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TMI Blog2024 (12) TMI 228X X X X Extracts X X X X X X X X Extracts X X X X ..... und for the Order C. Major Lapses in the Audit D. Findings on the Articles of Charges of Professional Misconduct E. Penalty and Sanctions A. EXECUTIVE SUMMARY 1. This Order is being passed as a result of an investigation by the National Financial Reporting Authority (NFRA) into the professional conduct of CA Krishna Bihari Chaturvedi for his role as a Partner in the audit of five branches of DHFL. DHFL, a housing finance company listed on NSE and BSE, and operating through a network of branches, was reportedly involved in financial fraud. NFRA took suo motu notice of the matter pursuant to an Audit Quality Review (AQR) of the statutory audit of DHFL for FY 2017-18, conducted by Chaturvedi & Shah (CAS), a Mumbai-based Chartered Accountant Firm. During the review, NFRA also noticed that 33 Engagement Partners (EP) or branch auditors had signed the "Independent Branch Auditors' Report" for nearly 250 branches. The Statutory Auditor of the Company viz, CAS had referred to these so-called Branch Audit reports in their report to the members of the Company. NFRA investigated these EPs responsible for Branch Audits under section 132 (4) of the Companies Act, 2013 (the Act) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o investigate the prescribed classes of companies and impose penalties for professional or other misconduct of the individual members or firms of chartered accountants. 6. The statutory auditors, both individual and firm of chartered accountants, are appointed by the members of companies under Section 139 of the Act. The statutory auditors, including the Engagement Partners and the Engagement Team that conduct the audit, are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing (SA), including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Section 132 (4) (c) of the Act. 7. Following media reports on the alleged siphoning of public money of around 31,000 crore and the Enforcement Directorate's reported action in April 2020 on an alleged banking fraud of about 3,700 crore by the promoter/ directors of DHFL, NFRA suo-motu initiated an Audit Quality Review (AQR) to probe into the role of the Statutory Auditors of DHFL for the FY 2017-18, the year in which the alleged fraud was primarily stated to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i on behalf of Mr. Kashinath Chaturvedi". 11. Under the above circumstances, we examined in detail the Audit File submitted, the Audit Reports issued and other records. We found no evidence or information in the working papers regarding who performed the audit procedure and the nature, extent and timing of audit procedures. 12. On being satisfied that prima facie sufficient cause existed to take action under sub-section (4) of Section 132 of the Act, a Show Cause Notice (SCN hereafter) was issued to CA Krishna Bihari Chaturvedi on 07.12.2022, asking him to show cause why action should not be taken for professional misconduct in respect of the performance as the Statutory Auditor of five branches of DHFL for the FY 2017-18. He was charged with professional misconduct on account of: a. Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, b. Failure to obtain sufficient information which is necessary for the expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion, and 13. The SCN was duly sent to CA Krishna Bihari Chaturvedi on 07.12.2022 to his email, which was used for regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personal hearing, he submitted an Affidavit dated 04.09.2023 wherein he stated that he had signed the Audit Reports after "due diligence necessary for making opinion". 16. On perusal of written and oral response of CA Krishna Bihari Chaturvedi, it was found that apart from the charges mentioned in the SCN dated 07.12.2022, he had also prima facie failed to comply with Clause 2 of Part 1 of the Second Schedule to Chartered Accountants Act, 1949. Thus, vide Supplementary SCN dated 17.01.2024, an additional charge was added as Section A (II) to the SCN dated 07.12.2022. He was asked to submit his reply to the supplementary SCN by 01.02.2024. Complete SCN and appendices were delivered to him on 17.01.2024 via email. However, the physical copy of SCN sent to him via speed post returned undelivered from the address mentioned in his affidavit, on which we had earlier communicated with him. Since no response was received, the last date for the reply to Supplementary SCN was suo motu extended to 11.02.2024. On 12.02.2024 he requested to re-post the Supplementary SCN and give further time extension. The supplementary SCN was sent again and the last date was extended to 29.02.2024. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e audit reports of five branches of DHFL for FY 2017-18. After the personal hearing, he submitted an Affidavit dated 04.09.2023 stating that "being the managing partner and Mumbai branch-in-charge, the audit has been done by him [CA Kashinath Chaturvedi] and due to his urgency and his call I, Krishna Bihari Chaturvedi, had done [.sic] due diligence necessary for making opinion". He also certified in the audit report(s) that "we conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act [Companies Act, 2013]". 19. In this regard, we observe that there is no evidence of compliance with either Clause 2 of Part 1 of the Second Schedule to Chartered Accountants Act, 1949 or the requirements of SA 220 Para 7, 9, 10, 15 and 17 of SA 220, Quality Control for an Audit of Financial Statements, SA 230, SA 500, SA700 Para 6(a), 10 and 11 of SA 700, Forming an Opinion and Reporting on Financial Statements, and the ICAI Code of Ethics 2009. The evidence of non-compliance is as follows: a. There is no evidence in the Audit File or explanations to demonstrate if any assessment of the accounts of the branch, as required by SA 700, was performed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proved. 22. Such lapses relating to the signing of audit reports and issuing certificates without verification of relevant documents have been viewed seriously by the ICAI in the past. We note that in one case, a Chartered Accountant issued certificates of consumption which did not reflect the correct factual position of the consumption of raw materials by the concerned units. Also, the same certificates had been issued without examining and scrutinising thoroughly/properly the requisite records. ICAI held that the respondent was guilty of professional misconduct under clauses (2) and (7) of part I of the second schedule read with sections 21 & 22 of the Chartered Accountants Act, 1949. (JDI, Bombay vs. B.K. Kurhade - Page 585 of Vol. VIII - 1 - 21(6) of Disciplinary Cases- Judgement dated 12th August 2004). 23. CA Krishna Bihari Chaturvedi was also charged with non-compliance with other SAs. There is no evidence in the audit file regarding compliance with any of the SAs. In the absence of evidence, the charges regarding non-compliance with the following SAs stand proved: a) Para 6, 7, 8, 9 & 10 of SA 300 since he failed to establish an overall audit strategy and development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is firm or by another chartered accountant in practice", b) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, because of the lapses and omissions as explained and proved in parts C above. (As per Section 22 and Clause 7 of Part I of Second Schedule to the CAs Act); c) Failure to obtain sufficient information which is necessary for the expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion, because of the lapses and omissions as explained and proved in part C above. (As per Section 22 and Clause 8 of Part I of the Second Schedule to the CAs Act); and Thus, we find that CA Krishna Bihari Chaturvedi committed professional misconduct, as defined in the respective clauses of the CAs Act, the meaning of which is conceived under Section 132 (4) of the Companies Act as amounting to professional misconduct. E. PENALTY AND SANCTIONS 25. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The law lays down a minimum punishment for such misconduct. 26. In this case, the information contained in the Financial Statemen ..... 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