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TMI Blog2025 (3) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... al and pervasive - Failure to obtain sufficient appropriate audit evidence regarding the appropriateness, completeness and accuracy of consolidation adjustments - penalty and sanctions. HELD THAT:- The EP has committed professional misconduct as defined in Section 132(4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below: i. The Auditors committed professional misconduct of failure to report a material misstatement known to them to appear in a financial statement with which they are concerned in a professional capacity. (Refer Clause 6 of Part I of the Second Schedule of the CA Act). ii. The Auditors committed professional misconduct by failing 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. iii. The Auditors committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct of their professional duties. iv. The Auditors committed professional misconduct by failing to invite attention to any material departure from the generally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter). CA Neeraj Bansal is a Member of the Institute of Chartered Accountants of India (ICAI' hereafter) and was the Engagement Partner ('EP' hereafter) for the Statutory Audit of Religare Finvest Limited, Delhi ('RFL' or 'the Company' hereafter) for the Financial Year ('FY' hereafter) 2017-18. 2. This Order is divided into the following sections: A. Executive Summary B. Introduction and Background C. Lapses in the Audit D. Articles of Charges of Professional Misconduct E. Penalty and Sanctions A. EXECUTIVE SUMMARY 3. NFRA initiated action under Section 132(4) of the Companies Act, 2013 (the Act) for investigating into professional or other misconduct of the EP for the statutory audit of RFL for the FY 2017-18, and issued a Show Cause Notice (SCN) on 15.05.2024. 4. This Order disposes of the said SCN and finds that the EP failed to meet the relevant requirements of the Act as well as the Standards on Auditing ('SA' hereafter) in respect of several significant areas, reflecting gross negligence and lack of due diligence in performing the audit of RFL for the Financial Year ended 2017-18. These include: i. Failure to comply with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. NFRA has the responsibility to protect the public interest and the interests of the investors, creditors and others associated with the companies or bodies corporate that come under its purview. Under Section 132(4) of the Act, NFRA is vested with the powers of a civil court, and power to investigate the prescribed classes' of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 7. The Statutory Auditors, both individual and firm of chartered accountants, are appointed under Section 139 of the Act. The Statutory Auditors, including the Engagement Partners, Engagement Quality Control Reviewer and the Engagement Team that conducts 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 and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalties prescribed under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r its exceptions are sufficiently material to negate the expression of an opinion. iii. Failure to exercise due diligence and being grossly negligent in the conduct of their professional duties. iv. Failure to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances. 11. The reply to the SCN was submitted by the EP vide email and letter dated 14.06.2024. The EP also availed the opportunity of personal hearing, which was held on 27.08.2024 at the office of NFRA, New Delhi and post the hearing, written submissions were submitted on 10.09.2024. The EP was represented by legal counsel Mr. Ajay Bahl and his team of advocates. This Order is based on NFRA's own independent investigation including a review of the Financial Statements of RFL for the FY 2017-18, the audit files, written responses of the EP, submissions made during the personal hearing and written submissions thereafter. Each of the charges in the SCN is analysed and discussed herein below. C. LAPSES IN THE AUDIT C1. Delay in reporting fraud under Section 143(12) of the Companies Act, 2013 12. The EP was charged with delay in filing ADT-4 report rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no delay in reporting of fraud. That, based on the predecessor Auditor's Report, the issue was discussed with the management, which had informed the ET that, as directed by RBI, RFL was committed to reduction of the Corporate Loan Book by February 2018. The EP submitted that as per professional judgement applied at the time of commencement of Audit in October 2017, the conditions indicated that loans under CLB portfolio had significant risks but there was no sufficient or convincing evidence of fraud when the audit was commenced in October 2017. 16. The EP further added that: i. the ET was enquiring and analysing the details with the management and was in continuous correspondence with RFL, RBI and the banks, however, the flow of information was taking time, and more time was required for having 'reasons to believe' that fraud was committed. The ET received from the management on 18.01.2018, party wise quarterly movement details of the CLB for the period April 2015 to September 2017 and the RBI inspection Report for the F.Y. 2015- 16 and 2016-17 on 09.02.2018. The Financial Statements for the period upto December 2017 were received on 30.03.2018. ii. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that some of the loans referred to in the RBI letter had been repaid by the time he came in as the statutory auditor, b) the officers and employees involved in the sanctions of those loans and whether they knew about the intended end-use and subsequent movement of funds from the concerned borrower. v. That had he reported fraud without doing so, the company, officers or its borrowers may have had a reason to initiate legal action against him. 19. The EP also stated that the Financial Statements of December 2017 were received towards the end of March 2018; that EP had issued a qualified opinion as the RFL had made a provision of 50% only on the CLB portfolio of Rs. 2036.70 crores as on 31.03.2018, while the EP considered the entire loan portfolio as loss asset to be provided @100%; that the EP then wrote to the Audit Committee on 25.05.2018, listing out the items that he had considered for possible reporting under Section 143(12) of the Companies Act; the Audit Committee (which had changed following several resignations), provided its response on 09.07.2018 where they disagreed with his proposal to report the matter under Section 143(12) of the Companies Act. However, after co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of any additional information/observation of significance regarding CLB in ADT-4. The additional information sought from RBI vide EP's letter dated 12.04.2018 was awaited till the initiation of the fraud reporting process and the signing of the Audit Report, yet the EP went ahead with the process of reporting fraud. Therefore, it is evident that the EP did not want to report fraud before signing off the audit report. 22. Therefore, in the light of above, there is no substance in the stand of the EP that he was obtaining additional information to confirm his 'reasons to believe' about suspected fraud in the CLB portfolio. The EP's deliberate delay which concealed critical information from the stakeholders exhibits lack of due diligence and gross negligence in performance of his statutory function. We find the EP to be grossly negligent in complying with Rule 13 of Companies (Audit and Auditors) Rules, 2014 and consequently Section 143(12) of the Companies Act, 2013. 23. We also note that the EP signed the Financial Statements for FY 2017-18 on 30.05.2018 and the Annual General Meeting was held on 28.09.2018 (Date of issue of Financial Statements). The EP file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made no reference to fraud, and referred to the company's practices as 'reflecting poorly on its corporate governance structure'; that these comments were related to the management at that time; that the earlier management was no longer with the Company; and the new management had reinforced actions for no further disbursement under CLB after November 2017 and recovery of the earlier disbursement. The EP also stated that the predecessor auditor had also not reported, or suspected fraud, or treated the same as an instance of management override. Therefore, pending the RBI's inspection reports for FY 2015-16 and FY 2016- 17 which were due, the risk assessment was appropriate, however, the EP undertook significant investigation after the RBI's Inspection Reports for FY 2015-16 and FY 2016- 17, resulting in identifying and reporting fraud to Central Government. 29. We have reviewed the planning assessment documents prepared by the EP, a screenshot of which is placed below: Exhibit 1 Audit Area Assessed Risk Audit Approach to Assessed Risk 9. Loans and Advances Existence, Rights & obligations, Completeness and Valuation- For these assertions risk has been ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Date: 12-01-2018 Partner: Mr. Neeraj Bansal Audit manager: Mr. Apurav Agarwal Other engagement team members: Issues Disussed Comments and actions raising Financial statement areas susceptible to fraud Loans and Advances Revenue recognition As per AS 9 Potential for management override Based on the developments related to the group, the audit procedures should take into account potential for management over-ride Exhibit-3 B. Meeting with Management/ Those charged with Governance Present: & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to fraud or misappropriation. We did not find any asset susceptible to fraud or misappropriations Exhibit-6 1.6 Consideration of risk of management override of controls No such over-ride observed. 33. Therefore, we find contradictions regarding presumption of fraud risk in the planning and risk assessment stage. Further, such risk assessment was out of line of the fact that RFL itself had reported the SCCPL fraud to RBI on 01.05.2017; that RBI had raised serious concerns regarding the CLB portfolio in its letter dated 27.01.2017, based on which the predecessor auditor had issued a qualified opinion. 34. Further, sanctioning of loans under CLB to borrowers with weak financial creditworthiness and solely based on relations with the promoter and the Disclaimer of Opinion given in the Internal Control over Financial Reporting (ICOFR) by the auditor of the previous Financial Year, which was known to the EP during the risk assessment exercise and the fact that the EP himself also issued a Disclaimer of Opinion in the ICOFR report which clearly established that there was management override of controls. 35. Regarding areas that are prone to fraud, the EP in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply with the requirements of SA 315 and to appropriately respond to the risks as per SA 330. 38. We note that international regulators have viewed such negligence seriously. Financial Regulatory Commission (FRC), the Audit Regulator of UK in the matter of Price Waterhouse Coopers LLP and Jessica Miller imposed total financial sanction of GBP4,900,000 and GBP105,000 on the firm and the partner respectively for deficiencies in audit of London Capital & Finance PLC like the exercise of professional skepticism with particular regard to the risk of fraud etc. In the same case, FRC imposed financial sanction of GBP4,410,000 on Ernst & Young and GBP47,250 on its partner Neil Parker for a different financial year but for similar deficiencies in audit'. C.3. Audit of Loan Book RFL 39. The EP was charged with non-compliance with SA 2008, SA 230⁹ and SA 50010 in the audit of the loan book of RFL for the FY 2017-18, for not performing enhanced procedures in view of the suspected fraud in the CLB portfolio and the SCCPL fraud reported to RBI wherein twelve (12) loan accounts were assigned to SCCPL and subsequently Rs. 793 crores was written off during FY 2016-17 on the direction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form an audit with professional skepticism recognising that circumstances may exist that cause the financial statements to be materially misstated. In the absence of presumption of fraud risk and rebuttal thereof and lack of enhanced audit procedures especially in light of previously reported fraud in RFL, we conclude that the EP failed to show necessary professional skepticism in the audit of the LAP and LAS verticals of the company and also failed to comply with SA 200 and SA 230. 43. FRC in the matter of PricewaterhouseCoopers LLP and Richard Hughes" decided that a financial sanction of GBP1,750,000 is payable by PwC and GBP42,000 by Mr Hughes for deficiencies in audit of BT Group plc. FRC found that Respondents did not act with the requisite professional skepticism; did not obtain sufficient appropriate audit evidence; and did not prepare audit documentation that was sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the audit procedures performed. C.4 Recognition of Deferred Tax Assets (DTA) 44. The SCN stated that DTA of Rs. 495.63 crores was recognised in the Standalone Financial Statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad found that since the test applied was that of AS 22, the mere language of the policy would not be relevant. 48. We find from above that the auditor's lack of diligence in maintaining comprehensive audit work papers reflects unprofessional approach and raises concerns regarding the integrity of the audit process. The absence of documented audit procedures and substantive evidence to support the recognition of DTA, as per AS 22, suggests non-compliance of the standards, if not the tampering with the audit file. The auditor's reliance on company- provided figures without corroborative analysis, coupled with the presentation of supplementary documents that do not substantiate audit procedures, indicates a significant lapse in the performance of his professional duties, undermining the reliability and transparency of the Financial Statements. We, therefore, conclude that the EP failed to comply with SA 200, SA 230, SA 500, and SA 540 in recognition of DTA of Rs. 495.63 crores which was a material amount. C.5 Audit of Investments 49. The EP was charged with non-compliance with SA 200, SA 240 and SA 500 for his alleged failure to verify the business rationale of the investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his written submissions, the EP stated that in the AWP '1. Other income Working Paper', the interest income from debentures for FY 2017-18 was included in the figure of Rs. 22.09 crores and was recognised only to the extent the amount was received for the quarter ended June 2017 i.e. Rs. 6.30 crores. The EP stated that the accounting for this item was not done on an accrual basis by RFL due to non-repayment of the principal amount which was due in December 2017 and there was no reason to disagree with that treatment. 54. The reply of the EP is not acceptable for the following reasons: i. During FY 2016-17, OSPL borrowed Rs. 200 crores from RFL via NCDs and invested Rs. 204 crores in the Equity Shares of BRNL. Therefore, OSPL acted as a conduit for transfer of funds from RFL to BRNL. ii. The NCDs were supposed to be repaid by 14.12.2017, however, the same were not repaid till the end of the FY 2017-18. iii. OSPL did not service the interest after June 2017. iv. RFL already had existing exposure of more than Rs. 50 crores (unsecured) towards BRNL under its CLB Portfolio. There was no justification for RFL to accept the security of shares of BRNL as both OSPL and BRN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Hearing, the EP informed that EFX Holdings Limited indeed purchased RFL's share of equity in Equifax for Rs. 50 crores in September 2018, and that the value of such investment (Rs. 13.50 crores) was below the materiality level (Rs. 17 Crores). Considering this, the charge is not being pursued further. C.6 Opinion on audit of Financial Statements (SA 705) 59. The EP was charged with non-compliance of Para 8 of SA 70519 for issuing a Qualified Opinion on the Standalone Financial Statements and a Disclaimer of Opinion on the Internal Financial Control over Financial Reporting (ICOFR) for the FY 2017-18. The Qualified Opinion and the Disclaimer of Opinion did not take into account the impairment needed for investments in the debentures of OSPL Infradel Pvt. Ltd, which amounted to Rs. 200 crores, and the incorrect recognition of DTA of Rs. 495.63 crores, discussed in the foregoing paragraphs. The EP denied the charge by stating that based on his replies given against the charges for recognition of DTA and impairment of investments, there was no reason to modify the opinion. 60. As discussed in the above paragraphs the recognition of DTA and investments in NCDs of OSPL were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Audit File showing how the EP verified the appropriateness of the elimination entries in preparation of the Consolidated Financial Statements and how the EP verified the appropriateness, valuation and completeness of the Minority Interest of Rs. 24.72 crores shown in the Consolidated Financial Statements as on 31.03.2018. 64. The EP denied the charge. The EP submitted that during FY 2017-18, there was no change in the investments held in the equity shares of RHDFC. Accordingly, the minority interest was the same as in previous year in terms of percentage. The Minority Interest was calculated by applying the said percentage to the shareholders' fund i.e. 12.50% of Rs. 197.77 crores which comes to Rs. 24.72 crores as stated in the Consolidated Financial Statements. The EP stated that while submitting the Audit Files to NFRA, the working papers for appropriateness, valuation and completeness of the Minority Interest were inadvertently missed out and submitted an email containing attachments showing the calculation of the minority interest and the elimination entries for the purpose of preparation of the Consolidated Financial Statements of RFL as on 31.03.2018. 65. We note t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements has been viewed seriously by international regulators too. For example, PCAOB in its order dated 06.02.202421 barred Marcelo de los Santos Anaya and Martín Rodríguez Martínez from being an associated person of a registered public accounting firm and imposed civil money penalty of $125,000 and $40,000 respectively and required both to complete 40 hours of continuing professional education. These penalties and sanctions were levied by PCAOB inter alia for failing to test the accuracy and completeness of the amounts presented by the company for the purpose of consolidation of its subsidiaries. D. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT 68. Based on the foregoing discussion and analysis, we conclude that the EP has committed professional misconduct as defined in Section 132(4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below: i. The Auditors committed professional misconduct of failure to report a material misstatement known to them to appear in a financial statement with which they are concerned in a professional capacity. (Refer Clause 6 of Part I of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic at large. 73. Thus, the Auditors are duty bound to examine and ascertain the integrity of Financial Statements of such entities 22 in larger public interest. 74. The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this Order, substantial deficiencies in the audit, abdication of responsibility and inappropriate conclusions on the part of CA Neeraj Bansal establish his professional misconduct. The lack of documented evidence in the original Audit File severely compromises the credibility of the audit and the reliability of the Financial Statements. Moreover, the submission of supplementary work papers, without substantiated audit procedures, appears to be an attempt to cover up significant audit deficiencies. Despite being a qualified professional, CA Neeraj Bansal has not adhered to the Standards and has thus not discharged the duty cast upon him. This conduct not only violates the SAs but also signifies a disregard for the principles of transparency and accountability in the audit profession. Had the auditor exercised due diligence, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw Appellate Tribunal (NCLAT) dated 01.12.202323, we have limited the monetary penalty to Rupees Five Lakhs only since the violations relate to FY 2017-18. 78. This Order will become effective after 30 days from the date of its issue. FOOTNOTE 1As per Rule 3 of NFRA Rules, 2018 2Revised (2016) Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013 3Standards on Auditing (SA) 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements 4Standards on Auditing (SA) 560, Subsequent Events 5Standards on Auditing (SA) 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment 6SA 330, The Auditor's Responses to Assessed Risks 7https://www.frc.org.uk/news-and-events/news/2024/05/sanctions-against-three-audit-firms-over-the-audits-of-london-capital-finance-plc/ 8SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing ⁹SA 230, Audit Documentation 10SA 500, Audit Evidence 11https://media.frc.org.uk/documents/Final_Decision_Notice_against_Pricewat rhouseCoop rs LLP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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