2023 (12) TMI 319 - NFRA - Companies Law

NFRA upholds jurisdiction over pre-2018 misconduct cases, penalizes chartered accountant Rs. 5 lakh with five-year audit ban

NFRA established jurisdiction over professional misconduct cases committed before its 2018 formation, rejecting challenges to retrospective application. ... Professional Misconduct - Jurisdiction of NFRA - failure to exercise due diligence, and being grossly negligent in the conduct of professional duties - failure 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 - failure to invite attention to any material departure from the generally accepted procedures to audit applicable to the circumstances - sanctions and penalties. Jurisdiction of NFRA - HELD THAT:- From the specific wordings of Section 132 and Rule 10, it is clear that NFRA has the sole and exclusive jurisdiction to initiate proceedings in cases of professional misconduct committed in earlier years too or else it would lead to an anomalous situation of a regulatory gap where any misconduct committed before the formation of NFRA will go unpunished. The law enabling investigation into professional and other misconduct, being in existence in the period before 2018, cannot be said to be retrospective and NFRA jurisdiction is established for implementing the process of investigation into misconduct committed in the past as well. Thus, the challenge to the jurisdiction of NFRA with respect to misconduct committed before 2018 does not stand - NFRA has the requisite jurisdiction to monitor compliance with accounting standards, monitor and enforce compliance with the SAS and to investigate matters of professional misconduct of Chartered Accountants falling under the NFRA domain. Charges of Professional Misconduct - HELD THAT:- The EQCR Partner did not perform his duties as per the Standards and the Law in conducting the Engagement Quality Control Review of the statutory audit of DHFL FY 2017-18. Based on the discussion and analysis, we conclude that the EQCR Partner has committed Professional Misconduct as defined in the Act, as below: i. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he 'does not exercise due diligence or is grossly negligent in the conduct of his professional duties'. This charge is proved, as the EQCR Partner failed to conduct the review in accordance with the SAS and applicable regulations. He failed to notice and document the serious omissions and commissions by the ET that led to the issue of a baseless audit report by the EP, as explained in paras 28 to 35 above. ii. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he 'fails 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' This charge is proved, as the EQCR Partner failed to conduct the review in accordance with the SAS and applicable regulations. He failed to notice and document the serious omissions and commissions by the ET that led to the issue of a baseless audit report by the EP, as explained in paras 28 to 35 above iii. CA Amit Vinay Chaturvedi committed professional misconduct as defined by Section 132 (4) of the Companies Act, 2013, read with Section 22 and Clause 9 of Part I of the Second Schedule of the Chartered Accountants Act, 1949 (No. 38 of 1949) as amended from time to time, which states that a Chartered Accountant is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”. This charge is proved since the EQCR Partner failed to conduct the review in accordance with the SA 220 and SQC-I as explained in Paras 28 to 35 above but falsely certified that he had performed the review as per SAS. Thus, it is concluded that the charges of professional misconduct in the SCN, as detailed above, stand proved based on the evidence in the Audit File, the audit reports on the standalone financial statements and consolidated financial statements for the FY 2017-18 and the submissions made by the EQCR Partner. Sanctions and penalties - HELD THAT:- Considering the nature and seriousness of violations and principles of proportionality, we, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, following is being imposed: (i) Imposition of a monetary penalty of Rupees Five Lakh upon CA Amit Vinay Chaturvedi, (ii) In addition, CA Amit Vinay Chaturvedi is debarred for Five years 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. Issues Involved:1. Jurisdiction of NFRA.2. Major lapses in the audit.3. Articles of charges of professional misconduct.4. Sanctions and penalties.Summary:1. Jurisdiction of NFRA:The EQCR Partner challenged the jurisdiction of NFRA, arguing that NFRA lacked authority to investigate professional misconduct for audits conducted before NFRA's establishment. The Hon'ble Bombay High Court and the Hon'ble Supreme Court upheld NFRA's jurisdiction. NFRA determined that it had the requisite jurisdiction under Section 132(4) of the Companies Act, 2013, to investigate professional misconduct, including cases before its establishment, as the law did not create new obligations but merely shifted the forum for investigation.2. Major Lapses in the Audit:The EQCR Partner, CA Amit Vinay Chaturvedi, was found to have failed in several key areas:- Audit Documentation: Failed to evidence objective evaluation of significant judgments made by the Engagement Partner (EP).- Discussion with EP: No evidence of discussions on significant matters during the audit.- Evaluation of EP's Work: Failed to question EP's compliance with Standards on Auditing (SAS) and the Companies Act.- False Reporting: Failed to report material misstatements, non-compliance with NHB Directions, and deficiencies in internal financial controls.- Going Concern Assumption: Did not assess the entity's ability to continue as a going concern.- Related Party Transactions: Failed to verify these transactions adequately.3. Articles of Charges of Professional Misconduct:The EQCR Partner was charged with:- Failure to Exercise Due Diligence: Gross negligence in professional duties.- Insufficient Information for Opinion: Did not obtain necessary information for expressing an opinion.- Failure to Report Material Departures: Did not highlight departures from generally accepted audit procedures.These charges were substantiated based on the evidence in the audit file and the EQCR Partner's failure to adhere to SAS and applicable regulations.4. Sanctions and Penalties:Considering the seriousness of the violations:- Monetary Penalty: A fine of Rupees Five Lakh was imposed.- Debarment: CA Amit Vinay Chaturvedi was debarred for five years from being appointed as an auditor or internal auditor or from undertaking any audit of financial statements or internal audit of any company or body corporate.These penalties will take effect 30 days from the issuance of the order.Conclusion:The NFRA found CA Amit Vinay Chaturvedi guilty of professional misconduct for failing to meet the standards required for an Engagement Quality Control Review, leading to an inappropriate audit report for DHFL for FY 2017-18. The penalties imposed reflect the gravity of the lapses and aim to uphold the integrity of the auditing profession.