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TMI Blog2023 (5) TMI 1321X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to Other Information - sanctions and penalties. HELD THAT:- The Auditors have committed Professional Misconduct as defined under Section 132(4) of the Companies Act 2013 in terms of section 22 of the Chartered Accountants Act 1949 (CA Act) as amended from time to time, and as detailed below: a) The Auditors committed professional misconduct as defined by clause 5 of Part 1 of the Second Schedule of the CA Act, which states that an auditor 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 , b) The Auditors committed professional misconduct as defined by clause 6 of Part 1 of the Second Schedule of the CA Act, which states that an auditor 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 . c) The Auditors committed professional misconduct as defined by clause 7 of Part 1 of the Second Schedule of the CA Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NFRA order dated 26.04.2023. b) Imposition of a monetary penalty of Rs. Five Lakhs upon CA C. Ramesh-In addition, CA C. Ramesh is debarred for a period of Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. c) Imposition of a monetary penalty of Rs. Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande is debarred for a period of Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. - Dr. Ajay Bhushan Prasad Pandey, Chairperson, Dr. Praveen Kumar Tiwari and Smita Jhingran, Members ORDER 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) no. NF-23/14/2022 dated 3rd November 2022, issued to M/s. Sundaresha Associates. Firm No: 008012S ('Firm' hereafter), an Audit Firm registered with the Institute of Chartered Accountants of India ('ICAI' hereafter) and its partners CA C. Ramesh, ICAI Membership n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on Auditing ('SA' hereafter) and the provisions of the Companies Act 2013 and demonstrated a serious lack of competence. They failed to evaluate their potential conflict of interest and failed to maintain their independence from GVIL by basing audit and non-audit relationships with a large number of Coffee Day Group companies and the family members of the promoters. They blatantly violated the Code of Ethics issued by 1CAI, as the percentage of professional fees received from Coffee Day Group (including Promoters) was more than 40% of their total professional fees. The Auditors failed to comprehend that GVIL was a shell company used by promoters for financial maneuvers. The Auditors did not exercise professional judgment skepticism during audit of (a) Rs. 581.16 crores borrowed from subsidiary companies of CDEL; (b) loan of Rs. 370 crores fraudulently given to promoter's company MACEL; (c) loan of Rs. 105 crores fraudulently given to a related party named SICAL Logistics Ltd; (d) land advance of Rs. 45 crores fraudulently given to Mrs. Razia Sultana, which was subsequently provided for and written off; (c) bank transactions-failing to detect ever greening of loan thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. B. INTRODUCTION BACKGROUND 7. The National Financial Reporting Authority ('NFRA' hereafter) is a statutory authority set up u/s 132 of the Companies Act 2013 ('Act' hereafter) to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professionals associated with ensuring compliance with such standards. NFRA has the powers of a civil court and is empowered u/s 132(4) of the Act to investigate the prescribed classes of companies [1] and impose penalty for proved professional or other misconduct of the individual members or firms of Chartered Accountants. 8. The Statutory Auditors, individual Chartered Accountants or firms of Chartered Accountants, are appointed by the members of companies as per the provision of section 139 of the Act. The Statutory Auditors, including the Engagement Partners ('EPs' hereafter) and the Engagement Team that conduct the Audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness transactions with the 6 of the 7 subsidiary companies except CDGL and MACEL was used as a conduit to transfer funds from CDEL's subsidiaries to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, as loans and advances that were never returned to MACEL/CDEL 14. The modus operandi of the alleged diversion of funds discovered by the SEBI during its investigation was that VGS used to ask the Authorized Signatories to sign a bunch of cheques which were Kept in his possession and used them as and when required . Such pre-signed blank cheques of bank accounts of various Coffee Day Group companies were used for the diversion of funds. Giri Vidhyuth (India) Limited ('GVIL' hereafter) was one of the companies used for such diversion of funds. 15. GVIL is a wholly owned subsidiary company of Tanglin Development Limited ('TDL' hereafter) which, in turn, is a subsidiary company of CDEL (see Chart 1), which is the listed entity of the Group. GVIL was incorporated in 2001 for carrying on the business of power generation but was yet to commence its operations. As per the Financial Statements for 2019-20, GVIL is not engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l misstatement known to the Auditors to appear in a financial statement with which the statutory auditors are 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 necessary for expression of an opinion or its exceptions are sufficiently material to negate (he expression of an opinion, and e) Failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances, 18. At the request of the Auditors, the time for submission of reply was extended till 22.12.2022. After availing the extension, the Finn vide letter dated 21.12.2022 submitted its reply to the SCN. Ramesh and Chaitanya, vide letters dated 21.12.2022 and 22.12.2022 respectively, submitted that the reply of the firm may be considered as their reply and that they were not giving separate replies. In the interest of natural justice, the opportunity of personal hearing was also given to the Auditors on 17.03.2023 at 11:00 AM/2:30 PM However, both the Firm and the CA C. Ramesh withdrew their requests for personal hearing vide l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions to the Opinion in the Independent Auditor's Report , Evert if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial statements, the auditor shall describe in the basis for opinion section the reasons for any other matters of which the auditor is aware that would have required a modification to the opinion, and the effects thereof . Para A24 of the explanatory material to the Standard further explains that An adverse opinion or a disclaimer of opinion relating to a specific matter described within the Basis for Opinion section does not justify the omission of a description of other identified matters that would have otherwise required a modification of the auditor's opinion. In such cases, the disclosure of such other matters of which the auditor is aware may be relevant to users of the financial statements * Thus, it is clear that in case an Auditor gives disclaimer of opinion for one matter, it does not mean that the Auditor will be free of responsibilities for other unreported material deficiencies/misstatements in the financial statements. It is important that the Auditors report all material misstatements so that the impact of all m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of assembling the final Audit File on a timely basis after the date of the auditor's report. e) Paragraph 16 of SA 230: In circumstances where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document:(8) The specific reasons for making them; and (b) When and by whom they were made and reviewed. f) The explanatory material to the Standard at Para A21 states that SQC 1 [3] requires firms to establish policies and procedures for the timely completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of the final Audit File is ordinarily not more than 60 days after the date of the auditor's report. g) The explanatory material to the Standard at Para A22 states that the completion of the assembly of the final Audit File after the date of the auditor's report is an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions. 23. We farther note that while submitting the Audit Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ires the Audit Firm to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel (including experts contracted by the firm and network firm personnel) and, where applicable, others are subject to independence requirements, maintain independence where required by the Code. Such policies and procedures should enable the firm to (a) Communicate its independence requirements to its personnel and, where applicable, to others subject to than; and (b) Identity and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement. It also provides that The firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide it with reasonable assurance that it will undertake or continue relationships and engagements only where it: (i)--. (ii)----and (iii) Can comply with the ethical requirements . 28. SA 200, which provides overall objectives of the independent aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CN stated that CA A. S. Sundaresha, promoter and founder of M/s. Sundaresha Associates-retired from this firm w.e.f. 31.03.2017. CA Magha Sundaresha Andani, daughter of CA A. S. Sundaresha, has major share in the revenue of M/s. Sundaresha Associates. M/s. ASRMP Co was formed w.e.f. 01.04.2018 and CA A. S. Sundaresha has major share in the revenue of M/s. ASRMP Co. The Auditors had intimated vide letter dated 21.07.2022 that all these firms are related firms. All these audit firms operate from the same address. 32. The Audit Firm vide letter dated 10.09.2022 furnished below mentioned details of bills raised during FY 2019-20 and FY 2020-21 (relevant to service rendered in FY 2018-19 and FY 2019-20): Table No. 3 Rs. In Lacs Particulars M/s Sundaresha Associates M/s ASRMP Co Mis Sundaresh Co Grand Total 2018-19 2019-20 2018-19 2019-20 2038-19 2019-20 2018-19 2615.22 Fee received from CCD Group as % of Tot fee 30.83% 36.66% 82.14% 83.62% 21.60% 33.70% 31.00% 41.68% Note: CCD group refers to Coffee Day Group and GVIL is one of the companies of CCD Group. 33. As per Code of Ethics [6] , the Auditors were required to comply with the fundamental principles i.e. (a) Integrity, (b) Objectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be jeopardized he should, as far as possible, take care to see that the professional fees for audit and other services received by the firm in which he is a partner, by him and his partners individually and by firm or firms in which he or his partner are partners from one or more clients or Companies under the same management does not exceed 40% of the gross annual fees of the firm, firms and partners referred to above. Companies under the same management here would refer to the definition of this expression as provided in section 370(1-B) of the Companies Act, 1956. 37. The SCN stated that as per audit manual of the Firm, Total fees generated by an auditee should not represent a large proportion of the firm's total fees. The fees generated by an auditee should not represent a large proportion of the revenue of an individual partner, which may create self-interest threat. 38. The SCN pointed out that the total fees generated by all related audit firms of the Auditors from CCD group represented a large proportion of the total fees of the three related audit firms. In view of the requirements mentioned above, the Auditors were required to evaluate the significance of self-inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07.02.2019 and 24.05.2019. These presentations related to review of quarterly results of CDGL by the Auditor, scope of engagement, audit approach, observations of the Auditor on the Statutory Audit of the annual financial statements for FY 2018-19 and applicability of Ind AS 116 for FY 2019-20, A perusal of the Audit File shows that the presentation given by CA Pradeepa Chandra C. before the Audit Committee of CDGL, on 24.05.2019 was authored by CA Megha Sundaresha Andani (Partner of M/s. Sundaresha Associates). This clearly shows the sharing of resources between these two audit firms and their interrelationship. 42. The inter-relationship among the three firms is corroborated by another fact that CA Pradeepa Chandra C. (Partner of M/s. Sundaresha Associates) was involved in the statutory audit of CDGL for FY 2019-20 and FY 2018-19 but was named as external reviewer in the Audit files, Further, CA Chaitanya G. Deshpande (Partner of M/s. Sundaresha Associates) was also involved in the statutory audit of CDGL for FY 2018-19 and of GVIL for FY 2018-19 2019-20. This shows that the partners of M/s. ASRMP Co. and M/s. Sundaresha Associates jointly performed the Audit of Coffee Day Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their engagement; that the audit team will be regularly rotated: that they ensured that total fees from auditee did not exceed prescribed limits; and that where the amount forms large portions of total fees, they have taken following safeguards to mitigate the risk: a) The Firm has exposure to various clients, adding new clients and providing additional services to existing clients without compromising on non-allowed services over the years. b) The remuneration of partners is not linked to earning of any single client and c) They have sufficient resources and the cost can be covered even on loss of any client which forms significant portion of their fees. 45. The Auditors argue that they have complied with the requirement of auditing standards and the Act as they did not enter into any contingent fee arrangement with an auditee, and ensured that fees are not overdue except CCD group fees which is partially due on account of financial constraint faced by the group. 46. The Auditors' reliance on steps taken to reduce self-interest threat and familiarity threat are general statements without detailing specific steps taken to reduce such threat, despite the three audit films having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement. ..... Marcum BP failed to implement, effectively apply, and appropriately monitor quality control policies and procedures sufficient to provide reasonable assurance concerning the Firm's independence . In this case, PCAOB censured the audit firm, imposed monetary penalty and required the audit firm to undertake a review of its policies, procedures, staffing, and training with respect to auditor independence. 50. Similarly, in AWC (CPA) Limited, WONG Chi Wai, CPA, and WONG Fei Cheung, CPA, PCAOB observed As the engagement partner. Albert Wong was responsible for AWC's compliance with independence requirements...............Albert Wong took, or omitted to take, actions during the Kandi 2012 Audit, that he knew, or was reckless in not knowing, would directly and substantially contribute to the Firm's violation of independence requirements, in contravention of PCAOB Rule 350 . For misconducts including independence violations. PCAOB censured the audit firm partner, revoked the audit firm's registration barred the partner from being an associated person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , except writing off of Rs. 45 crores land advance. There was no business relationship between GVIL MACEL. The loans and advances made to the related parties (depicted as Assets) were worth Rs. 475 crores, which constituted 98.76% of the total assets of Rs. 480.96 crores. The Loans and advances taken from related parties (depicted as liabilities) were to the tune of Rs. 581.16 crores, which constituted 99.99% of total liabilities of Rs. 581.17 crores. GVIL had a negative net worth of Rs. 100.21 crores. These details from the Financial Statements show that GVIL was like a shell company being used as a conduit for the financial maneuvers to divert funds from listed company to entities controlled by the Promoter of listed entity and to mislead stakeholders and regulators. This has resulted in material and pervasive misstatements in the Balance Sheet. 55. The SCN pointed out that the Auditors were required by SA 200 [9] to exercise professional judgment in planning and performing an audit of financial statements. There is no evidence in the Audit File that the Auditors had critically analysed the Financial Statements of GVIL to understand its nature, operations, ownership, governance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Audit File about their understanding of the nature of business of GVIL, its ownership, governance structures etc. 59 The Auditors further submitted that as GVIL did not commence operations, it had no physical assets, Work-in-Progress, revenue, employee cost etc. and invested in an Infrastructure Company to further its objective. They submitted that in the earlier years GVIL had borrowed Rs. 511.16 crores from TDL, its holding company. They further stated that section 186 of the Act allows the holding company (TDL) to advance loans to its subsidiary company without further approvals, which implies that a subsidiary can borrow from its holding company without restriction, They admitted to the fact that GVIL's shareholders did not pass any special resolution as required under the Act, for such borrowings. According to the Auditors, GVIL is of the view that since TDL itself has given the loan, approval of shareholders is implied to have been taken, Further, in respect of the loan of Rs. 70 crores taken from fellow subsidiary company (TRRDPL), the Auditors replied that it is within the Rs. 200 cores limit approved by special resolution passed in Extraordinary General Meeting he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed clause iii(B)(2) of MOA of GVIL and found that clause B pertains to Objects incidental or ancillary to the attainment of Main Objects. GVIL's Main Objects relate to business of power projects. Whereas Loans given to MACEL and SICAL did not relate to or were not ancillary to the business of power projects which had not yet taken off. It shows that loans given by GVIL to MACEL and SICAL were beyond its powers mentioned in the MOA, which the Auditors failed to observe. This shows that the Auditors did not even attempt to understand or had a totally flawed understanding of GVIL. 63. We note that GVIL was formed in 2001 for power sector business, it obtained some approvals for setting up of a power plant/substation and later on dropped the projects. GVIL had no operations. It had invested in shares of SICAL and had given loans/advance to SICAL, MACEL and Razia Sultana, all of which were totally unrelated to its business as per MOA. These borrowings and lending were all unauthorised including those with related parties. MACEL is a promoter owned entity to which a huge amount of Rs. 370 crores was diverted. These facts are proof of GVIL being used as a shell company by the promoter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd size of GVIL. this loan too was unusual and given without any business rationale. The Auditors were required to evaluate the terms and conditions of this interest free loan and its recoverability. The Auditors had recorded in the Audit File that the counter party had a running business with regular turnover but they did not report about recoverability of this loan whereas they had reported about the recoverability of other loans in the Independent Auditor's Report. 68. The SCN points out that an advance of Rs. 45 crores for purchase of land was given to Ms. Razia Sultana during the year and a lull provision for doubtful advance of Rs. 45 crores against this advance was recognised during the year itself. This advance and full provisioning within the year itself was unusual and indicative of diversion of funds. This advance should have been evaluated by the Auditors to ascertain its purpose and terms conditions. However, the Audit file does not evidence performance of any such evaluation. 69. The loans were given to MACEL and SICAL without charging any interest and without obtaining any security. These funds were sourced by borrowings from TDL (Rs. 511.16 crores) and TRRDPL (R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2020 370 370 0 72. The Table 4 above depicts the loan transactions between GVIL and MACEL in their respective Financial Statements. This created serious doubt about the completeness of the Financial Statements of GVIL and MACEL. On examination of the respective bank statements of GVIL and MACEL, both with Karnataka Bank, we find that on 10.04.2019. GVIL received Rs. 90 crores from TDL, which triggered a chain of apparently sham payments such as: GVIL paid Rs. 90 crores to MACEL, which then paid Rs. 50 crores to GVIL, which then paid Rs. 50 crores to MACEL which then paid Rs. 90 crores to TDL, which then paid Rs. 90 crores to GVIL, which then paid Rs. 90 crores to MACEL and so on. Further, on 10.05.2019, GVIL received Rs. 10 crores from MACEL, thereafter GVIL paid Rs. 10 crores to MACEL, which then paid Rs. 10 crores to GVIL and so on. It went on for 36 times making the transactions total to Rs. 360 crores on the same day. 73. As pointed out in the SCN, these transactions were done in a circular manner by rotating smaller amount amongst three companies, resulting in 'Ever Greening of Loans'. This was an indication of severe financial crisis in Coffee Day group and an indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of funds. There is no evidence in the Audit File of performing any audit procedure to comply with SA 240. 78. The SCN points out that the Auditors had the statutory duty to report the offence of fraud to the Central Government under Section 143(12) of the Act. Disbursal of loans and advances without any business rationale, complete absence of internal control and also violating provisions of the Act were indications of diversion of funds, which was a fraud on the company, ultimately fraud on the stakeholders of listed company viz. CDEL. The Auditors knew that funds were being diverted to MACEL, which is an entity controlled by VGS and his relatives. It is evident from the Financial Statements of GVIL that it had no business relations with MACEL. The Auditors were in knowledge of the diversion of funds, i.e. fraud being committed in the company. It is also evident from above analysis that despite being aware that an offence of fraud had been committed in the company, the Auditors failed to report the same to the Central Government, On the contrary, they reported in The Companies (Audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no reporting obligation on the Statutory Auditor regarding compliance with section 179 of the Act. This reply of the Auditors is not acceptable because neither was the Board approval under section 179(3) of the Act taken for both the loans nor was a special resolution passed for the borrowings from TDL. 82. Regarding the loan given to MACEL, the Auditors submitted that there is no need to have a written agreement for loan transactions with related parties. Besides, they relied on the Disclaimer of Opinion in their Audit report regarding recoverability of this loan. In respect of the loan given to SICAL, the Auditors relied on the fact that it was a listed company; had a running business with a turnover of Rs. 856 crores; had a positive networth; and 30% of the loan had been recovered during the year itself Thus, the loan to SICAL did not warrant any comment regarding its recoverability. In respect of the land advance given to Razia Sultana, the Auditors stated that they were not provided with sufficient appropriate audit evidence/explanations by TCWG to evaluate the loan given and the provision for doubtful advance thereof. Therefore, they had given a disclaimer of opinion for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the loan of Rs. 105 crores given to SICAL, the Auditors believe that it is covered in the limit of Rs. 200 crores approved by shareholders in 2015. We notice that in FY 2018-19, loan of Rs. 150 crores was given to SICAL in addition to Rs. 550 crores loan given to MACEL, which indicates that this limit was breached in FY 2018-19 also. Further, shareholders had given a general approval, authorizing the Board of Directors (BOD) to finalize the terms conditions of loan/investment within a limit of Rs. 200 crores. The Board did not make any formal authorization/approval. As in the case of MACEL, there was no business relation with SICAL, no security was taken for the said loan and there was no agreement spelling out the terms of the loan. Further, the analysis of the Financial Statements of SICAL, as relied upon while responding to the SCN, is not available in the Audit File (The Auditors have only recorded that counter party has a running business with regular turnover). Therefore, we treat this part of the reply as an afterthought of the Auditors to justify their failure during performance of the Audit. 87. In respect of land advance of Rs. 45 crores given to Razia Sultana and subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of loans through structured circulation of funds was clearly visible from the above bank statement. While the fraud was apparent earlier, it got established after the financial mess was unveiled post the death of VGS in the first half of the financial year. The Auditors were required to evaluate this evident evergreening of loans while verifying clearance of cheques issued in 2018-19, it is clear that the Auditors have failed to exercise professional skepticism and due diligence while verifying the bank statement. Therefore, we are of the view that the Auditors' inert passivity in the face of known evergreening of loans does not insulate them from their gross negligence in performance of Audit. 90. The Auditors by their own admission, had access to the investigation report of Mr. Ashok Kumar Malhotra (Retd DIG of CB1) at the time of audit, This investigation report has a finding suggesting evergreening of loans. Para 8.6.2 this report states Based on the review we were able to identify transactions where MA CEL issued cheques to the subsidiary Companies during the last week of September and March of every financial year. These monies were credited into the Bank accounts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through structured circulation of funds has also been proved Therefore, we find that the Auditors failed to report this fraud to the Central Government and in the Independent Auditor's Report resulting in violation of the section 143(12) of the Act and applicable Auditing Standards. 94. While denying the charge relating to PMLA, the Auditors have quoted section 420 of IPC, and stated that there is no cheating or dishonesty in RPTs and no delivery of property or destruction of valuable security, therefore section 420 of IPC is not attracted While quoting section 3 of PMLA, they replied that both the source and application of funds are clear from the transactions and funds are routed through banking channels. Accordingly, these are not proceeds of crime as mentioned under PMLA. They further replied that these transactions have not been flagged by banker as suspicious transactions. Accordingly, they claimed to have complied with SA 250. We note that disclosure of Related Party Transactions in the Financial Statements and its routing through banking channel does not provide immunity to such transactions from PMLA. After the death of VGS (in July 2019) the fraud was clearly in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re transaction. 96. It is undisputed fact that the Auditors were the Statutory Auditors and not the forensic auditors, However, laws and regulations lay down certain responsibilities on Statutory Auditors with respect to internal financial control and internal controls, internal financial control over financial reporting is designed and implemented to prevent, and detect fraudulent transactions. In this case, use of pre signed cheques for diversion of funds and evergreening of loans through circulation of funds were enough evidence of complete absence of internal control and internal financial control in the GVIL. Further, we could not find any evidence in Audit File about the Auditors conducting any review of matters indicated in the guidance note issued by ICAI and cited in the reply by the Auditors, We note that the Auditors did not perform any test of control with reference to use of cheques leaves, management override of control and authorisation of transactions etc. We further note that, being the Auditors of GVIL, TDL and TRRDPL, they also had access to banks statements of these group companies. Further, movement of funds, pre-signing of blank cheques and understatement of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marcum from audit works for a period of three years. PCAOB also imposed a penalty of $25,000 on the Engagement partner John E. Klenner besides barring him from being an associated person of a registered public accounting firm. 99. Similarly, failures to perform audit procedures and exercise professional skepticism in related party transactions and internal control over financial reporting have invited serious action by audit regulators in other jurisdictions too. For example, in case of Cheryl L. Gore, CPA and Stanley R. Langston. CPA, PCAOB [17] had observed that Gore failed to obtain sufficient appropriate audit evidence and to perform sufficient procedures concerning whether Issuer A's financial statements accurately disclosed its related party transactions ..... Gore failed to exercise due professional care, including professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with Issuer A's identification, accounting, and disclosure of related party relationships and transactions...............Specifically, as part of her risk assessment procedures, she was required to obtain an understanding of the design and implementation of Is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... denied the charge stating that material uncertainty existed that might cast significant doubt on the GVIL's ability to continue as a going concern and accordingly they have provided material uncertainty para in the Independent Auditor's Report and also in para 2(f) of Report on other legal and regulatory requirements , While drawing attention to para 19 of SA 570, they have replied that GVIL has given proper disclosures in the Financial Statements that GVIL has accumulated losses, eroded net worth, holding company has extended financial support and fair value of shares of SICAL was expected to be on positive note in long run. They further stated that the holding company is hilly operational with substantial assets. They had evaluated the Financial Statements of SICAL, the business of which was intact and SICAL had positive net worth. Accordingly, they have complied with SA 570. 104. As per para 12 of SA 570, on Auditor has the responsibility to evaluate the Management's assessment of an entity's ability to continue as going concern. In this case we note that the Audit File carries no such evaluation. The Auditors' response relying on the Managements assertion r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in noncompliance with Ind AS 7. 107. The Auditors have denied the charge on the basis that terms and conditions of loans/advances were not finalized, therefore, these transactions cannot be termed as investing activity or financing activity and has to be classified as operating cash flow under elimination method, which is in compliance with Ind AS 7. They further replied that they had given a disclaimer of opinion in respect of compliance with accounting standards specified under section 133 of the Act. 108. We note that benefits of cash flow information are described in para 4 5 of Ind AS 7 as A statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity. Its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Sr., and Armando C. Ibarra, Jr. relating to inter alia inappropriate classification in the Statement of Cash Flows, PCAOB [20] observed, In 2003. when it returned artwork to the original artist, Boys Toys wrote off its investment in fine art as a charge to the income statement. No cash was exchanged as a result of this transaction. In its FY 2003 statement of cash flows, Boys Toys reported $25.320 of positive cash flow from investing activities related to the write off. The return of the fine art represented 100% of Boys Toys' cash flows from investing activities and, as a noncash transaction, its classification as an investing activity is inconsistent with GAAP . In this case, PCAOB revoked registration of the Audit Firm and barred two of its partners from associating with registered public accounting firm. D. OTHER NON-COMPLIANCES WITH LAWS AND STANDARDS In addition to the major lapses covered under section C of the order, the Auditors were also charged with following lapses in the audit: a) Failure to ensure compliance with section 134(1) of the Act b) Failure to comply with SA 700-Forming an Opinion and Reporting on Financial Statements. c) Failure to comply with SA 230-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error. 116. While denying the charge, the Auditors referred to para 17 of SA 700 and para-A1 5(a) of SA 705 and replied that the basis for disclaimer of opinion given in audit report represents substantial proportion of financial statements, accordingly, they have complied with SA 700. While repeating the reply given in respect of each of alleged misstatements in Financial Statements, they stated that even if they had considered these alleged misstatements, their opinion would have been the same i.e., disclaimer of opinion. 117. We note from the Independent Auditor's Report that Basis of Disclaimer of Opinion does not include (a) fraudulent diversion of funds worth Rs. 520 crores, (b) fraudulent borrowing of Rs. 581.16 crores. (c) understatement of related party transactions worth Rs. 350 crores, and (d) misstatement in statement of cash flows worth Rs. 325 crores. Disclaimer of opinion covered only recoverability of Rs. 370 crores from MACEL Rs. 45 crores from Razia Sultana. Therefore, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile drawing attention to para 19 of SA 260. they argued that written communication with TCWG is not compulsory. 120. Having considered the reply, we observe that dates of performing audit procedures its review are required to be documented in the Audit File, which the Auditors failed to do. They replied that articled clerks maintain time sheets separately but they could not give any reply in respect of not recording date of audit work done/reviewed by Ramesh and Chaitanya. Further, not keeping the Financial Statements Audit Report in the Audit File is a proof that the Audit File was not assembled within permitted period. We note from 'Audit Conclusion' section of the Audit File that it does not have any reference relating to discussion with TCWG/Management. Date of discussion name of person (with whom matters were discussed) were also not recorded. Accordingly, we find that the Auditors did not comply with SA 230, SA 260 SA 265. 121. The Auditors were charged with failure to establish overall audit strategy and development of audit plan as required by SA 300. They were required to undertake the required activities at the beginning of the current engagement e.g., performing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched, but may be used to explain or clarify information contained in the audit documentation. There is no record in Audit File that the Auditors had verified draft annual report. This reply is not satisfactory and thus, we find that this charge is proved. E. OMISSION AND COMMISSION BY THE AUDIT FIRM In addition to being jointly responsible for the lapses in audit performed by the EP and other members of the engagement team, the Audit Firm was charged with omissions and commissions solely attributed to it. These are discussed below. Lapses in constitution of Engagement Team ('ET' hereafter) and assigning responsibility among ET members (Additional Lapse on the part of the Audit Firm only) 126. The Firm was charged with non-compliance with SQC 1 by splitting the responsibility of an EP between two partners as against the requirement to assign responsibility for each engagement to 'an engagement partner'. The firm should establish policies and procedures requiring that; (a) The identity and role of the engagement partner are communicated to key members of the client's management and those charged with governance; (b) The engagement partner has the appropriate capab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of due diligence in this regard for constituting their Engagement Team with multiple EPs in violation of SQC 1. 130. We observe from the reply that there was no clarity about the EP who was required to take ultimate responsibility for the Audit Engagement. This led to a situation where the entire audit was conducted in a perfunctory manner and no single ET member took the ultimate responsibility of the audit engagement. This has adversely affected the performance of audit engagement as evident from the preceding paras. Therefore, we find that this charge is proved. Responsibility of the Audit Firm for the audit work done by the Engagement Team 131. In addition to lapses in constitution of the engagement team, the Audit Firm was also charged with various omissions and commissions attributed to the Auditors in section C and D above, Para 2 of SA 220 and para 3 of SQC 1, stipulate that Quality Control Systems, Policies and Procedures are the responsibility of the Audit Firm. The Audit Finn was charged with failure 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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . M/s. Sundaresha Associates was the Statutory Auditor of GVIL for FY 2019-20. We have already considered in the earlier paragraphs, the point wise replies of the Audit Firm and determined that the Audit Firm and the Engagement Team have been grossly negligent in ensuring that the Audit of GVIL was performed in accordance with the applicable laws and regulations and that the Audit Report issued on behalf of the Audit Firm was not appropriate. Therefore, as per the standards and the legal provisions mentioned above, in addition to the Engagement Team, the Audit Firm is also responsible for the lapses discussed in the preceding paragraphs of this Order. F. POINTS OF LAW RAISED BY THE AUDITORS 134. The Auditors have stated that no accounting and auditing standards have been prescribed on the recommendation of NFRA, hence question of monitoring such standards by NFRA does not arise and issuance of SCN is beyond the powers of NFRA. This contention of the Auditors is not acceptable. The NFRA's authority to monitor and enforce compliance with the accounting and auditing standards is derived from section 132 of the Act. All the Accounting Standards and Auditing Standards have the force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known to him to appear in a financial statement with which he is concerned in a professional capacity . This charge is proved as explained in Section-C-3 to C-5 and D (b) above. c) The Auditors committed professional misconduct as defined by clause 7 of Part 1 of the Second Schedule of the CA Act, 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 explained in Section-C and D above- d) The Auditors committed professional misconduct as defined by clause 8 of Part 1 of the Second Schedule of the CA Act, 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 opinion . This charge is proved as explained in Section-C-2 to C-5 and Section-D above. e) The Auditors committed professional misconduct as defined by clause 9 of Part 1 of the Second Schedule of the CA Act, which stales that an auditor is guilty of professional misconduct when he fails to invite attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofessional relationship with the promoters of the auditee company. The Standards on Auditing do not free an Auditor from reporting all other misstatements once a Disclaimer on a particular aspect is given. The Auditors have failed in their statutory duty and have tried to hide behind one Disclaimer of opinion, which was incomplete as they did not cover all aspects of infraction of the Laws and the Standards. All of this weighs heavily on our mind while determining the quantum of penalty. 143. 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 ten lakh rupees, but which may extend to ten times of the fees received, in case of firms; (B) debarring the member or the firm from--(1) 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) performin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation, and Other Assurarance and Related Services Engagements. [4] Audit file is defined in para 6(b) of SA 230 Audit Documentation as one or more folders or storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement . [5] Section 143(9) of the Act provides that every auditor shall comply with the auditing standard. Further proviso to section 143(10) of the Act provides that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. [6] Para 100.4 of Code of Ethics 2009 issued by the Institute of Chartered Accountants of India [7] PCAOB Release No. 105-2016-016 dated 18.05.2016 and PCAOBR Release No. 105-2019-022, PCAOB Release No. 105-2019-023 both dated 10.09.2019. [8] See para 11(b) of SA 315. Identifying and assessing the risk of material misstatement through understanding the entity and its environment. [9] Para 16 of SA 200 provides that 'The auditor shall exercise professional judgment in planning and performing an audit of financial statements. Para 13 (k) of SA 200 de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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