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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 ..... Lapses 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 Kashinath Chaturvedi for his role as the Partner in the audit of five branches of DHFL. DHFL, 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 Chaturve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, this Order imposes on CA Kashinath Chaturvedi a monetary penalty of Rupees One lakh and debarment for One year 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. B. INTRODUCTION AND BACKGROUND FOR THE ORDER 5. NFRA is a statutory authority 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 responsibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uo-motu extended to 15.09.2022 vide NFRA letter dated 01.09.2022. The Audit File along with other information in respect of the five branches for FY 2017-18 was submitted by him on 15.09.2022 on an affidavit stating that "...I also affirm that the Audit File(s) submitted by me/my Audit Firm to NFRA is complete in all respects as stipulated in the Standards on Auditing (SA)...". 10. On examination, 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 requirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duties as well as compliance with the Act before accepting the engagement. In the process, the CA also did not comply with Paras 14, 15 and 16 of SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing". 16. In response, CA Kashinath Chaturvedi stated that "We wish to agree with you and reconfirm that we were not appointed statutory auditors of the company or its 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 accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Housing Finance Corporation Limited for the year ended on 31st March, 2018". 19. Besides the above, the Audit Firm prepared a report titled "Independent Branch Auditors' Report" on the accounts of the branch examined and sent it to the auditor of the company as is required by the proviso to Section 143(8) read with Rule 12 "Duties and Powers of the Company's Auditor with Reference to the Audit of the Branch and the Branch Auditor" of the Act. Thus, the contention of the CA 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Company and its branches. Therefore, in the absence of a valid appointment, acceptance of audit engagement by the CA vide letter dated 11.09.2017 of the appointment as Statutory Auditor of the branches and issuance of the "Independent Branch Auditor's Report" by the Audit Firm for the five branches of DHFL, describing the engagement as Branch Statutory Audit confirms the absence of professional skepticism and lack of due diligence on his part. 23. CA Kashinath Chaturvedi was required 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial information. Accordingly, the various violations of the SAs with which the CA was charged in the SCN are discussed in the following paragraphs. Non-Compliance with SA 210 "Agreeing the Terms of Audit Engagements" 25. The CA was charged with non-compliance with SA 210 (SA 210), Agreeing the Terms of Audit Engagements and displaying an absence of professional skepticism and professional judgment in documenting the objective and scope of the audit, thereby violating SA 200 Para 15 and 16 of SA 200, Overall 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable legal and regulatory requirements. In the absence of the required documentation, the audit report issued by the Audit Firm to CAS, the Statutory Auditor, was without adequate basis and was in violation of SAs. 31. Responding to the charges, the CA denied all the charges and submits that "deeper study of our documentations will prove that commensurate to our required job, we have done full justice". 32. As explained by SA 230 Para 5 of SA 230, the nature and purposes of audit documentation are to provide evidence 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue which undermines the credibility of the audit and may defeat the very purpose of the audit itself. Lack of sufficient documentation has been viewed seriously by national and international regulators as well. For example, in the matter of Bharat Parikh & Associates Chartered Accountants, dated 19-03-2019, the US audit regulator PCAOB took a serious view of the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB Order states "Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to (a) understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, and (b) determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review......the documentation for each of those audits was insufficient to demonstrate the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, including in those areas of the audits involving significant risks. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n from the Branches of the Company, where a substantial part of the lending activities was carried out. 42. A Branch Auditor is duty-bound to examine and ascertain the integrity of the underlying information forming Financial Statements of such entities As defined in Rule 3 of NFRA Rules 2018 in the larger public interest. 43. In this case, while all the documents and reports described the engagement as a statutory branch audit and the audit was, in substance as well as in form, a statutory branch audit, none of the legal requirements regarding the appointment 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 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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