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TMI Blog2024 (8) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... bed in the SAS and SQC -1. Given the fact that the Audit Firm is the appointed auditor under the Act and that the EP remains mandatorily responsible for the individual audits subject to firm-level supervision, both the Audit Firm and the EP have joint and several responsibilities for the Audit. Section 132 (4) that provides for sanctions against both the chartered accountants and the firm of chartered accountants emanates from this basic premise. There is not adequate evidence of effective supervision and oversight of this audit by M/S BSR Associates LLP. Had the Audit Firm discharged its supervisory responsibilities timely and effectively such major lapses in the audit as discussed in the foregoing paragraphs could have been avoided. Further, in this case, the Firm's policies and procedures with respect to audit documentation have also been found to be non-compliant with SQC I and SA 230. Due to these fraudulent transactions the consolidated financial statements of CDEL were grossly misstated and, therefore, did not present a true and fair view of the company's affairs. As a result, the unmodified audit report issued by the Audit Firm was false and misleading for the users ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by clause 6 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 the Firm and the EP failed to disclose in the audit report the material misstatements made by the Company. The Firm, the EP and the EQCR committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice is guilty of professional misconduct when he does not exercise due diligence or is grossly negligent in the conduct of his professional duties - This charge is proved as the Firm, the EP and the EQCR failed to conduct the audit in accordance with the SAS and applicable regulations, failed to report the material misstatements in the financial statements arising from diversion of tilllds circulation of funds and failed to report non-compliances made by the Company. The Firm and the EP committed professional misconduct as defined by clause 8 of Part I of the Second Schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al statements or internal audit of the functions and activities of any company or body corporate. - DR AJAY BHUSHAN PRASAD PANDEY, DR PRAVEEN KUMAR TIWARI AND SMITA JHINGRAN ORDER 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) no. NF- 23/14/2022 dated 17.01.2024 issued to M/s BSR Associates LLP, Chartered Accountants, firm No: 116231 W/W-100024, ('Firm' hereafter), an audit firm registered with the Institute of Chartered Accountants of India ('ICAI' hereafter), CA Aravind Maiya, ICAI Membership No-217433 (Engagement Panner or EP hereafter) and CA Amit Somani, ICAI Membership No- 060154, (Engagement Quality Control Reviewer or EQCR hereafter), who are members of ICAI and were EP and EQCR respectively for the statutory audit of Coffee Day Enterprises Limited for the Financial Year ('F Y' hereafter) 2018-19. (All are collectively called the Auditor/s or Principal Auditor/s). 2. This Order is divided into the following sections: A. Executive Summary B. Introduction Background C. Major lapses in the Audit of Consolidated Financial Statements ('CFS' hereafter) D. Major lapse in the Audit of Standalone Financial Statements (' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled entity. The EP considered the exposure of CDEL group to MACEL as an important area for audit, but did not perform the required audit procedures, nor ensured appropriate audit procedures by the other auditors disregarding the provisions of para 10 of SA 600. (Section C-1 of this Order). CFS had Rs 842.49 crores of outstanding amounts receivable from MACEL, a related party with very minimal business activities, but the Principal Auditors were grossly negligent in evaluating recoverability and the adequacy of the impairment allowance as per the applicable accounting standards; there was a pattern of diversion of funds of CDEL, the listed entity, to promoters or entities controlled by the promoters through a web of intra group circular transfer of funds where MACEL was used as a main conduit. (Section C-I of this Order). CFS contained a number of false and erroneous account balances portraying lower amount of receivables; this was achieved through book entries of repayments of intra group loans through cheques received but not encashed as of balance sheet date. The Auditors did not exercise professional judgement professional skepticism during the audit of loans of Rs 2,549 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod 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. This Order will be effective after 30 days from its issuance. B. INTRODUCTION BACKGROUND 6. The National Financial Reporting Authority ('NFRA' hereafter) is a statutory authority set up under section 132 of the Companies Act 2013 to monitor the implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA is empowered under section 132(4) of the Act to investigate, for the prescribed classes of companies], the professional or other misconduct, and impose a penalty for proven professional or other misconduct, of the individual Chartered Accountants or firms of Chartered Accountants. 7. The Statutory Auditors, whether individuals 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 EP and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Ltd (TDL) -l I .68 474.00 462.32 4 Coffee Day Trading Ltd (CDTL) 125.00 125.00 5 Coffee Day Hotels Resorts Pvt Ltd (CDH RPL) 150.00 150.00 6 Giri Vidhyut (India) Ltd (GVIL) 50.00 50.00 Total 842.49 1,706.51 2,549.00 (Note-* Lending to MACEL was understated in the books of the subsidiaries, by accounting for cheques issued by MACEL in March 2019 without MACEL having requisite bank balance. These cheques were used by the lenders (CDEL's subsidiaries) to show recovery of related party loans in their books of accounts, without MACEL having adequate bank balance or approved bank credit limit. These cheques were later shown as cleared in the next financial year, i.e., FY 2019-20 by evergreening loans/advances by CDEL's subsidiaries through orchestrated circulation of funds among related parties). 11. The linkage of the entities described in Table I is depicted in the Chart I below: Chart- I 12. On examination of the Consolidated Financial Statements of CDEL and MACEL, it transpired that except for CDGL, MACEL did not have any business transactions with 6 of the 7 subsidiary companies. MACEL was used as a conduit to transfer funds from CDEL's subsidiaries to the personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned with that financial statement in a professional capacity. b) Failure to report a material misstatement known to them 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 the 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. 17. The Auditors were initially allowed 30 days to submit a reply to SCN. On 02.02.2024 they sought an extension till 29 th March 2024, which was allowed. The Auditors submitted their replies on 29 th March 2024. On 05.04.2024 an opportunity of Personal Hearing (PH) was also provided to the Auditors and PH was fixed on 17.05.2024. On their request of postponement, the PH was rescheduled on 30.05.2024 for the EP; and on 31.05.2024 for the Firm and the EQCR. The EP attended PH on 30.05.2024 , and the Firm and the EQCR attended PH on 31.05. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,166 crores. These subsidiaries in turn provided loans to other related parties, which apparently, did not have the capacity to repay, thereby impairing the investment of CDEL in the subsidiaries. The Auditors had identified significant risk in impairment of investments 5 and therefore the Auditors were required to give special audit consideration to this area of significant risk as per paragraph 4(e) of SA 315. As discussed later in this Order, the repayment of loans/advances by subsidiaries subsequent to the Balance Sheet date and funds for repayments were arranged through circular rotation of funds within the group entities, which the Principal Auditors failed to note despite the Auditors themselves having identified outstanding balances with MACEL, (91.75% of whose shares are held by the father of VGS) as an area of significant related party transactions, but closing their analysis based on management explanations and without applying professional skepticism. Further, in the case of some of these loans by the subsidiaries a false and erroneous position of the outstanding balances was reflected in the balance sheet by passing mere book entries as repayment by the cheques though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n/ Advance given 2 226.80 724.63 Loans / advance recovered 1,449.13 724.63 Interest received 98.06 11.87 Advance towards urchase of coffee 394.21# 365.01 Purchase of clean and raw coffee 70.90 39.23 51 D II Balances outstandi ng with MACEL were disclosed as u nder: - Balance of Loan given Assets 789.35* 0.00 Advances for supply of goods rendering of services 64.82 3.46 Balance of Loan received (Liability) 11.68 0.00 51 D 11 Advance given for purchase of land to Smt. Vasanthi He de Mother of VGS 275.00 275.00 # This pertains to advance given by Coffee Day Global Ltd (CDGL) to MACEL. *This pertains to loans given by Tanglin Retail Reality Development Private Ltd (TRRDPL) to MACEL. It can be observed from the above data that loans/advances of Rs 2,226 crores given to MACEL in 2018-19 were almost three times of the loans/advance given in the previous year i.e., 2017-18 (Rs 724 crores), and advance towards purchase of coffee beans (Rs 394 crores) was 5.62 times of its annual reported purchases (Rs 70 crores) from MACEL. Therefore, these transactions were unusual and lacked business rationale. Further, CDEL borrowed Rs 2,960 crores from Standard Chartered Bank, through its step down subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor is expected to examine the books of accounts and records of subsidiaries and associates wherever found necessary in situations similar to those of the audit under examination. The requirements in SA 600 and other SAs have to be seen in light of this overarching requirement of the Act. The CFS of CDEL had substantial amount of Rs 842 crores as loans given by its subsidiaries to MACEL and borrowings from banks/NBFCs of Rs 7,060 crores. The Audit report on CFS says that the principal auditor did not audit the financial statements of forty subsidiaries whose financial statements reflect total assets of Rs. 12, 140 crores as at March 31, 2019, total revenues of Rs. 4,091 crores and net cash inflows amounting to Rs. 591 crores for the year ended on that date, as considered in the consolidated financial statements. Considering the total assets and revenue of CFS, significant account balances in the CFS were arising from the financial information of the components audited by the Other Auditors. This fact, coupled with Group Entity Structure having many subsidiaries, with large scale intra group lending activities is nothing but special circumstances to make it essential for the Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principal auditor. The factors to be considered here are the materiality of the financial information audited by the Principal Auditor and the risk of material misstatements in the financial information of the Components audited by the Other Auditor. This para of SA 600 goes on to require the auditor to consider performing additional procedures as set out in this SA regarding the components audited by other auditor resulting in the principal auditor having significant participation in such audit. In view of the fact that the substantial percentage of total assets and total revenue were arising from the financial statements audited by the Other Auditors, the Risk of Material Misstatements ('RoMM' hereafter) arising from those financial statements were significantly material and, therefore, the Principal Auditor must have performed additional procedures to obtain sufficient appropriate audit evidence to enable him to issue the audit opinion on the CFS. 27. Had the above factors been taken into consideration, the EP could not have relied on the work of the component auditors without performing rigorous procedures to confirm the ultimate use of the funds of CDEL, the listed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there are no issues with regard to recoverability of the same. (emphasis provided by NFRA). 32. The Auditors were charged for non-verification of end use of Rs 2960 crores borrowed by TRRDPL from Standard Chartered Bank ('SCB' hereafter). TRRDPL is a 100% subsidiary of TDL which in turn is a 100% subsidiary of the auditee company, CDEL. The EP stated that he relied on management' s explanation regarding utilization of these funds. The facts of the matter are detailed below. CDEL and its promoters had 2,80,56,012 shares and 53,04,217 shares, respectively, of a listed company viz., Mindtree Ltd. All these shares were pledged against the group/promoter's borrowings. CDEL and its promoters agreed to sell these shares @ Rs 980 per share to a buyer The value of shares held by CDEL and promoters was to Rs 2,749.49 crores and Rs 519.81 crores respectively. In order to free these shares from the pledge, TRRDPL borrowed Rs 2,960 crores from SCB to repay to the lenders with whom such shares were pledged. As per the EP, out of this amount of Rs 2,960 crores, a sum of Rs 2,172 crores was lent to CDEL and Rs 789 crores was on-lent to MACEL. The EP's reply itself indicates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r all loans and advances. 35. Further, the ET did not evaluate the appropriateness of the methodology used for computation of the net worth of VGS by M/S Sundaresha Associates. The EP did not perform any procedures for compliance of paragraph 8 of SA 500 (Audit Evidence), that requires evaluation of the competence, capabilities and objectivity of the management expert. The EP did not provide a specific reply to this charge but mentioned that the ET assessed the recoverability risk associated with transactions entered into between CDEL's subsidiaries and MACEL; and component auditors did not raise any issue on this matter. This reply is not accepted as there is no evidence in the Audit File regarding Auditor's evaluation of the appropriateness of the methodology used for computation of the net worth of VGS by M/S Sundaresha Associates; and evaluation of the competence, capabilities and objectivity of the management expert. 36. Table 2 shows an advance of Rs 394.21 crores given by CDGL (a subsidiary of CDEL) to MACEL whereas the actual supply of goods was only Rs 70.90 crores. On being questioned about the purpose of an advance of such a large amount to a related party, the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impairment allowance. The principal auditor obtains reasonable assurance on such matters through discussions with the other auditors, specific testing of the transactions and scrutiny of the work of the other auditors, and by performing additional procedures as required by SA 600. It is evident that such an examination was not done in this case as the Auditors failed to notice and report the web of circular transactions designed to siphon funds out of the listed company. Having knowledge of the business of the group and having identified these loans and advances as an area of risk, the EP was required to holistically assess the financial statements of the group and to sufficiently co-ordinate audit work with other auditors to ensure that the transactions and balances represent genuine business transactions in pursuance of the stated objectives of the entity. Routing funds under different pretexts, such as loans, advances for supply etc., to group entities without adequate justification and rationale should have made the Principal Auditors more vigilant and professionally skeptical. Para 19 of SA 600 requires that there should be sufficient liaison between principal auditor and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit file does not evidence verification of the bank statements to check recovery of loans from the promoter company. The Auditors blindly relied on management explanation. All recoveries within the group were actually through evergreening of loans as detailed in NFRA Orders no NF-23/14/2022 dated 13.04.2023, NF-23/14/2022 dated 12.04.2023, and NF-23/14/2022 dated 26.04.2023. in the cases of MACEL, CDGL and TDL. It is important to note that it has been recorded in the Audit File that bank statements of CDGL and TDL had been verified 22 . Any verification of bank statements should have clearly evidenced the circular flow of funds and the evergreening arrangements within the group. This matter of evergreening is further discussed in paragraph no. 45 to 47 of this Order. 42. The CDEL did not disclose Related Party Transactions between - a) MACEL and CDGL of Rs 266.54 crores , b) MACEL and CDH RPL of Rs 150 crores , c) MACEL and CDTL Rs 250.02 crores; d) MACEL and GVIL of Rs 200 crores. The Auditor did not report this misstatement in the CFS. The EP has admitted this mistake. Evidently, a diligent auditor would not miss out such high quantum RPTs, especially when exposure of the Audite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the bank statement of CDEL with Karnataka Bank is given below: Table-3 Bank Statement of CDEL with Karnataka Bank (Rs in crores Date Name of Company Withdrawal Deposits 24.12.2018 TDL 50 TDL 50 27.12.2018 TDL 50 TDL 5 TDL 50 TDL 5 08.022019 TDL 50 11.02.2019 TDL 50 13.02.2019 TDL 50 TDL 50 It can be observed from Table no. 3 that on 24.12.2018, Rs 50 crores received from TDL was returned to TDL; on 27.12.2018 Rs 50 crores Rs 5 crores received from TDL were returned to TDL; Rs 50 crores received from TDL on 08.02.2019 was returned on 11.02.2019 to TDL; on 13.02.2019 Rs 50 crores received from TDL was returned to TDL. In respect of evergreening of loans as was apparent in CDGL, TDL and TRRDPL, the EP replied that he was not aware of alleged evergreening of loans by these companies; the Firm was not the auditor of these companies and that the auditors of these companies did not highlight any such issues. This reply is not accepted as the ET has verified this bank statement available in the Audit File. the A WP no. 3.2.4.4.2 'Review of Bank Reconciliation Statement' (Consolidated Financial Statements), We have obtained and review the bank reconciliations, We have traced the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .03.2019. CDGL again provided funds to MACEL for clearance of these cheques in FY 2019-20. The Auditors failed to detect the fraud committed through evergreening during their verification of the subsequent clearance of cheques in CDGL's bank statements. Accordingly, the auditors also failed to raise alarms about the possibility of the similar frauds in other subsidiaries of CDEL. Further, it is relevant to mention that as per CFS of CDEL, there was unusually high amount of cash and cash equivalent account balance (Rs 1453.79 crores), which was almost 20% of the total borrowing of Rs 7,060.35 crores. This represents mostly the amount of uncashed cheques used in evergreening and was additional red flag to verify bank reconciliation statements of subsidiaries, which was not done properly. Thus, it is proved that the Auditors failed to exercise due diligence and professional skepticism despite presence of a number of red flags about fraud risk. In order to hide diversion of funds to MACEL, the promoters indulged in such activities in other subsidiaries of CDEL also. The total understatement in respect of amount recoverable from MACEL was of Rs 1,706.51 crores as the amount recovera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate audit procedure to detect and report fraudulent diversion of funds. The facts enumerated clearly show that the Independent Auditor's Report falsely reported that financial statements of CDEL gave a true and fair view. It is clear that they knew that funds were being diverted to MACEL, an entity owned by promoters of CDEL and the 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, they failed to report the same to the Central Government under Section 143 (12) of the Act. On the contrary, they reported 25 that no material fraud by or on the company had been noticed or reported during the course of audit. Thus, the EP and the Firm violated section 143 (12) of the Act, the Companies (Auditors Report) Order 2016, SA 200, SA 240, SA 315, SA 330 and SA 550. It is also proved that the EQCR did not exercise due diligence and showed gross negligence during review of the significant judgements of the EP in this matter. There were clear indications of the CDEL Group activities not being conducted in an orderly manner, the auditor should have probed the matter to the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C'. As such it is misleading on the part of the Auditor to say that the money was advanced to MACEL. The Auditor did not check the bank statement of CDGL to verify the management's explanation that Rs 130.55 crores was recovered by CDGL from CCC W. Being principal auditor of the holding company, the Auditor had a right of access to these bank statements of CDGL as per permitted under section 143(1) of the Act. However, he did not do so. We have obtained and reviewed that bank statement of CDGL which shows that CDGL provided additional funds to MACEL, which were rotated seven times among CDGL, MACEL, CCC W and Kumar Hegde to show repayment of this amount. The Bank statement of CDGL and MACEL shows that on 09.05.2019, CDGL paid Rs 20 crores to MACEL, which then paid Rs 20 crores to Kumar Hegde, thereafter CDGL paid Rs 20 crores to MACEL which then paid Rs 20 crores to Kumar Hegde and so on.. .. . . . In this manner a total of Rs 135.55 crores were paid by CDGL to MACEL and by MACEL to Kumar Hegde. From these transactions, Kumar Hegde repaid the capital advance of Rs 130.55 crores to CCCW/CDGL. However. the end use of capital advance given in 2018-19 to Kumar Hegde is not kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the risk. After earmarking this item for risk assessment, the Standards- specifically, paragraph 26 of SA 240, requires the Auditors to presume the risk of fraud in revenue recognition and as per SA 315, they were required to perform risk assessment procedures. 59. The EP's response again is that the Firm was not the auditor of MACEL and thus was not aware that MACEL had not recognized interest expense; that the interest income in question was recognized in the profit loss account and cash flow statement of TDL; that the work paper referred by NFRA has only listed various streams of revenues but does not mean that the ET presumed fraud risk in each of those listed income stream. 60. This reply is not acceptable as TDL had recognized an interest income of Rs 75 crores on advance of Rs 2,614 crores given to MACEL in FY 2018-19, as compared to only Rs 1.32 crores interest income recognized in the previous year on advances of Rs 3,410 crore given to MACEL. This huge jump in interest income itself is an unusual item and above the materiality limit of Rs 28.4 crores determined by the Auditors for CFS, which should have caught the attention of a diligent Auditor. It would not be out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble - 5 Rs in crores Name of subsidiary to whom CDEL provided loans/ guarantee Amount of loans given Amount of guarantees provided Tanglin Developments Ltd (TDL) 734.46 1,015.00 Coffee Day Kabini Resorts Private Limited (CDKRPL) 1 10,67 0.00 Coffee Day Hotels and Resorts Private Limited (CDH RPL) 210.60 0.00 Total 1,055.73 1,015.00 62. The Firm, the EP, and the EQCR were also charged with failure to exercise professional skepticism to evaluate fraud risk in respect of loan of Rs 734.46 crores given by CDEL to TDL during the year as per Note 33 of SFS as mentioned above. It may be noted that TDL had given a total amount of Rs 1,929.07 crores as loan to MACEL, a conduit used to divert funds from CDEL and its subsidiaries. The EP's response to this charge was that the loan of Rs 734.46 crores given during FY 2018-19 by CDEL to TDL was utilized by TDL for repayment of its pre-existing loans/debentures, proceeds of which had been used for business activities of TDL; that he had reviewed the matter from the perspective of recoverability; that only Rs 2 crore was outstanding from TDL at the end of the year; and that therefore there was no reason to suspect diversion of funds. 63. TDL, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a special resolution in the general meeting before giving loans/advances as stated above. The Auditors did not verify whether subsidiary companies had used proceeds of loans for their principal business activities. The Audit File does not evidence audit procedures performed in respect of the guarantee provided to TDL and loan given to CDKRPL. 66. The EP in his reply stated that it was his good faith understanding (based on management explanation and representation letter) that each of these loans/guarantees were for respective business activities of TDL, CDKRPL CDH RPL therefore special resolution was not required; and he had no reason to believe that these companies would breach the end use of loan proceeds or divert the funds to MACEL. This reply itself shows the violation of professional ethics as in blindly relying on the management assertions, the Auditor has breached the faith reposed in him by the shareholders who had appointed in a fiduciary capacity to report on the management assertions. His actions not only show lack of due diligence but have led to infraction of the provisions of the law. The transaction wise reply furnished by the EP is discussed below. a) Loan of Rs 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of loan proceeds was not verified. As such the reply of the Auditor is not accepted. 67. The EQCR had also been charged with the above violations as his review suffered from the same infirmities as those that the EP was charged with. The replies of the EQCR are summarised below- (a) He stated that generally compliance matters do not require a significant judgement of the ET. This reply is not accepted as compliance matters also requires significant judgement as happened in this case and discussed in preceding paras. (b) He stated that no issue in respect of compliance with section 185 of the Act was highlighted by the ET and the EP when he reviewed CARO audit work paper; and (c) None of the Auditors of the subsidiaries of CDEL highlighted any issues on this matter. We find that the EQCR had reviewed the relevant work papers in which judgements have been made and recorded compliance with section 185 of the Act. As such his reply in this matter is not accepted. 68. Importantly, Section 185 of the Act prohibits direct or indirect advance of any loan, including any loan represented by a book debt to directors, etc. This section also imposes certain conditions i r extending loans o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er alia, the record of name of person date of performing audit procedures, name of person performing review and date extent of review. Paragraph 13 of SA 230 requires that if, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor's report, the auditor shall document: (a) The circumstances encountered; (b) The new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditor's report; and (c) When and by whom the resulting changes to audit documentation were made and reviewed. 71. During the relevant period, the Firm maintained the Audit Files electronically in e-audit application of KPMG. The e-audit application has the functionality where the preparer and reviewer can sign off Audit Work Papers. The Application allows multiple sign offs. The Application allows modification of AWP after signing off by the preparer and reviewer but does not make it necessary for the modifier to sign off the AWP again after such modification. This is not in accordance with paragraph 77 79 of SQC and 8, 9 13 of SA 230 as the name of the person who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sign-off date, and (b) the EP takes full responsibility for that occurring. The Firm replied that it has established policies and procedures designed to maintain the confidentiality, safe custody, integrity , accessibility and retrievability of engagement documentation as required under paragraph 77 and 79 of SQC l . 73. We have considered the Firm's reply and note that the Firm has acknowledged that its policies and procedures allow changes (modifications) in AWPs during the pre-archival period (between the date of the audit report and archival date); and between the document sign-off date and date of audit report. It is also undisputed that the Firm's policies and procedures did not make it mandatory for modifiers of AWPs to sign off AWPs after such modifications. The Firm's detunse is that its system provides information about modified AWPs in the forms of 'asterix' and ' diagnostic reports' to the EP, who exercises judgment on whether to re-review the modified AWPs or not. We find that there is no mandatory provision in the Firm's policies/procedures to ensure that modifiers sign off AWPs after modification. This leaves a systemic loophole in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is noted that only administrative changes are permitted by paragraph A22 of SA 230 such as deleting or discarding superseded documents; sorting, collating and cross-referencing working papers; signing off on completion checklists relating to the file assembly process; and documenting audit evidence that the auditor has obtained, discussed and agreed with the relevant members of the ET before the date ofthe auditor's report etc. In the instant case, there is no evidence about the nature of changes made in the modified documents therefore it is not possible to find out whal changes were made in the Audit File. For example, AWP no. 3.4.5.0010 'Related party WP.x1sx' (SFS) was last signed off on 20.05.2019 and modified till 27.05.2019. This AWP is an Excel file containing nine Excel sheets; and further 4 PDF documents one Excel file are embedded in this AWP. This AWP contains evidence of audit procedures performed including judgements made relating to related party transactions; compliance with section 177, 185, 186, and 188 of the Act; and compliance with SEBI (LODR) requirements etc. It is not possible to find out if only administrative changes were made in the Excel she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEL vide letter dated 01.10.2018. The powers and duties of the statutory auditors have been prescribed in Section 143 of the Act. The duties include making audit report to the members of the company after taking into account the provisions of the Act, the accounting and auditing standards (subsection 2); stating in her/his report and expressing opinion on matters listed in subsection 3; stating the reasons, if any, the matters required to be included in the audit report under this section is answered in the negative or with a qualification (subsection 4); complying with the auditing standards (subsection 9); and reporting to the Central Government matters which he believes involve the offence of fraud (subsection 12). The Independent Auditors Reports were issued on 24.05.2019 by M/S BSR Associates LLP under the signature of the EP . Therefore, the Firm was charged for all the misconducts committed by the EP and the EQCR. Paragraph 2 of SA 220 stipulates that Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC l, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort under the Act. We have proved in the previous sections of this Order that the audit report issued by the Firm ws BSR Associates LLP lacked adequate basis. Hence, apart from the individuals assigned by the Firm to carry out this audit, the Firm (as the appointed statutory auditor having the primary responsibility for the audit) is also answerable for its audit report issued under the Act, as further explained in the following paragraphs. 83. The requirements of Sub-Sections 9 and 10 of Section 143, SQC-I and SAS, which are subordinate legislations, lay down the following in clear terms: a) 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. b) Within the above framework, the individual engagement partners are personally responsible for the quality of specific engagements to which they are assigned by the firm as per its policies. 84. When a firm is appointed as an auditor under Section 139, all the responsibilities cast under the Act are primarily of the firm. As mandated by Section 132, the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uditors in response to the identified risks, advised them accordingly, and exercised due professional skepticism throughout the audit, (as required by SA 200), they could have identified the material and pervasive misstatements in the CFS. However, despite identifying and documenting evidence indicating possible misstatements, the auditors relied blindly on the component auditors. This neglect contradicts the basic objectives of an audit as outlined in Section 143 of the Act and SA 200. The lack of professional skepticism in challenging both the management and the component auditors and the failure to address contradictory evidence was apparent in significant areas of the audit. Such omissions and commissions by an experienced audit firm cannot be taken lightly, as they are detrimental to the public interest. 88. As regards to the responsibility of the Audit Firm, we note that globally also this is the accepted position. The various PCAOB (US Audit Regulator) orders underline this fact. For instance, The PCAOB 33 for charges including violations of auditing standards related to the audit of financial statements of Medicis Pharmaceutical Corporation and subsidiaries, imposed civil m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext of purchase of material, observed that The transactions between one of the Issuer 's wholly-owned Chinese subsidiaries ( Subsidiary ) and a Chinese purchasing agent ( Agent-involved the Subsidiary's transfers of loan proceeds to the Agent as prepayments to buy equipment and materials that the Agent never delivered. The loans were obtained from Chinese lenders for the purpose of making these purchases. While the Agent returned a portion of the prepayments some in unusual same-day, round-trip transfers it did not return most of them By failing to adequately respond to the known fraud risks, Marcum 's engagement team breached its duty to perform the Audits with the due professional care and professional skepticism required by PCAOB standards. The feam also failed to adequately understand the business rationale (or the lack thereof) for the significant unusual transactions and failed to obtain sufficient appropriate audit evidence to support Marcum 's opinion on the Issuer 's financial statements ' (Emphasis supplied). For this misconduct, PCAOB censured Audit firm Marcum LLP ( Marcum ); imposed a civil money penalty of $250,000 on Marcum; prohibiting Marcum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt professional skepticism the release of WIP credits (a type of client payment on account), which increased revenue; and A failure to document the auditors' reasoning, or complete their enquires with management, in relation to the retention of rebates under a contract which, on its face, appeared to require such rebates to be passed back to a client. 95. FRC in the matter of KPMG LLP and MS NICOLA QUAYLE 41 imposed financial sanction of 877,500 and 45,500 on the firm and the partner respectively for deficiencies in audit of Eddie Stobart Logistics plc. like failure to failed to obtain sufficient appropriate audit evidence in respect of revenue, and failure to properly evaluate adequacy of disclosures etc. 96. Similarly, failures to perform audit procedures and exercise professional skepticism in related party transactions 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 42 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct as defined by clause 5 of Part I 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 . This charge is proved as the Firm and the EP failed to disclose in their report the material non-compliances by the Company as explained in Section - C D above. b) The Firm and the EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 the Firm and the EP failed to disclose in the audit report the material misstatements made by the Company as explained in Section - C D above. c) The Firm, the EP and the EQCR committed professional misconduct as defined by clause 7 of Part I of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Auditors of a listed company viz., CDEL. The Auditors did not report fraudulent diversion of funds despite having enough evidence that public money was moved to a promoters' entity which had no business connection with the listed company. The Auditors put on their blinkers and when asked to explain sought refuge in the provision of SA 600, relying on the work of Auditors of the subsidiaries, while CDELs investments in these subsidiaries constituted a staggering figure of Rs 1,937 crores constituting 89% of the standalone balance sheet. This was in addition to the fact that they themselves had listed the exposure to promoter entities as a significant and important area of Audit. Providing of loans by the listed company to a related party in the garb of an advance for purchases, the amount itself being over five times the value of purchases, was not questioned by the Auditor for its business rationale. The Auditors' reliance on management explanation and using the ruse of a good faith understanding of management explanation, resulted in their having totally flayed the professional skepticism required of a prudent Auditor. 102, As detailed in this Order, substantial deficienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties of any company or body corporate. 106. This Order will be effective after 30 days from the date Of issue of this order. Footnotes 1 As defined in Rule 3 of the NFRA Rules 2018. 2 Net of cheques issued and cheques received. 3 Please refer paragraph 22 of NFRA order no.: NF-23!14/2022 dated 13.04.2023 available on NFRA website. 4 Institute Of Chartered Accountants Of vs P. K. Mukherji and Anr on 26 February, 1968, 1968 AIR 1 104, 1968 SCR (3) 330, AIR 1968 SUPREME COURT 1104. 5 AWP no. 2.14.3.1 of Audit File for SFS. 6 Section 143(2) of the Act inter alia provides that the auditor shall make a report whether financial statements give true and fair view. 7 Section 143(9) of the Act provides that Every auditor shall comply with the auditing standards. 8 Section 143(12) of the Act provides that if an auditor has reason to believe that an offence of fraud has been committed in a company, the auditor shall report the matter to the Central Government. 9 SA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing. 10 SA 240 - The Auditor s Responsibilities Relating to Fraud in an Audit of Financial Statements . 11 SA 315 I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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