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TMI Blog2024 (12) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... CA Kashinath Chaturvedi as contained in the Articles of Charges in the SCN, are established. a) Failure to ascertain from the audited Company whether the requirements of Sections 139 140 of the Act in respect of such appointment had been duly complied with. (As per Section 22 and Clause 9 of Part I of the First Schedule to the CAs Act); b) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, because of the lapses and omissions. (As per Section 22 and Clause 7 of the Part I of Second Schedule to the CAs Act); It is found that CA Kashinath 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, 2013 as amounting to professional misconduct. 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 law lays down a minimum punishment for such misconduct. There were deficiencies in the Audit and abdication of responsibility on the part of CA Kashinath Chaturvedi right from the acceptance of the Audit without due diligence in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a housing finance company listed on both NSE and BSE and operating through a network of branches, was reportedly involved in financial fraud. NFRA took suo motu notice of the matter and 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 shareholders. NFRA investigated these chartered accountants responsible for Branch Audits under section 132 (4) of the Companies Act, 2013 (the Act), including CA Kashinath Chaturvedi, partner of M/s K.B. Chaturvedi Associates, who had accepted the audit assignment for five of the 250 branches of DHFL. 2. NFRA's investigations revealed that the appointment of none of the branch auditors was approved at the Annual General Meeting (AGM) of DHFL, as required by the Act. CA Kashinath Chaturvedi accepted the appointment portraying himself as Branch Statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority set up under Section 132 of the Act to monitor the implementation and enforce compliance with the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA has the powers of a civil court and is empowered under Section 132 (4) of the Act to 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 certain media reports exposing an alleged siphoning of public money of around 31,000 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is revealed that the branch auditors had violated both the Companies Act, 2013 and the Chartered Accountants Act, 1949 by accepting the appointment that lacked a valid approval and had also violated the SAs while carrying out the branch audit. 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 Kashinath Chaturvedi ( the CA hereafter) on 17.01.2024, asking him to show cause why action should not be taken for professional misconduct in respect of his performance as the Statutory Auditor of five branches of DHFL for the FY 2017- 18. The CA was charged with professional misconduct on account of: a. Failure to ascertain from the Company whether the requirements of Sections 139 140 of the Act in respect of such appointment have been duly complied with and b. Failure to exercise due diligence and being grossly negligent in the conduct of professional duties 11. CA Kashinath Chaturvedi was asked to submit his reply to SCN by 16.02.2024. The CA's response was received on 13.02.2024 stating that they were not appointed as statutory auditors of the company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s branches as required under section 139(1) read with section 143(8) of the companies Act, 2013 (CA-2013) in the AGM of the company and no such resolution was passed in the AGM of the dhfl . The CA claimed that they were appointed only for the purpose of certain specific verification and certifications . 17. We observe that the appointment letter acknowledged by CA Kashinath Chaturvedi and the Independent Branch Auditors' Report issued by the Audit Firm clearly described the engagement as a Branch Statutory Audit . The contention of the CA now that he was not a Statutory Auditor shows the absence of professional behaviour and gross negligence. Misconduct, arising out of gross negligence, implies failure to act honestly and reasonably either according to the ordinary and natural standard or according to the standard of a particular profession Cited in ICAI Code of Ethics, Registrar of Companies, Bihar vs. M.N. Basu - Page 323 of Vol. IV of the Disciplinary Cases, ICAI vs B. L. Khanna (Delhi High Court) . His failure to act honestly and reasonably is established by the fact that despite the clear communications by the Company and CAS that the engagement is a statutory audit, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the subject matter engagement was not for statutory audit is an afterthought and cannot be accepted. 20. Under Section 22 of the Chartered Accountants Act, 1949 read with Clause (9) of Part I of the First Schedule to the said Act (the meaning of which is conceived in Section 132(4) as professional misconduct) a chartered accountant in practice shall be deemed to be guilty of professional misconduct if an appointment as auditor of a company is accepted without first ascertaining from it whether the requirements of Section 225 of the Companies Act, 1956 (equivalent Sections being Section 139 140 of Companies Act, 2013) As per Ministry of Corporate Affairs Circular No. 7/2014, dated 01-04-2014, the equivalent sections of the Companies Act 2013 for the above sections of the Companies Act, 1956 are sections 139 and 140. in respect of such appointment have been duly complied with. 21. The ICAI Code of Ethics, 2009 makes it clear that Under Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, the incoming auditor has to ascertain whether the Company has complied with the provisions of the above sections. The word ascertain means to find out for certain . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exercise due diligence under SA 200 and adhere to the specific provisions of the Chartered Accountants Act, 1949 under Section 22 read with Clause 9 of Part I of the First Schedule. The non-compliance is therefore professional misconduct in terms of section 132(4)(c) of the Companies Act 2013. Branch Statutory Audit is rendered invalid ab initio due to non-ratification by the shareholders of the Company which was the requirement of the law. This is compounded by the fact that CAS, in their Statutory Audit Report, has referred to the branch audit reports Independent Auditor's Report of DHFL dated 30.04.2018 issued by CA Jignesh Mehta on behalf of CAS, available in the public domain (https://www.bseindia.com/bseplus/Annual Report/511072/5110720318.pdf Last accessed 21.06.2024) . The said lack of due diligence in accepting an invalid appointment is also professional misconduct as per Clause 7 of Part I of the Second Schedule to the CAs Act, the meaning of which is conceived in Section 132(4)(c) of the Act. Therefore, we find that the charges in paras 14 and 15 above stand proved. II. Failure to comply with Standards on Auditing (SAS) 24. We now discuss the non-compliance by CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing as well. SA 210 Para 9, 10 and 11 of SA 210 stipulates that the auditor shall agree to the terms of the audit engagement with management or Those Charged With Governance (TCWG) and that subject to paragraph 11 of the SA, the agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable forms of a written agreement and shall include (a) the objective and scope of the audit of the financial statements; (b) the responsibilities of the auditor; (c) the responsibilities of management; (d) identification of the applicable financial reporting framework for the preparation of the financial statements; and (e) reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. 26. Responding to the charges, the CA stated that he had followed all necessary auditing practices which in such assignments of certifications are needed . 27. The contention of the CA is not acceptable in the absence of a valid engagement l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence of the auditor's basis for a conclusion about the achievement of the overall objectives of the auditor; and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. SA 230 lists enabling the conduct of quality control reviews and inspections in accordance with SQC 1; and enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements among the additional purposes that are served by the audit documentation. Para 7 of SA 230 emphasises the Timely Preparation of Audit Documentation i.e. in a manner contemporaneous with the events that are being sought to be documented. 33. Apart from SA 230, there are other SAs that also require the documentation of events, data, evidence, opinions and conclusions. SA 230 makes it very clear that reliance can be placed only on the audit file as evidence of what was done. Para A5 of SA 230 makes explicit that: Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain 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 procedures performed, evidence obtained, and conclusions reached, including in those areas of the audits involving significant risks. For the FY 2016 and 2017 Issuer A audits, the documentation also failed to demonstrate who performed the work and the date such work was completed. Additionally, in each of the Issuer A and Issuer B audits, the audit documentation was insufficient to demonstrate which aspects of the audit and which audit documentation Bharat Parikh reviewed . D. FINDINGS ON THE ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT 39. Given the above-mentioned actions and omissions, it is established that CA Kashinath Chaturvedi did not comply with the stipulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointment of the statutory audit was complied with. More importantly, the Audit Firm performed the audit as a statutory audit. Audit Firm was well aware that these reports would ultimately be used and referred to by the Company's auditor, to whom these reports were addressed. The Audit Firm also certified in the reports that the engagement was performed as per SAs. Despite all these facts, the evidence shows several non-compliance with applicable SAs and the applicable laws. 44. As detailed in the foregoing paragraphs, there were deficiencies in the Audit and abdication of responsibility on the part of CA Kashinath Chaturvedi right from the acceptance of the Audit without due diligence in ascertaining the validity of the offer, which establishes his gross negligence resulting in professional misconduct. In fact, accepting an audit assignment in contravention of the Law and continuing it in non-conformity with the SAs, constitutes a flagrant violation of the Law. We also conclude that despite being a qualified professional, CA Kashinath Chaturvedi has not adhered to the Standards on Auditing and provisions of the law. 45. Considering the fact that professional misconducts have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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