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TMI Blog2024 (12) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... P has committed professional misconduct as defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below: a. The EP committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct of his professional duties. (refer to Clause 7 of Part I of the Second Schedule of the CA Act). b. The EP committed professional misconduct by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the audit engagement (refer to Clause 9 of Part I of the Second Schedule of the CA Act). Penalty and sanctions - HELD THAT:- Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law - Absent a robust system of auditing, investors, creditors and other users of Financial Statements would be handicapped and their interest compromised. The best of systems fails if the professionals implementing the sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... despite existence of several indicators of fraud. ii. Obtain sufficient appropriate audit evidence (SAAE) in the audit of valuation of UIL's investments in two fellow subsidiaries, namely UIL Singapore Pte Ltd and UIL Hong Kong Ltd and another company, UGFL. The EP relied on the valuation report of the management's expert without challenging the assumptions and methods and without independently assessing the impairment requirements of these investments, even though the valuation expert had stated that he had not carried out any due diligence, nor had he independently verified the data provided. iii. Comply with Para 9 of SA 230 ( SA 230), Audit Documentation as there were deficiencies in the audit working papers such as lack of authentication by preparer, undated signatures of EP and some working papers prepared by a person who was not member of the ET and who had not even given the independence declaration required of him. iv. Report the non-compliances with Ind AS 16 Indian Accounting Standard (Ind AS) 16 Property, Plant and Equipment which requires that the Financial Statements shall disclose the existence and amounts of restrictions on title, and property, plant and equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock Exchange (BSE). The EP took up the audit assignment vide Engagement Letter dated 13.09.2017. The company went into insolvency proceedings under IBC, 2016 Insolvency and Bankruptcy Code, 2016 vide NCLT National Company Law Tribunal , Mumbai Bench Order dated 14.05.2018. The EP issued a Disclaimer of Opinion both on the Financial Statements and on the Internal Financial Controls over Financial Reporting (ICOFR) in his audit report dated 25.07.2018. 10. The information sent by CEIB indicated that an FIR dated 05.07.2022 had been registered by Central Bureau of Investigation (CBI) against UIL, based on a complaint from SBI dated 09.12.2020 relating to bank fraud, which involves violation of Companies Act, 2013, manipulation of books of accounts/financials, submission of fake/forged/fabricated Financial Statements before banks to avail credit facilities. According to the FIR, as on June 2015, the total credit facilities given to UIL by a consortium of 15 banks led by SBI stood at Rs. 2630 Crores (approx.) which was classified as NPA subsequently. While the company defaulted in its payment obligations to banks, the debtors of the company too defaulted and a provision of Rs. 2,859.69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, written responses of the EP and submissions made during the personal hearing. Each of the charges in the SCN is analysed and discussed below. However, before these are discussed, a general point raised by EP questioning the rationale for the SCN when he had issued a Disclaimer, must be addressed. 14. While audit of Financial Statements of companies under the Companies Act 2013 is conducted primarily to express an opinion on the Financial Statements by conducting the audit in accordance with the SAs prescribed u/s 143 (10), the auditor also has other reporting obligations under the Companies Act 2013, for example: - a. Reporting to MCA in relation to frauds under Section 143 (12) b. CARO Report under Section 143 (11) which has many additional reporting obligations including matters relating to frauds, related parties, compliance with Companies Act, 2013 provisions regarding loans, investments, guarantees etc., and companies internal audit system and so on. c. Other reporting obligations under Section 143 (1) (a) to (f) and 143 (3) of the Companies Act, 2013, for example, Independent Auditor's opinion on adequacy and operating effectiveness of the internal financial controls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom Rs. 2301 Crores was booked as ECL, accounting for approximately 80% of the total ECL on Trade Receivables booked during FY 2017-18. It was also alleged that fresh sales totalling to Rs. 53 Crores approx. were made during the FY 2017-18 to the same parties that were in default for one to three years, but the EP did not question the rationale for the same. The details of such sales are given below: Table 1 S.No Name of the Party Outstanding Amount as on 31.03.2018 Ageing Bucket Sale made during 2017-18 1 Minecraft Limited (Foreign) 264.00 1-3 years 19.37 2 New Alloys Trading Pte Ltd (Foreign) 206.00 1-3 years 7.17 3 New Zone Intertrade Fze (Foreign) 234.00 1-3 years 21.8 4 Healus India Private Limited (Domestic) 9.53 1-2 years 4.72 Total 53.06 18. The EP in his reply to the SCN submitted that the provision had been made because the Trade Receivables and advances to vendors for purchase of steel had not been recovered for more than 2 years and there were minimal chances of recovery; that making a provision for the amounts, recovery of which was doubtful, was not a fraud; that the EP in his professional judgement concluded that there was no fraud risk while performing risk of mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... major foreign parties accounting for 80% of the total ECL on Trade Receivables, the EP submitted that he had carried out procedures viz., balance confirmation of major parties, background search of parties and had reviewed the follow-up actions taken by the company viz., letters/ emails sent, and documents of legal actions taken by the company. However, we did not find sufficient evidence in the Audit File to show that the EP had done even the existence checking for the 17 major foreign parties. Considering that these 17 major foreign parties constituted approximately 80% of the total ECL provision on Trade Receivables for the FY 2017-18, the EP ought to have shown skepticism and should have ascertained at least the existence of such foreign parties in order to rule out fraud. 22. As regards the charge regarding fresh sales of Rs. 53 Crores made during FY 2017-18 to the defaulting parties, which was another red flag indicating possible fraud, the EP only stated that there were certain collections during the year from such parties, without giving any details. However, the EP remained silent on the rationale for fresh sales of Rs. 53 Crores during FY 2017-18 to the defaulting partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26 Crores in these three entities which accounted for approximately 8% of its Balance Sheet size as on 31.03.2018. The EP was charged for not evaluating whether the management's expert Report on Valuation of Investments by CA Vivek Newatia (ICAI M.no.062636) who prepared the report on valuation of investments, had appropriate and adequate expertise in the domain of fair valuation; and for relying on valuation report and the assumptions and method used without questioning the same. The EP was also charged for not evaluating whether there was any requirement for impairment in the investment made by UIL in these companies. 26. The EP replied that the management's expert was a Registered Valuer and had expertise in business consultancy which the EP stated included the valuation related expertise; that the AWP also documents that the audit firm (of the management's expert) offered services of business consultancy, however, there is no document supporting the valuation related expertise of the management's expert, CA Vivek Newatia. In respect of valuation of investments in UIL Singapore Pte Ltd. and UIL Hongkong Ltd., the EP replied that since both companies were engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed below: 'We have used the data as per the latest available financial statements of the companies for the purpose of relative valuation of their equity shares. Name of the company UIL (Singapore Ptd. Ltd.) UIL Hong Kong Limited Uttam Galva Ferrous Ltd. As at 31/03/2018 30/09/2017 31/03/2017 Nature of Financial Statements Provisional Provisional Audited Currency US$ US$ INR Share Capital Reserves Surplus 3,22,15,000 4,72,38,572 3,21,32,528 4,81,74,774 2,22,51,48,000 63,84,06,092 Net Worth 7,94,53,572 8,03,07,302 2,86,35,54,092 No. of Equity Shares Net Asset Value Exchange Rate 10,27,97,982 0.77 65.07 71,94,18,000 0.11 65.41 22,25,14,800 12.87 Net Asset Value (INR) 50.30 7.30 12.87 On the basis of such working the relative fair value per share of the companies on the Valuation Date- (i) Mis UILSPL-Rs. 50.30 per share (ii) Mis UILHKL-Rs. 7.30 per share (iii) Mis UGFL-Rs. 12. 87 per share. ' 30. As can be seen from the above, management's expert performed the valuation on the basis of the net worth figure without any evidence whether he had done sufficient work in identifying the nature and condition of the underlying assets of these companies and their recoverable va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Documentation SA 230 34. The EP was charged with failure to comply with Para 9 of SA 230 which requires that in documenting the nature, timing and extent of audit procedures performed, the auditor shall record the identifying characteristics of the specific items or matters tested; who performed the audit work and the date such work was completed; and who reviewed the audit work performed and the date and extent of such review. The deficiencies noted in the Audit Working Paper included: no authentication by preparer, no date affixed by EP with his signature and authentication by person who was not a member of the ET. The role of EP in reviewing the working papers is not evidenced in the Audit Working Papers as they do not have the authentication by the EP. Further, in view of the fact that audit documentation was prepared by a person who was not a member (Hitesh Sevada) of the ET for 2017-18, the integrity of the Audit File is questionable and also indicated possible tampering before submission to NFRA. 35. The EP submitted that the AWPs have been prepared, compiled and documented with due diligence as mentioned in Para 9 of SA 230. However, inadvertently in some cases the prepare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment were reviewed by him is incorrect. Further, the preparation of working papers by a person (Hitesh Sevada) in respect of whom independence confirmation is also not available in the Audit File, is a serious lapse on part of the EP. We therefore find that the EP violated Para 9 of SA 230. 38. Such lapses are viewed seriously by other regulators also. In its order dated 19.03.2019 in the matter of Bharat Parikh Associates Chartered Accountants, the US audit regulator PCAOB took a serious view of the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB order states that Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to: (a) understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, and (b) determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review the documentation for each of those audits was insufficient to demonstrate the nature, timing, extent, and results of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eports of the PPE which are part of the Audit File, the BP evidently failed to report non-disclosure of these restrictions in its Financial Statements. Therefore, it is evident that BP failed to exercise due diligence in the audit of the disclosures w.r.t Ind AS 16 Property, Plant and Equipment. 42. The BP was also charged for not pointing out the non-compliances by the company in respect of Para 35 of Ind AS 107 as there are no disclosures in the Financial Statements regarding credit risk exposure of trade receivable i.e., provision matrix used, the loss allowance percentage used and the loss allowance against each past due bucket and other risk evaluation tools. The BP stated that he had given a Disclaimer of Opinion in respect of Trade Receivables and ECL provisioning. Accordingly, we are not proceeding further with the charge. C.5. Internal Financial Control over Financial Reporting 43. The EP was charged for non-compliance with Section 143(3)(i) of the Companies Act, 2013 for not giving a proper basis for the Disclaimer of Opinion issued on the Internal Financial Control over Financial Reporting (ICoFR). The EP in the Annexure-B to the Independent Auditor's Report i.e., th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that ET will be more diligent and cautious in future to ensure additional disclosures are made in the Financial Statements. 47. We find that the disclosure was inadequate for the users of the Financial Statements. However, in view of the reply of the EP and his admission to be more cautious in future, we are inclined not to proceed further with the charge. C.7 Accounting Estimates SA 540 SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates. and Related Disclosures 48. The EP was charged with not reporting non-provisioning for advance of Rs. 39.80 Crore under 'Advance recoverable in cash or kind or for value to be received'. This included an amount of Rs. 39.53 Crores due from Wind world (India) Limited which was undergoing voluntary liquidation under IBC, 2016. However, in view of the explanation furnished by the EP that he had given a Disclaimer of Opinion on the recoverability of the loans advances, we are not proceeding further with this charge. C.8 Non-Compliances with Other SAs 49. The EP was charged with noncompliance with SA 220 (SA 220), Quality Control for an Audit of Financial Statements ; Para 13 of SA 250 (SA 250), Consideration of La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely result in a breakdown in trust and confidence of investors and the public at large. 54. The EP in the present case was required to ensure compliance with SAs and requirements of the Act to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this Order, in spite of issuing a Disclaimer of Opinion, deficiencies in the audit on the part of CA Chirag Doshi establishes his professional misconduct. Despite being a qualified professional, CA Chirag Doshi has not adhered to the Standards and requirements of the Act and has thus not discharged the duty cast upon him. 55. As information provided by the auditor, CA Chirag Doshi received a remuneration of Rs . and a share of profit of Rs for FY 2017-18, however the EP did not receive any specific remuneration from the statutory audit of UIL for the FY 2017-18. 56. The professional misconduct of CA Chirag Doshi has been detailed in the foregoing paragraphs of this Order. Considering the professional misconducts have been proved and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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