9911796707
TMI Blog2024 (12) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... ('FY' hereafter) 2019-20. The Firm and the EP are collectively called as 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 D. Omission and Commission by the Audit Firm E. Finding on the Articles of Charges of Professional Misconduct F. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA suo moto examined the professional conduct of the statutory auditors of Coffee Day Enterprises Limited under Section 132(4) of the Companies Act 2013 ('the Act' hereafter), pursuant to the Securities and Exchange Board of India ('SEBI' hereafter) shared its investigation report regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL. Coffee Day Enterprises Limited is listed on stock exchanges. A Show Cause Notice was issued to to Mis Venkatesh & Co., the auditor for the FY 2019-20; CA Dasaraty V., the EP for the audit engagement and CA Desikan G, the EQCR. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors also failed to perform any audit procedure to verify whether CDEL passed special resolution in the general meeting before giving loan of Rs 1,841.46 crores and guarantee of Rs 100 crores to subsidiaries. They also failed to verify whether loan taken by subsidiaries from CDEL and money raised by the subsidiary on the strength of CDEL's guarantee were used for the principal business activity ofthese subsidiaries (Section C-11 of this order). 5.3 The Auditors accepted this audit engagement as statutory auditor of CDEL from FY 2019- 20 without first performing mandatory procedures and started audit activities even before obtaining no objection certificate from the resigning auditor (Section C-111 of this order). 5.4 The Auditors failed to exercise due diligence and were grossly negligent in preparation of the Independent Auditor's Reports by giving contradicting opinions, wrongly including Key Audit Matter in the Audit Reports despite disclaiming audit opinions, and wrongly included Emphasis of Matter paragraph in respect of the matters not presented and disclosed in the financial statements. (Section C-IV of this order). 5.5 The EQCR failed to perform an engagement q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 139 of the Act. The Statutory Auditors, including the EP and the Engagement Team ('ET' hereafter) that conduct the Audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing ('SA' hereafter), including the Standards on Quality Control ('SQC' hereafter) and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalty prescribed under section 132 (4) (c) of the Act. 9. NFRA started its scrutiny, on receipt of information from SEBI in April 2022 about its investigation regarding the diversion of funds worth Rs 3,535 crores (as on 31-07-2019) from seven subsidiary companies of CDEL to MACEL, an entity owned and controlled by the promoters of CDEL. 10. Late V. G. Siddhartha ('VGS' hereafter) was Chairman & Managing Director of CDEL; and Late S.V. Gangaiah Hegde, father of VGS was holding 91.75% shares of MACEL during relevant period. 11. As per the investigation made by the SEBI and examination by NFRA, the outstanding balance payable by MACEL to subsidiary companies of CDEL, which represented the funds diverted from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate bank balance or approved bank credit limit to support these cheques. These cheques were later shown as cleared in the next financial year, i.e., FY 2019-20 (year of audit in this case) by evergreening loans/advances by CDEL's subsidiaries through orchestrated circulation of funds among related parties). 12. The linkage of the entities described in Table-1 is depicted in the Chart -1 given below: 13. The examination of the Consolidated Financial Statements of CDEL and financial statements of MACEL, shows 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 accounts of VGS, his relatives and entities controlled by him and/or his family members, as loans and advances that were never returned to CDEL/MACEL. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Audit File and other materials on record, each of which was shared with the noticees, a Show Cause Notice ('SCN' hereafter) dated 17.01.2024 under section 132(4) of the Act, was issued and served upon the Auditors, charging them with the following professional misconducts a) Failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where the Statutory Auditors are concerned with that financial statement in a professional capacity. b) Failure to report a material misstatement known to 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. f) Failure to first communicate wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans to them constituted 97% of the SFS balance sheet, which had a total size of Rs 3,711 crores. 21. We note that the Auditors gave a Disclaimer of Audit Opinion on CFS, on the basis of inter alia not obtaining audit evidence about appropriateness of transactions with MACEL and recoverability of Rs 3,512 crores from MACEL, a promoter entity. It is important to note that following the suicide of CDEL's Chairman (VGS), in July 2019, an investigation led by a former CBI official and Agastya Legal LLP uncovered significant financial irregularities like questionable loans to MACEL, understated balances, the use of pre-signed cheques, and diversion of funds for the private investments of promoters. The Auditors had access to this investigation report dated 24.07.2020 which clearly detailed the irregularities in CDEL's financial statements. Specifically, the substantial loans and advances extended to a promoter entity, purportedly for supply of goods, were disproportionately high (110 times) of the value of goods purchased. Additionally, CDEL and its subsidiaries engaged in large-scale evergreening of loans by circulating funds among group companies to mask the diversion of fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied by CDEL to the Firm did not give any reason to believe that any fraudulent transactions had occurred in CDEL. c) They had given disclaimer of opinion in their audit report demonstrating exercise of professional skepticism and judgement. d) There was no failure on their part to evaluate fraud risk in CDEL. There was no diversion of funds from CDEL and funds were allegedly diverted from subsidiaries of CDEL. Source of lending by subsidiaries of CDEL to MACEL was not CDEL. e) They had no obligation to evaluate fraud risk in any of the group companies other than CDEL. f) They had no access to the books of subsidiaries of CDEL audited by other auditors. g) They had communicated with TCWG (TCWG) - Those Charged With Governance, Audit Committee and management about these transactions. h) Disclaimer of opinions given by Auditors of subsidiaries of CDEL had been incorporated by them in consolidated audit report as per Guidance Note of ICAI regarding reporting of fraud u/s 143(12) of the Act Guidance note of ICAI is not mandatory. i) While responding to the charge relating to evergreening of loans, they admitted the occurrence of various transactions between CDGL and MAG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the books of accounts and other records of the said component. The large quantum of funds given to MACEL is given in Table 2 above. Further, the investigation report of Mr. Ashok Kumar Malhotra and Agastya Legal LLP available to the Auditors, clearly highlighted several red flags like unusual movement of funds from subsidiaries of CDEL to MACEL without any commercial sense, evergreening of loans, signing of blank cheques etc. Further, SFS of CDEL show investments of Rs 1,866 crores in its subsidiaries and Loans of Rs 1751 crore to its subsidiaries. These investments and loans were 97% of the SFS balance sheet size of Rs 3,711 crores which was under full scope of audit by the Auditors. These subsidiaries provided unusual loans to promoter group entity. It is critical to note that the proviso to section 143(1) of the Act gives an auditor right of access to the records of all subsidiaries and associates of a holding company. Accordingly, the principal 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. Therefore. we do not agree with the Auditors defen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than Rs 10 lacs be advanced gargantuan sums of money aggregating to several Crores of rupees, while the legality of these transactions may well and truly be unquestionable, the fact of the matter remains that these transactions did not make any commercial sense to us. In retrospect, an analysis of the transaction between the Company and its subsidiaries on one hand and MACEL on the other, clearly brings about the fact that these transactions though couched in all legalities, disclosure norms and meeting the imperial standards of all regulations probably did not meet the simple test of commercial expediency". (Emphasis added). Despite such a clear report in hand, the Auditors did not evaluate fraud risk and thus failed to comply with the above SAs in respect of loans and supplier advance given to MACEL by subsidiaries of CDEL. The Auditors' stand that they had no obligation to assess fraud risk related to these transactions, is also contradictory to the Audit report and audit work papers. The Auditors' disclaimer of opinion stating that they were "unable to comment on the appropriateness of the transactions" clearly shows that they wanted to obtain audit evidence regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) Further, according to CDEL's Standalone Financial Statements, the company extended loans totaling Rs 1,832.02 crores to its subsidiary, Tanglin Developments Ltd. (TDL), with Rs 1,746.10 crores outstanding as of 31.03.2020. The financial statements of TDL indicate that: (a) Rs 609 crores was recoverable from MACEL; (b) Rs 511 crores were recoverable from GVIL (GVIL) - Giri Vidhyut (India) Limited, a subsidiary of TDL, which is a subsidiary of CDEL, which in tum was to recover Rs 370 crores from MACEL; (c) Rs 954.26 crores were recoverable from TRRDPL (TRRDPL) - Tanglin Retail Reality Developments Private Ltd, a subsidiary of a subsidiary of TDL, which is a subsidiary of CDEL, which was to recover Rs 1.050.31 crores from MACEL As per financial statements of TRRDPL. Further, CDGL (CDGL)- Coffee Day Global Ltd, a subsidiary of CDEL had a recoverable amount of Rs 1,222.60 crores from MACEL. The above details clearly indicate that CDEL's funds were channeled to MACEL through various layers of subsidiaries. As mentioned in paragraph 24(a) of this Order, section 143(1) of the Act allows the Auditor right of access to the books of accounts and records of all these subsidiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted in Aug 2020. The Auditors had access to this investigation report which contained clear details about diversion of funds to promoter entity without commercial sense, evergreening of loans and signing of blank cheques. The Auditors performed audit for four months and issued audit report on 25.11.2020. Thus, they had four months to evaluate fraud and communicate with Those Charged With Governance (TCWG), the Audit Committee and Management regarding the suspicious fraudulent transactions. SA 260 (Communication with Those Charged with Governance) required the Auditors to communicate with TCWG at planning stage about inter alia the significant risks identified by them (paragraph 15); significant matters arising during the audit [paragraph 16 (c & e)]; and to communicate with TCWG on timely basis (paragraph 21). The Auditors did not communicate with TCWG during four months of the audit period but only communicated on 25.11.2020 i.e. the date of signing of the audit report. The Auditors replied that Disclaimer of Opinions given by component auditors were highlighted in the presentation given to TCWG and reply thereon was obtained from the management; and queries were made regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the investigation report by Mr. Ashok Kumar Malhotra. Despite this, the Auditors failed to apply adequate professional skepticism and did not examine the bank statements of these subsidiaries, particularly those with significant transactions. The reply of the Auditors that evergreening happened in subsidiaries only and not in CDEL, is very concerning. By stating this the Auditors are absolving themselves of any action due on their part when there is a report of an inquiry done at the behest of the Auditee company, wherein evergreening in the groups accounts is proved. This is tantamount to the Auditors refusing to see the result of an inquiry directly implicating the accounts they have consolidated. It is noted that as per proviso to section 143(1) of the Act, the Auditors had the right of access to the records of subsidiaries. Further, as per para 10 of SA 600, this was a special circumstance to verify bank statements of subsidiaries as red flag of evergreening was available in the investigation report mentioned above. But the Auditors chose to remain silent on this issue. This clearly shows an obstinate refusal to deal \Vith the issue thereby establishing their gross neglig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignificant loss to the shareholders ofa listed company, the Auditors did not perform their statutory duty diligently and were then seeking refuge under SA 600. It is important to note that any loss to a holding company on account of any fraudulent transaction in a subsidiary, is ultimately borne by the stakeholders of the holding company who solely rely on the auditor of the holding company. In many cases financial statements of subsidiaries are not available in public domain. Thus, it is all the more the responsibility of the auditor of the holding company to exercise scepticism, more so in such a case where there are sufficient red flags indicating fraud. 28. Responding to the charge relating to the failure to report this fraud to the Central Government under section 143(12) of the Act, the EP replied that he acted as per guidance note issued by ICAI on reporting of fraud by the statutory auditors, according to which the auditor of parent company is not required to report on the fraud in the subsidiaries if the same has not been reported by the statutory auditors of subsidiaries. It is evident that the fraud had been committed in the CDEL itself as proved in paragraph 24 (e) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. It is also evident from above analysis that despite having adequate evidence that an offence of fraud had been committed in the company, the Auditors failed to evaluate and report the fraud to the Central Government under Section 143 (12) of the Act. On the contrary, they reported Para X of Annexure -A (CARO report) of Independent Auditor's Report dated 25.11.2020 on SFS that no material fraud by or on the company had been noticed or reported during the course of audit. Accordingly, the charge that the Auditors had violated section 143 (12) of the Act, the Companies (Auditors Report) Order 2016, SA 200, SA 240, SA 315, SA 330 and SA 550 stands proved. 31. Notwithstanding the above, it is important to note that the Auditors had given a Disclaimer of Opinion on the basis of inability to obtain sufficient appropriate audit evidence in respect of inter alia appropriateness of the transactions with MACEL and recoverability of money from MACEL. A Disclaimer of Opinion is to be given when the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatements (paragraph 6 of SA 705 - Modificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees, security, whether provisions of sections 185 of the Companies Act have been complied with, giving details thereof in case of non-compliance. In this case, the Auditors reported that the Company has complied with the provisions of Section 185 of the Act with respect to loans advanced and investments made and securities and guarantees given. b) Section 185(2) of the Act provides that: "A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that- (a) a special resolution is passed by the company in general meeting: Provided that ; and (b) the loans are utilised by the borrowing company for its principal business activities. Explanation-For the purposes of this sub-section, the expression "any person in whom any of the director of the company is interested" means- (a) ;or (b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commission etc., but this work paper does not have evidence that the Auditors had verified whether CDEL passed special resolution before providing guarantee and whether CDH&RPL had utilised the proceeds of loans for its principal business activities. Thus, the Auditors' reply on this part of the charge is also not accepted. 35. In view of the above, it is proved that the Auditors did not exercise due diligence and wrongly reported that CDEL had complied with section 185 of the Act, and thus violated CARO. III. Lapses in acceptance of audit engagement (This matter pertains to SFS as well as CFS) 36. The Auditors were charged that they had accepted this audit engagement as statutory auditor of CDEL from FY 2019-20 without performing mandatory audit procedures and without first communicating with resigning auditor, thus they were charged to have violated para 28(a) and 29 of SQC 1 (SQC) I - Standard on Quality Control (SQC) I -Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements, para 12 of SA 220 (SA 220) - Quality Control for an Audit of Financial Statements and para 12 & A21 of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is not a common template but the Auditors had recorded on 01.08.2020 in this AWP that they had obtained documents relating to 18 specific requirements like financial statements with detailed sub-schedules and trial balances for the year ended 31st March 2019 and three quarters of FY 2019-20; books of accounts in SAP/ERP/tally/in - house software etc.; details of related party transactions with concerned; to enable remote access to books of accounts for auditors with separate login credentials; and financials of subsidiaries etc. They had also obtained documents about 12 general requirements like memorandum and article of association; particulars board of directors; PAN, TAN, GST registration certificates of HO and branches etc.; internal audit reports for Ql of FY 2019-20; and standard operating procedures / accounting manual. Therefore, the Auditors reply is not correct that this document contain only basic requirements, in fact they had started the audit on 01.08.2020. * On 03.08.2020, CDEL intimated the Auditors about their proposal to appoint the Firm as statutory auditor of CDEL from FY 2019-20. * On 04.08.2020, the Auditors wrote to the outgoing auditor seeking their no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s Report". and para 8 (a) & 9 (c) of SA 706 (SA 706) - "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report". due to following- a) In the Disclaimer of opinion section, they reported that they were unable to obtain Sufficient Appropriate Audit Evidence (SAAE), whereas in the Auditor's responsibilities sections, they reported that they obtained SAAE, which are contradictory; b) They had given 'Disclaimer of Opinion'; as well as the 'Key Audit Matter' (KAM) in the Independent Auditor's Reports on both, the Standalone Financial Statements (SFS) and Consolidated Financial Statements (CFS). But as per the provisions of SA 705, KAM is not allowed if auditor disclaims audit opinion; c) In the 'Emphasis of Matters' (EOM) paragraphs, they had reported on matters which were neither presented nor disclosed in the financial statements whereas an EOM paragraph on such matters is not permitted as per SA 706; and d) They had given disclaimer of opinion in the Independent Auditor's Reports on SFS and CFS as they could not obtain SAAE, but their audit report starts with the phrase "we have audited ... ", w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harge relating to wrong reporting of KAM in respect of the matters included in the Disclaimer of Opinion section of the audit report but stated that the intention behind including KAM in the audit report was to highlight the issues of magnitude that had come up during the audit. This reply is not accepted in view of para 29 of SA 705 which states that: "Unless required by law or regulation, when the auditor disclaims an opinion on the financial statements, the auditor's report shall not include a Key Audit Matters section in accordance with SA 701 or an Other Information section in accordance with SA 720 (Revised). " The logic for such provision is explained in para A26 of SA 705 that "Providing the reasons for the auditor's inability to obtain sufficient appropriate audit evidence within the Basis for Disclaimer of Opinion section of the auditor's report provides useful information to users in understanding why the auditor has disclaimed an opinion on the financial statements and may further guard against inappropriate reliance on them. However, communication of any key audit matters other than the matter(s) giving rise to the disclaimer of opinion may suggest that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... includes an Emphasis of Matter paragraph in the auditor's report, the auditor shall indicate that the auditor's opinion is not modified in respect of the matter emphasized. " The 'Emphasis of Matter' sections of the Independent Auditor's Reports has 4 points in SFS and 11 points in CFS. On EOM section, it is found that following matters were not presented or disclosed in SFS/CFS, therefore EOM paragraph on these issues in the Auditors' report was not appropriate: * Independent Auditor's Report on SFS - Point (a) of EOM section pertains to Rs 3,535 crores recoverable from MACEL and point (c) of EOM section pertains to a notice received from Registrar of Companies Karnataka. * Independent Auditor's Report on CFS - Point (1) of EOM section pertains a notice received from Registrar of Companies Karnataka. Further in respect of both the audit reports (SFS & CFS), the auditors did not indicate that the audit opinions were not modified in respect of the matters emphasized. d) In respect of the charge relating to wrong mentioning of the phares "we have audited " in the audit report despite giving Disclaimer of Opinion, the Auditors replied that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Documentation of the Engagement Quality Control Review. Further, paras 19 to 21 of SA 220 provides prescriptions about the responsibilities of EP and EQCR regarding engagement quality control review. 48. It may be noted that the EQCR did not give specific reply to the charges mentioned at points I to IV above. However, while denying this charge, the Firm, the EP and the EQCR have stated that the approach of the Firm towards EQCR as mentioned in their quality control manual was complied with and EQCR had gone through the relevant working papers and discussed with the EP to arrive at the appropriateness of the conclusions. 49. This reply is not accepted as the violations and non-compliances with the Act and SAs, as proved in this Order, had not been pointed out by the EQCR. The EQCR is bound to perform an objective evaluation of the significant judgments made by the engagement team, and the conclusions reached in formulating the auditor's report. However, the same is not done in this case. This proves that the EQCR failed to highlight the significant non-compliances with the requirements of the Act and SAs. 50. Further, on perusal of the Audit File, no evidence was found of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon, is dated after the date on which the Audit report was signed. This proves that the audit report was issued without completion of EQCR review. This has posed a significant challenge for the audit process. The primary concern is that this discrepancy in timing has raised questions about the reliability of the audit. The review by EQCR must be completed before the issuance of the audit report to ensure that any issues identified are addressed promptly and that the final audit opinion reflects the highest standards of quality and accuracy. In this case, the EQCR certificate is delayed and therefore, raises questions on credibility of the audit as to whether the audit was conducted in full accordance with professional standards. Para 19 of the SA 220 states that the EP shall not date the auditor's report until the completion of the engagement quality control review. It was essential for the Firm also to establish robust procedures that ensure the timely completion of the review by the EQCR, thereby reinforcing the reliability of the audit outcomes and maintaining stakeholder confidence. 54. From the above, it is proved that the Firm violated paragraphs 60 to 73 of SQC 1 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (b) The reports issued by the firm or engagement partners are appropriate in the circumstances. * SQC 1 establishes standards and provides guidance regarding a firm's responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related service engagements. Paragraph 5 of SQC 1 says that the SQC l applies to all firms. 59. The requirements of Sub-Sections 9 and l O of Section 143 of the Act; and SQC-1 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. 60. When a firm is appointed as an auditor under Section 139, all the responsibilities cast under the Act are primarily on the firm. As mandated by Section 132, the responsibility o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by SA 200), they could have identified and reported fraud in this case. However, despite having information about fraudulent transactions, the Auditors did not evaluate fraud risk. This negligent approach contradicts the basic objectives ofan audit as outlined in Section 143 of the Act and SA 200. The lack of professional skepticism in challenging the management about clearly visible fraud is not expected from an auditor of a listed company. Such omissions and commissions by an experienced audit firm cannot be taken lightly, as these are detrimental to the public interest. 64. 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, for charges including violations of auditing standards related to the audit of financial statements of Medicis Pharmaceutical Corporation and subsidiaries, imposed civil money penalties of $2,000,000 to the firm Ernst & Young LLP, $50,000 to Jeffrey S. Anderson, the Partner with final responsibility of the subject matter audit engagement, $25,000 to Robert H. Thibault, the independent review partner, and $25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This contention is not logical as an auditor is required to comply with Laws and auditing standards even if he disclaims his opinion. More specifically, SA 705 has prescriptions about procedures to be performed even while disclaiming an audit opinion one of which is given in para 27 of SA 705 that "Even 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'. Further, the Auditors were required to comply with section 143(12) of the Act and CARO even in case of disclaimer of opinion. 68. Similar misconducts have been viewed seriously at international level as detailed below. a) The PCAOB (PCAOB) Release No. 105-2020-012 and PCAOB Release No. 105 2020-013 both dated 24.09.2020 in matters of diversion of funds to related parties on the pretext 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") ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary Cases - decided on 13th, 14th & 15th September 1973). Of ICAI, where a chartered accountant commenced the work of audit on the very day he sent a letter to the previous auditor the Disciplinary Council of ICAI had held that he was guilty of professional misconduct. The appointment could be accepted only when the outgoing auditor does not respond within a reasonable time. In another case As per the decision cited in the Code of Ethics 2009, issued by ICAI (P.P. Sangani in Re: Page 356 of Vol.VI I (2) of Disciplinary Cases - Council's decision at 7th to 9th March, 1991 - Judgement dated l 0th August, 1994, the Council found a chartered accountant guilty of professional misconduct because he commenced the audit without waiting for a reasonable time for a reply from the previous auditor. d) PCAOB (PCAOB) release no 105 2015 001 dated 12.01.2015., charged Grant L. Hardy (CPA) for his failure in connection with his role as Engagement Quality Reviewer in the audit of financial statements of some of the issuer clients and noted that "Hardy violated PCAOB Auditing Standard No. 7, Engagement Quality Review ("AS 7'') by providing his concurring approval of issuance without p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained in Section - C - I above. c) 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 funds to promoter entity & evergreening of loans by circulation of funds, and failed to perform engagement quality control review etc., as explained in Section - C and D above. d) The Firm and the EP committed professional misconduct as defined by clause 8 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 obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned complete details of diversion of funds. This investigation report inter alia detailed out the advance of huge amount of loans to promoter entity without commercial sense; evergreening of loans; and the fact that VGS kept pre-signed blank cheques of CDEL's subsidiaries to facilitate diversion of funds and evergreening of loans etc. Despite having all material on record and having access of books of accounts and records of all subsidiaries of CDEL, the Auditors did little in terms of audit procedures to alleviate the risk of material misstatements and fraud. They deliberately chose to shy away from discharging their statutory duty to report the fraud and to protect the public interest. 72. As detailed in this Order, substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of the Auditors and EQCR establish their professional misconduct due to lack of due diligence; and gross negligence. Despite being qualified professionals, the Auditors and EQCR have not adhered to the Standards and have thus not discharged the statutory duty cast upon them. 73. Section 132(4)(c) of the Companies Act 2013 provides that National Financial Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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