2022 (9) TMI 1479 - NFRA - Companies Law

External Auditor Guilty of Professional Misconduct: False Reporting & Non-Compliance

In Re : Rajiv Bengali

In Re : Rajiv Bengali - TMI Issues Involved:1. False reporting by Auditor in Independent Auditor's Report.2. Failure to comply with Standards on Auditing.3. Failure to report non-compliance with Accounting Standards and provisions of the Companies Act 2013.Issue-wise Detailed Analysis:A. False reporting by Auditor in Independent Auditor's Report1. False Reporting on Cash Flow Statement (CFS):- The auditor falsely reported auditing the CFS, which was not present in the financial statements. The EP later submitted a CFS, raising suspicion it was created post-facto to mislead.- The EP's defense that the CFS was inadvertently not attached was found unconvincing due to discrepancies in the manner of preparation and signing.2. False Reporting on RBI Registration:- The auditor incorrectly reported TDML as registered under section 45IA of the RBI Act, which was not the case.- The EP's claim of a typographical error was dismissed, highlighting a lack of due diligence.3. False Reporting on Specified Bank Notes (SBN) Disclosure:- The auditor falsely reported that TDML disclosed dealings in SBNs post-demonetization, which was not included in the financial statements.- The EP's justification of an unsigned disclosure sent to the company was deemed an attempt to cover up the oversight.B. Failure to comply with Standards on Auditing (SAs)1. General Non-compliance with SAs:- The EP falsely stated compliance with SAs despite numerous violations, including failure to retain audit documentation for seven years and inadequate audit evidence.- The EP's excuses of system breakdown and non-communication were rejected as frivolous.2. Non-compliance with SA 240 (Fraud):- The auditor failed to recognize risks of material misstatements due to fraud, particularly regarding unusual expenses and misstatements in bad debts.- The EP's claim of no circumstances indicating fraud was dismissed given the significant and unusual expenses.3. Non-compliance with SA 450 (Misstatements):- The EP failed to document corrections of misstatements, particularly regarding bad debts and other expenses.- The EP's defense of system breakdown and non-communication was rejected.4. Non-compliance with SA 570 (Going Concern):- The auditor failed to obtain evidence supporting the 'Going Concern' assumption despite several adverse indicators.- The EP's explanations were found insufficient and unsupported by audit documentation.5. Non-compliance with SA 550 (Related Party Transactions):- The EP failed to identify and disclose related party transactions, despite evidence of such transactions in the audit file.- The EP's inability to retrieve emails was deemed an unacceptable excuse.6. Non-compliance with SA 230 (Audit Documentation):- The EP failed to document audit procedures and evidence, and did not assemble the audit file within the required timeframe.- The EP's explanation of system breakdown was rejected.C. Non-compliance with Accounting Standards (AS) and Provisions of the Companies Act 20131. Approval and Signing of Financial Statements:- The EP failed to obtain evidence that financial statements were approved by the Board of Directors and signed as required by the Act.- The EP admitted lapses in trusting the directors' signatures without verification.2. Deferred Tax Assets (DTA):- The EP failed to evaluate the reasonable certainty of future taxable income to justify DTA recognition.- The EP's defense was unsupported by audit documentation.3. Non-compliance with Division I of Schedule III:- Several presentation and classification errors in the financial statements were identified, which the EP failed to report.- The EP admitted some lapses but provided evasive replies for others.4. Significant Accounting Policies (SAP):- The EP failed to report non-compliance with statutory requirements in SAP, including depreciation methods and inventory valuation.- The EP admitted errors but failed to report them in the audit.5. Managerial Remuneration:- The EP incorrectly reported no managerial remuneration despite evidence of salary payments to a director.- The EP's explanation of inadvertent errors was rejected.6. Employee Benefits (AS 15):- The EP failed to report non-compliance with AS 15 regarding retirement benefits.- The EP's reliance on verbal explanations was deemed insufficient.Conclusion:The EP was found guilty of multiple counts of professional misconduct, including failure to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and follow generally accepted audit procedures. The EP was penalized with a monetary fine and debarred from auditing for five years.