the engagement team's assessment of, and audit responses to, significant risks identified by the engagement team, including fraud risks. As a result of his failure to perform Engagement Quality Reviews with due professional care, among other things, Donald R. Burke, CPA was suspended from being an associated pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andards of auditing (SA) is another statutory duty cast on NFRA. 73. Taking the above cardinal factors into account, Section 132 (4) of the Act empowers NFRA to investigate the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949. Violation of the Act, SAs or SQC 1 is one of the key ingredients of professional misconduct, as envisaged by the Act. 74. Thus, after a detailed examination of facts and circumstances, we observe that the failure in this audit engagement was due to violations of SAs, the Act and Ethical Principles laid down in the Code of Ethics. Hence the role of the Audit Firm, whose responsibilities are mandated by the Act, is equally important as that of EP and EQCR Partners, whose responsibilities are delineated in the SAs and SQC -1. Given the fact that the Audit Firm is the legal body appointed as the auditor and EP mandatorily takes responsibility for the individual audits subject to firm-level supervision, both have joint and several responsibilities for the Audit. Section 132 (4) emanates from this basic premise. However, there is not adequat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any audit undertaken by the Firm. D. FINDINGS ON THE ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT 77. Given the above actions or omissions as the Auditors, it is proved that EP, EQCR Partner and PHD did not exercise due diligence in ensuring the audit quality expected in an audit of a public interest entity and were grossly negligent in the conduct of their professional duties by not adhering to the requirements as laid down by the relevant statutes. Based on the above discussion, it is proved that EP and PHD had issued audit opinion on the Financial Statements without adequate basis, which was concurred by the EQCR Partner. The poor quality of the audit, incomplete documentation and attempt to mislead through evasive replies further compound the professional misconduct of the Auditors. Based on the discussion and analysis, we conclude that EP, PHD and EQCR Partner have committed Professional Misconduct as defined in the Act, as below: * 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional misconduct when he "fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion". This charge is proved since EP, EQCR Partner and PHD failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to their total failure to obtain sufficient appropriate audit evidence to support their opinion on the financial statements as explained in Paras C1 to C7 above. * * EP and PHD committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 9 of Part I of the 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 invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since EP and PHD failed to conduct the audit in accordance with the SAs as explained in Paras C1 to C7 above but falsely reported in their audit report that the audit was conducted as per SAs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Fifty Lakh) respectively on EP CA Parimal Kumar Jha and EQCR Partner CA Vishal D Shah. c. In addition, EP and EQCR partners are debarred for 10 years and 5 years respectively 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. 82. This order will become effective after 30 days from the date of issue of this order. ------------------------ Foot Notes 1 Under section 143(12) of Companies Act, 2013 auditor is required to report any fraud identified in the company. 2 In the Emphasis of Matter paragraph, referring to the matters reported by PW under section 143(12). 3 Vide NFRA letter dated 24.11.2021. 4 SA 299 (Revised) - Joint Audit of Financial Statements 5 1. Letter dated 04.05.2019 from CFO, RCL to PW, 2. Letter dated 09.05.2019 from Executive Director, RCL and CFO, RCL to PW, 3. Letter dated 14.05.2019 from PW to RCL, Audit Committee and Copy to PHD, 4. Letter dated 20.05.2019 from PW to RCL, Audit Committee and Copy to PHD, 5. Letters dated 06.06.2019 and 09.06.2019 from CFO, RCL to PW, and 6. 11.06.2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Periods 21 Refer WP - Audit Committee Meeting Presentation 22 Indian Accounting Standard (Ind AS) 32 Financial Instruments: Presentation 23 The CCDs issued by RCL are 11% CCDs, so there is an outflow of interest. Thus, the present value of the interest will be considered as a debt and the remaining as equity. 24 Refer WP- Closure Document 25 WP- Closure Document states, "During the year the financial strength of Reliance Innoventures Limited has weakened significantly on account of fall in market capitalization of ADA Group Companies, which were the significant assets of Reliance Innoventures Limited. Accordingly, as on March 31, 2019, reliance has not been placed on the comfort letter while evaluating the recoverability of Loans." 26 SA 505 External Confirmations 27 Refer - File No 4 - Loans, g. Loan End Use Details 28 Crest Logistics & Engineers Pvt Ltd , Reliance Venture Asset Management Pvt Ltd and Reliance Digitech Ltd. 29 WP- 'Loan End Use Details' 30 To be read with our observations regarding inadequate ECL provisions explained in subsequent sections of this Order. 31 To be read with our observations regarding inadequate assessment of ROMM due to fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (Revised), SA 610(Revised), SA 620 and SA 700(Revised) refer to SQC-1 when it comes to specific aspects of audit such as documentation, communication with those charged with governance, engagement of Auditor's expert, evaluating the adequacy of internal audit function of the Company, and general quality aspects. 55 SQC- lays down these core principles a Firm must adhere to ensure minimum required quality in any audits undertaken at the firm level. It emphasises that "3. The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances". SQC-1 then mandates in detail the stipulations at the firm level 56 Paragraphs 3, 4 and 8 of SA 220. 57 PCAOB Release No. 105-2012-001 February 8, 2012. 58 In the Matter of KPMG Assurance and Consulting Services LLP and Sagar Pravin Lakhani, PCAOB Release No. 105-2022-033 December 6, 2022. 59 https://assets.pcaobus.org/pcaob-dev/docs/default-source/about/advisory/documents/iag-october-2022/firm-and-en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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