9911796707
TMI Blog2024 (12) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... not adequate evidence of effective supervision and oversight by Mis Venkatesh Co. Providing the ET with a quality policy and tools are not good enough to establish effective supervision as envisaged in SQC-1. Had the Audit Firm discharged its supervisory responsibilities timely and effectively such major lapses in the audit could have been avoided. Therefore, Mis Venkatesh Co. is responsible for the misconducts committed by the EP and EQCR. Due to these fraudulent transactions the consolidated financial statements of CDEL were grossly misstated. The Auditors in audit reports issued by the Audit Firm had disclaimed the opinion. Their contention about disclaiming the audit opinion is not logical as an auditor is required to comply with Laws and auditing standards even if he disclaims his opinion. Further, the Auditors were required to comply with section 143(12) of the Act and CARO even in case of Disclaimer of Opinion - 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dasaraty V.; and Rs Five lakhs upon CA Desikan G. In addition, CA Dasaraty V. and CA Desikan G are debarred for a period of Ten years and Five years respectively from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. - DR PRAVEEN KUMAR TIWARI FULL-TIME MEMBER, DR AJAY BHUSHAN PRASAD PANDEY CHAIRPERSON AND SMITA JHINGRAN FULL-TIME MEMBER Order In the matter of Mis Venkatesh Co., CA Dasaraty V. and CA Desikan G., u/s 132 (4) (c) of the Companies Act, 2013. 1. This Order disposes of the Show Cause Notice ('SCN' hereafter) no. NF- 23/1412022 dated 17.01.2024 issued to Mis Venkatesh Co., Chartered Accountants, Firm No: 004636S ('Firm' hereafter), an audit firm registered with the Institute of Chartered Accountants of lndia ('ICAI' hereafter), CA Dasaraty V. ICAI Membership No-026336 ('EP' hereafter) and CA Desikan G. ICAI Membership No- 219101 ('EQCR' hereafter), who are members of ICAI and were members of Engagement Team for the statutory audit of Coffee Day Enterprises Limited ('CDEL' her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Auditors for the FY 2019-20 inter alia ignored all the red flags of frauds available in the above stated investigation report and chose not to exercise statutory access to the books of accounts and records of CDEL's subsidiaries. Further, there were many red flags in the CFS, which were ignored by the Auditors. They failed to meet the relevant requirements of the Standards on Auditing ('SA' hereafter) and provisions of the Companies Act 2013 and also demonstrated a serious lapse and absence of due diligence on the part of the Auditors and EQCR in following matters. 5.1 The Auditors failed to exercise professional judgement skepticism, thus failed to evaluate fraud risk during audit of (a) fraudulent diversion of Rs 3,512 crores through subsidiaries of CDEL to a promoter's entities named MACEL; (b) evergreening of loans through structured circulation of funds; and (c) provision made for doubtful land advances of Rs 245 crores given to related parties and others. Diversion of funds to promoter entity without commercial sense and evergreening of loan were clearly visible from the investigation report of DIG of CBI mentioned above; (Section C-1 of this order). 5.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively 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 from a period of 30 days from issuance of this Order. B. INTRODUCTION BACKGROUND 7. National Financial Reporting Authority ('NFRA' hereafter) is a statutory authority set up under section 132 of the Companies Act 2013 ('Act' hereafter) to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the 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 As defined in Rule 3 of the NFRA Rules 2018. , the professional or other misconduct and impose penalty for proven professional or other misconduct of the individual Chartered Accountants or firms of Chartered Accountants. 8. The Statutory Auditors, whether individuals Chartered Accountants or firm of Chartered Accountants, are appointed by the members of companies as per the provision of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances given by subsidiary companies of CDEL to MACEL Rs in crores Sr. No Name of company from whom funds were given to MACEL Balance as on FS of respective subsidiaries Balance reduced fraudulently* Total actual outstanding as on 31.03.2019 as per Total actual outstanding as on 31.03.2020 (I) (2) (3) (4) (5=3+4) 1 Tanglin Retail Realty Development Pvt Ltd (TRRDPL) 789.35 685.01 1,474.36 1,050 2 Coffee Day Global Ltd (CDGL) 64.82 222.50 287.32 1,119 3 Tanglin Development Ltd (TDL) -11.68 474.00 462.32 608 4 Coffee Day Trading Ltd (CDTL) 0 125.00 125.00 125 5 Coffee Day Hotels Resorts Pvt Ltd (CDH RPL) 0 150.00 150.00 137 6 Giri Vidhyut (India) Ltd (GVIL) 0 50.00 50.00 370 7 Coffee Day Econ Pvt Ltd (CDEPL) 0 0 0 103 Total 842.49 1,706.51 2,549.00 3,512 (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, even though MACEL did not have adequate bank balance or approved bank credit limit to support these cheques. These cheques were l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investigation report dated 24.07.2020 revealed inter alia unusual movement of funds from subsidiaries of CDEL to MACEL without any commercial sense, understatement and evergreening of loans, signing of blank cheques etc. Mis BSR Associates LLP resigned as CDEL's statutory auditor on 17.07.2020, after the close of FY 2019-20, citing a low level of audit fees as the reason for their resignation. Subsequently, on 05.08.2020, Mis Venkatesh Co. accepted the engagement as statutory auditor for CDEL. However, the Firm began audit activities prior to receiving a no-objection letter from the outgoing auditor, which was issued on 06.08.2020, without performing the mandatory audit procedures, which was one of the charges in the SCN and which is discussed in the later part of this Order (Section C-III). The Auditors submitted their audit report on 25.11.2020. 18. After detailed scrutiny of the information shared by SEBI, NFRA suo motu initiated proceedings under section 132(4) of the Act and the Audit File of CDEL for Financial Year 2019-20 was called for. Based on an examination of the Audit File and other materials on record, each of which was shared with the noticees, a Show Cause Notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCN, written replies, arguments made during personal hearing and other materials available on record. This Order discusses only those Charges which have been proved. C. MAJOR LAPSES IN THE AUDIT 20. Before taking up the charges individually, we note that the main thrust of the Principal Auditors' reply has been that they had given Disclaimer of Opinion in their audit report demonstrating exercise of professional skepticism and judgement; and that they were the Auditors of the listed company viz CDEL and not of any subsidiary. According to them, there was no failure on their part to evaluate fraud risk in CDEL as there was no diversion of funds from CDEL and the funds were allegedly diverted from subsidiaries of CDEL to MACEL. It would not be out of place for us to note that the Standalone Financial Statements of CDEL reveal investments totaling Rs 1,866 crores in its subsidiaries and loans amounting to Rs 1,751 crores to these subsidiaries. These subsidiaries extended loans to various related parties. Notably, CDEL's investments in subsidiaries and loans to them constituted 97% of the SFS balance sheet, which had a total size of Rs 3,711 crores. 21. We note that the Auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 315 -'Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment.' , SA 330 SA 330 -- 'The Auditor's Responses to Assessed Risks'. and SA 550 SA 550 - 'Related Parties'. as they did not exercise professional skepticism and judgement to identify and assess the fraud risk arising due to (a) diversion of funds to MACEL to the tune of approx. Rs 3,535 crores; (b) evergreening of loans through structured circulation of funds; and (c) diversion of Rs 245 crores to other parties in the name of land advances. Further, they did not report such fraud to the Central Government as required under section 143 (12) and also in the Independent Auditor's Reports and the CARO. 23. The Firm and the EP denied this charge and replied as under:- a) The Firm was statutory auditor of CDEL only and not any of its subsidiaries. b) There was no reason to suspect fraud in financial reporting of CDEL. Further, findings of the investigation report of Agastya Legal LLP (investigation report) supplied by CDEL to the Firm did not give any reason to believe that any fraudulent transactions had occurred in CDEL. c) They had given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant influence existed and transactions with MACEL during the year were disclosed as under:- 51 D. I Loan/ Advance given 3 172.25 2,226.80 Loans / advance recovered 502.29 1,449.13 Interest received 0.00 98.06 Advance towards purchase of coffee 0.00 394.21 Purchase of clean and raw coffee 28.71 70.90 Trade payable 21.09 0.00 51 DII Balances outstanding with MACEL were disclosed as under:- Balance of Loan given (Assets) 2,289.85 789.35 Other Advance 1 222.60 0.00 Advances for supply of goods rendering. of services 0.00 64.82 Balance of Loan received (Liability) 0.00 11.68 a) The Auditors took a stand that they were the Statutory Auditor of CDEL only and not of any of its subsidiaries. In this connection, we note that paragraph 10 of SA 600 provides that principal auditor would normally be entitled to rely upon the work of component auditors unless there are special circumstances to make it essential for him to visit the component and/or examine 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 Auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omment on the appropriateness of the transactions, including regulatory non-compliances, if any, and the recoverability of the amounts due in the absence of requisite evidence not being made available to us and its impact to the Consolidated Financial Statement. (emphasis added) The above opinion shows that the CDEL' s management did not provide to the Auditors the evidence about business rationale or appropriateness of these transactions and recoverability of Rs 3,512 crores dues from MACEL and it was evident from the material available with the Auditors that these transactions were outside the normal course of business of CDEL and its subsidiaries. The investigation report of retired DIG of CBI has mentioned about absence of commercial sense to lend huge funds to MACEL at para 8.3.7 of the report, which is quoted hereafter However, the question that no one seems to have put forth is why a Company with a paid-up capital of less 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 commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to MACEL, which is 110 times (Rs 3,172.25 crores / Rs 28.71 crores) of the value of goods purchased, indicating a disproportionate relationship between the financial transactions and the level of operation with MACEL. This disparity was a strong pointer of potentially fraudulent activity. Historical data reveals that the value of raw coffee supplied by MACEL to CDGL ranged from Rs 39 to 71 crores from FY 2015-16 to FY 2018-19. The substantial loans and advances made to a promoter group under the pretext of goods supply is unusual for a listed company like CDEL. The Auditors' reply that there was no reason to suspect fraud, is just not acceptable given the background and the circumstances when they took up this Audit. The absence of an inquiry into such a significantly high advance and the absence of evaluation of fraud risk reflect a complete absence of professional skepticism and due diligence on the part of the Auditors. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 . SA 240 prescribes auditor's responsibilities relating to fraud in audit of financial statements. Para 10 of SA 240 provides that the objectives of auditor are to identify and assess the RoMM in the Financial Statements due to fraud, obtain audit evidence and respond to identified or suspected risk. Para 12 of SA 240 requires the auditor to maintain professional skepticism recognizing the possibility of existence of material misstatement due to fraud. Para 32 (c) of SA 240 further requires an auditor to evaluate the business rationale (or lack thereof) of the significant transactions that are outside the normal course of business or otherwise appear unusual and evaluate whether such transactions may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of funds. g) The investigation report of retired DIG of CBI came on July 2020, thereafter the Auditors were appointed 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 crore were made by CDGL to MACEL on the same day, the receipts and payments matching exactly. Table 3: Bank Statement of CDGL with Yes Bank (Date = 04.04.2019) Particulars Rs in crores Payment Receipt Balance Receipt from MACEL 24.50 -50.48 Payment to MACEL 21.90 -72.38 Receipt from MACEL 23.90 -48.48 Payment to MACEL 24.01 -72.49 Receipt from MACEL 17.10 -55.39 Payment to MACEL 19. 59 -74.98 Total 65.50 65.50 b) Evidence of evergreening of loans through circular transactions is also apparent in the bank statements of CDGL with Induslnd Bank. Had the Auditors reviewed CDGL' s bank statements for April 2019, they would have uncovered this manipulation. Similar patterns of loan evergreening through structured fund circulation were observed in other subsidiaries, including TDL, GVIL, and TRRDPL. This issue was highlighted 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 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 27. The Auditors reliance on the claim that they were not required to evaluate fraud risk in subsidiaries as provision for significant amount was made by the subsidiaries in respect of land advance given to related parties is an oxymoron I reveals a flawed understanding of the work and responsibility of a principal Auditor. This was also a special circumstance envisaged in paragraph 10 of SA 600 discussed earlier in this Order. Therefore, the Auditors were required to evaluate fraud risk in these transactions also. Despite knowing that such unusual transactions had caused significant 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties, involving the use of deception to obtain an unjust or illegal advantage . The diversion of Rs 3,512 crores to MACEL without any business purpose resulted in the overstatement of receivables in the consolidated balance sheet of CDEL. Thus, the Auditors understanding of the issue as displayed in his reply is appalling. 30. The above analysis clearly shows absence of professional skepticism and due diligence; and absence of appropriate audit procedure to report in the Independent Auditor's Report, a diversion of funds which had already been detected. Granting of abnormal amount of loans and advance to MACEL and land advance to other related parties without any business rationale; and evergreening of loans through structured circulation of funds were clear indications of diversion of funds. 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 mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the main contentions in their reply are as follows: a) Section 185 of the Act does not apply to these transactions as loans were given to subsidiaries in which none of the directors of CDEL had any interest. b) No part of the funds given by CDEL to TDL was diverted to MACEL. The source of the loan given to TDL was the sale price of Mindtree shares held by CDEL. A part of the sale proceeds was utilised to repay the loan of TRRDPL (TDL's subsidiary). These transactions were verified by the EP with supporting documents. c) They verified the guarantees, guarantee working and loan agreements. 34. We have considered the replies and proceed to evaluate the same as under: a) Clause (iv) of the CARO requires the auditor to report inter alia in respect of loans, investments, guarantees, 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 adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, the details given in paragraph 24(e) of this Order show that TDL did not utilize the proceeds of loans given by CDEL for its principal business activities but diverted the funds to MACEL through its subsidiaries. This is also corroborated from the preceding para that funds were diverted by TRRDPL to MACEL by using pre-signed blank cheques. Thus, the Auditors' reply that funds of CDEL were not diverted to MACEL is not accepted. e) With respect to verification of guarantee of Rs 100 crores provided to the lender of CDH RPL, perusal of the audit work papers AWP - current file standalone - 12.6.3-Financial Guarantee workings quoted by the Auditors in their replies shows that this work paper contains details of the guarantees and calculation of guarantee 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to communicate with the predecessor auditor in compliance with relevant ethical requirements; major issues including the application of accounting principles or of auditing and reporting standards; and the audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances Refer para 12 A21 of SA 300 . 40. The sequence of events described below indicates that the Auditors accepted the audit of CDEL in haste without completing mandatory activities : On 17.07.2020, i.e. after the close of FY under question, the outgoing auditor of CDEL resigned citing low level of audit fee. On 01.08.2020, the Auditors prepared the client acceptance form and 'LRR Audit requirements_O1082020.pdf'. This 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the appointment as statutory auditor of CDEL and also started audit activities even before getting the no-objection letter from the outgoing auditor. Thus, it is proved that the Auditors did not exercise due diligence before accepting the audit engagement of CDEL, and violated paragraphs 28 29 of SQC J, paragraphs 12 of SA 220 paragraphs 12 A21 ofSA 300. IV. Lapses in forming audit opinion (This matter pertains to SFS as well as CFS) 43. The Auditors were charged with failure to exercise due diligence and for gross negligence in preparation ofthe Independent Auditor's Reports and violation of para 19 (c), 28 para 29 of SA 705 (SA 705) - Modifications to the Opinion in the Independent Auditor'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they were not able to obtain sufficient appropriate audit evidence, was not done. On the contrary they wrongly reported that they had obtained sufficient appropriate audit evidence. Relevant portion of the audit report on CFS is We believe that the audit evidence obtained by us along with the consideration of audit reports of the other auditors referred to in sub-paragraph (a) of the Other Matters paragraph below, is sufficient and appropriate to provide a basis for our audit opinion on the console dated financial statements. despite giving a disclaimer of opinion both on the SFS and the CFS. This is an evidence of gross negligence. b) The Auditors admitted the charge 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and better information. This reply is not accepted in view of para 8 (a) of SA 706 which states that: If the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor's report provided: (a) The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter. (Emphasis added). Para 9 (c) of SA 706 states When the auditor 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , EP and EQCR were charged with violation of paras 60 to 73 of SQC l and paras 19 to 21 of SA 220 as there is no record in the Audit Files that the EQCR performed an engagement quality control review providing an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report in respect of charges mentioned at points I to IV above. 47. Para 60 to 73 of SQC 1 provides detailed prescription regarding establishing policies and procedures about Engagement Quality Control Review; Nature, Timing and Extent of the Engagement Quality Control Review; and 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to the prevalence of covid in his family, his signature was obtained on 27.11.2020. 53. NFRA asked the auditors to provide evidence of remote working, to which they responded on 4th June 2024 and provided a medical certificate according to which EQCR and his wife were COVID infected during this period. This part of the reply is also not accepted as there is no evidence that EQCR did the work or completed his review before issue of audit report i.e. even email confirmation from EQCR is not available. Thus, there is no evidence of any work done by the EQCR, the only document relied 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out this audit, the Firm (as the appointed statutory auditor has the primary responsibility) is also answerable for its report issued under the Act, as further explained in the following paragraphs. 58. Paragraph 2 of SA 220 stipulates that Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and regulatory and legal requirements; 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm had disclaimed the opinion. Their contention about disclaiming the audit opinion is not logical as an auditor is required to comply with Laws and auditing standards even if he disclaims his opinion. Further, the Auditors were required to comply with section 143(12) of the Act and CARO even in case of Disclaimer of Opinion. Had the Auditors properly discussed the audit procedures with the component auditors in relation to the significant fraud risks, advised them accordingly, and exercised due professional skepticism throughout the audit, (as required 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11(1) of NFRA rules 2018 which provides that a show cause notice under section 132(4) of the Act can be issued based on inter alia the material available on record. In this case, the Show Cause Notice was issued based on the material available on record. Further, violation of accounting standards is not a prerequisite for making a charge for violation of auditing standards. 67. It was further contended that the Auditor had disclaimed his opinion therefore the adherence or non-adherence of auditing standards becomes an exercise in futility. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and failed to obtain sufficient appropriate audit evidence in connection with Issuer A 's identification, accounting, and disclosure of related party relationships and transactions Gore failed to perform any of these procedures during the 2016 Audit (Emphasis supplied). This case resulted in debarment and imposition of monitory penalty on the auditors. c) In a disciplinary case As per the decision cited in the Code of Ethics 2009, issued by ICAI (S.N. Johri vs. N.K. Jain - Page 1042 of Vol. IV of the Disciplinary 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 profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reports the fraudulent diversion of funds to promoter entity, which resulted in the material misstatements as fraudulent diversion of funds to promoter entity was not disclosed by the Company as explained 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 faile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iances with the SAS, Quality Control Standards and Laws by the Auditors and EQCR. The death of VGS (the then Chairman of CDEL), the key player of the entire financial fraud, happened in July 2019 and the Auditors, who were appointed in Aug 2020, had sufficient time to evaluate all the parameters/areas spelt out in this Order where the Standards have not been adhered to. The Auditors had access to the investigation report dated 24.07.2020 of Mr. Ashok Kumar Malhotra, which contained 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
