2024 (5) TMI 140 - NFRA - Companies Law

NFRA penalizes auditors Rs 50 lakh, debars partner for professional misconduct under Section 132(4) Companies Act 2013

NFRA found auditors guilty of professional misconduct under Section 132(4) of Companies Act 2013 for audit failures during FY 2019-2022. The auditors ... Professional Misconduct by CA - Liability of the Engagement Partner (EP) with Audit Firm - Failure related to non-recognition of liabilities classified as Non-Performing Assets (NPAs) by the Lender Banks - Failure to evaluate the management's assessment of the entity's ability to continue as a Going Concern - Failure relating to Revenue Recognition - Failures relating to Audit Documentation - Failures relating to audit evidence for Inventory - Failure relating to forming opinion on Financial Statements without obtaining Sufficient Appropriate Audit Evidence - Lapses in fulfilling duties related to Engagement Quality Control (EQC) Reviewer - Failure to determine Materiality - Failures related to audit of Trade Receivables - Failures relating to communication with Those Charged With Governance - Failure to report non-compliances with provisions of the Companies Act 2013 - Penalty and Sanctions - Section 132 (4) of the Companies Act, 2013. HELD THAT:- The Auditors have made a series of serious departures from the Standards and the Law, in their conduct of the audit of CMIL for FY 2019-2020, 2020-21 and 2021-22. Based on the above discussion, it is proved that the auditors failed to report in their audit report, the misstatement in the financial statements of CMIL. The poor quality of audit as reflected in failures related to fundamental aspects of audit like setting materiality, evaluation of going concern, carrying out external confirmation together with the incomplete documentation, further compound the professional misconduct of the auditors. It is concluded that the Auditors have committed Professional Misconduct as defined under Section 132 (4) of the Companies Act, 2013 in terms of Section 22 of the Chartered Accountant Act 1949 (CA Act) as amended from time to time as follows: i. The auditors committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 5 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ':fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity'. This charge is proved as the auditors failed to disclose in their audit report the material non-compliances by the Company in the area of recognition of the liabilities towards banks/financial institutions beyond the NPA dates. ii. The auditors committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 6 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he 'Jails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity'. This charge is proved as the auditors failed to disclose in their audit report the material non-compliances by the Company in the area of recognition of the liabilities towards banks/financial institutions beyond the NP A dates. iii. The auditors committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he 'does not exercise due diligence and is grossly negligent in the conduct of his professional duties'. This charge is proved as the auditors failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to their failure to report the material misstatements and non-compliances of the Company in its financial statements. iv. The auditors committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 ( as amended from time to time), which states that an auditor 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 auditors failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to their failure to report the material misstatements and non-compliances of the Company in the financial statements. v. The auditors committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor 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 auditors failed to conduct the audit in accordance with the SAs but falsely reported in their audit report that the audit was conducted as per SAs. The charges of professional misconduct enumerated in the SCN dated 04.12.2023 stand proved. Penalty and sanctions - HELD THAT:- Section 132(4) of the Companies Act, 2013 provides for penalties where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law. Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered: i. Monetary penalty of Rs 50,00,000/- (Rupees Fifty Lakhs) upon the Audit firm, M/s Krishna Neeraj & Associates. ii. Monetary penalty of Rs 10,00,000/- (Rupees Ten Lakhs) upon CA Krishna Kr Neeraj. iii. CA Krishna Kr Neeraj is also debarred for 2 (Two) 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. Lapses in the Audit2. Specific Lapses of the Audit Firm3. Articles of Charges of Professional Misconduct by the Auditor4. Penalty & SanctionsSummary:1. Lapses in the Audit:Non-recognition of Liabilities as NPAs:The auditors failed to report the non-recognition as liabilities of the interest accrued on loans classified as Non-Performing Assets (NPAs), resulting in a 'misstatement' as per Para 13(i) of SA 200. This led to an understatement of interest cost, current liabilities, and the reported loss by the company (Para C.1).Evaluation of Going Concern:The auditors failed to analyze the going concern assumption despite continuous declining trends in revenue, profit after tax, and net worth of CMIL, violating SA 570 (Para C.2).Audit Documentation:The auditors failed to demonstrate sufficiency and appropriateness of audit work in several critical aspects, including determining materiality, verification of inventories and trade receivables, and evaluating audit results, violating SA 230 (Para C.4).Physical Verification of Inventory:The auditors failed to perform physical verification or alternative audit procedures to determine the existence and condition of inventory, violating SA 501 (Para C.5).External Confirmation for Trade Receivables:The auditors failed to carry out external confirmation for trade receivables or any other alternative audit procedure, violating SA 505 (Para C.9).Engagement Quality Control Reviewer (EQCR):The auditors failed to demonstrate compliance with the requirement of the Standards on Auditing concerning the EQCR, violating SA 220 (Para C.7).Materiality Determination:The auditors failed to determine materiality for the financial statements as a whole, violating SA 320 (Para C.8).Communication with Those Charged with Governance (TCWG):The auditors failed to communicate with TCWG about audit responsibilities, scope, timing, and deficiencies in internal control, violating SA 260 and SA 265 (Para C.10).2. Specific Lapses of the Audit Firm:The audit firm failed to fulfill its duties prescribed u/s 143 of the Companies Act, 2013, and did not adhere to the requirements of SQC 1. The firm lacked a proper system of quality control, and the audit documentation was incomplete and misleading (Para D).3. Articles of Charges of Professional Misconduct by the Auditor:The auditors committed professional misconduct by failing to disclose material facts, report material misstatements, exercise due diligence, obtain sufficient information, and invite attention to material departures from generally accepted audit procedures. These violations are u/s 132(4) of the Companies Act, read with Section 22 of the Chartered Accountants Act 1949 (Para E).4. Penalty & Sanctions:Based on the investigation and proceedings u/s 132(4) of the Companies Act, the following penalties and sanctions were imposed:- Monetary penalty of Rs 50,00,000/- on the audit firm, M/s Krishna Neeraj & Associates.- Monetary penalty of Rs 10,00,000/- on CA Krishna Kr Neeraj.- Debarment of CA Krishna Kr Neeraj for 2 years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of any company or body corporate (Para F).This Order will become effective after 30 days from the date of issue.