NFRA penalizes audit firm Rs 5 lakh for professional misconduct under CA Act clauses 5-9

NFRA found the audit firm guilty of professional misconduct under clauses 5, 6, 7, 8, and 9 of Part I of the Second Schedule of the CA Act. The firm failed to disclose material non-compliances, report material misstatements, exercise due diligence, obtain sufficient information for opinion formation, and invite attention to departures from generally accepted audit procedures. The audit firm failed to implement quality control policies as required by Standards on Auditing and did not conduct the audit in accordance with applicable regulations. Under section 132(4) of Companies Act 2013, NFRA imposed a monetary penalty of Rs 5,00,000 on the audit firm, considering the nature of violations and principles of proportionality and deterrence.

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Issues Involved:
1. Liability of the Firm
2. Lapses in the Audit
3. Articles of Charges of Professional Misconduct
4. Penalty & Sanctions

Summary:

1. Liability of the Firm:
The firm, M/s S. Prakash Aggarwal & Co., argued that the Engagement Partner (EP) was already penalized for non-compliance related to the statutory audit of Vikas WSP Limited (VWL) for FY 2019-20, and further action against the firm would constitute double jeopardy. The firm contended that only the EP is accountable for non-compliance with auditing standards, as per SA 220 and SQC 1. The firm also argued that professional misconduct should be ascertained under Section 22 of the CA Act, 1949, which does not hold an audit firm guilty of professional misconduct. Additionally, the firm claimed that non-compliance with auditing standards or Code of Ethics cannot constitute professional misconduct for a firm.

The Authority found these arguments flawed, stating that the firm, as the appointed auditor u/s 139 of the Act, is accountable for compliance with auditing standards and quality control procedures. The firm cannot evade responsibility by shifting it to the individual partner. The charges against the firm stand proved.

2. Lapses in the Audit:
The firm faced several charges for lapses in the statutory audit of VWL for FY 2019-20, including:
- Failure to recognize full interest cost on borrowings classified as NPAs, leading to material misstatement of financial statements.
- Deficiencies in audit documentation and evidence, such as lack of audit procedures for evaluating interest cost, incomplete Management Representation Letter (MRL), and absence of documentation for discussions among the Engagement Team (ET).
- Failure to meet requirements of SA 230 regarding the nature, timing, and extent of audit procedures.
- No documentation of verification of interest certificates and balance confirmations from banks.
- Lack of communication with Those Charged With Governance (TCWG) as required by SA 260.
- Failure to appoint an Engagement Quality Control Review Partner (EQCR) for the audit engagement, violating SA 220.
- No documentation of compliance with independence requirements as stipulated in SA 220.

The firm denied all charges, reiterating that the EP was responsible for the audit engagement and quality. However, the Authority found the firm's reply inadequate and held the firm accountable for the lapses.

3. Articles of Charges of Professional Misconduct:
The Authority concluded that the audit firm committed professional misconduct as defined by the CA Act, including:
- Failure to disclose a material fact in financial statements.
- Failure to report a material misstatement.
- Gross negligence and lack of due diligence in professional duties.
- Failure to obtain sufficient information necessary for expressing an opinion.
- Failure to invite attention to material departures from generally accepted audit procedures.

The charges of professional misconduct against the firm were proved based on the evidence in the Audit File, Audit Report, and other materials on record.

4. Penalty & Sanctions:
The Authority emphasized the importance of audit firms formulating and implementing quality control policies and procedures to ensure compliance with professional standards and regulatory requirements. The firm failed to perform its duties, resulting in substantial deficiencies in the audit work.

U/s 132(4) of the Companies Act, 2013, the Authority imposed a monetary penalty of Rs 5,00,000/- (Rupees Five Lakhs only) on M/s S. Prakash Aggarwal & Co. The order will take effect after 30 days from its issue.

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