2024 (12) TMI 168 - NFRA - Companies Law

Auditor penalized Rs. 5 lakh for professional misconduct under Section 132(4) for failing fraud reporting obligations

In the matter of M/s. Ushdev International Limited for FY 2017-18 against CA Chirag Doshi

NFRA found an auditor guilty of professional misconduct under Section 132(4) of Companies Act, 2013 for gross negligence in fraud reporting obligations ... Professional misconduct - Section 132(4) of the Companies Act, 2013 - gross negligence in relation to his obligations to report fraud under Section 143(12) of the Companies Act, 2013 and SA 240 - reliance placed on the valuation report of the management's expert without challenging the assumptions and methods and without independently assessing the impairment requirements of these investments - deficiencies in the audit working papers - non-compliances with Ind AS 16 - Disclaimer of Opinion was based only on the NCLT, Mumbai Bench Order dated 14.05.2018. HELD THAT:- It is concluded that even though the EP has issued a Disclaimer of Opinion, he failed to exercise due diligence and displayed gross negligence in failure to adequately address the risks related to fraud, disclosures requirements and deficiencies in audit documentation and make appropriate reports under Section 143(12). 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: a. The EP committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct of his professional duties. (refer to Clause 7 of Part I of the Second Schedule of the CA Act). b. The EP committed professional misconduct by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the audit engagement (refer to Clause 9 of Part I of the Second Schedule of the CA Act). Penalty and sanctions - HELD THAT:- Section 132(4) of the Companies Act, 2013 provides for penalties in a case 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 - Absent a robust system of auditing, investors, creditors and other users of Financial Statements would be handicapped and their interest compromised. The best of systems fails if the professionals implementing the system do not perform their job. This could lead to a serious failure of the financial system which could ultimately result in a breakdown in trust and confidence of investors and the public at large. Considering the professional misconducts have been proved 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 imposition of monetary penalty of Rs. 5,00,000/-. Issues Involved:1. Responsibilities relating to fraud under Section 143(12) of the Companies Act, 2013 and SA 240.2. Obtaining sufficient appropriate audit evidence (SA 500).3. Compliance with audit documentation standards (SA 230).4. Non-compliance with Indian Accounting Standards (Ind AS 16 and Ind AS 107).5. Basis for Disclaimer of Opinion on Internal Financial Control over Financial Reporting (ICOFR).6. Inadequate disclosures in the Statement of Cash Flows.7. Non-compliance with other Standards on Auditing (SAs).Issue-wise Detailed Analysis:1. Responsibilities Relating to Fraud:The auditor, CA Chirag Doshi, was found to have failed in his responsibilities under SA 240 and Section 143(12) of the Companies Act, 2013. Despite indicators of fraud, such as a significant increase in Expected Credit Loss (ECL) provisions and sales to defaulting parties, the auditor did not report potential fraud. The auditor's argument that prior audits did not reveal fraud was rejected, as his responsibilities included identifying ongoing or already committed frauds. The auditor's lack of professional skepticism and due diligence in examining transactions with defaulting parties was noted, leading to a finding of gross negligence.2. Obtaining Sufficient Appropriate Audit Evidence (SA 500):The auditor failed to obtain sufficient audit evidence regarding the valuation of non-current investments in subsidiaries. The reliance on a management expert's report, which lacked due diligence, was criticized. The auditor did not independently verify the assumptions or assess the impairment requirements of these investments, indicating a lack of due diligence and gross negligence.3. Compliance with Audit Documentation Standards (SA 230):The auditor did not comply with SA 230, as the audit documentation lacked authentication, dates, and evidence of review. The involvement of a non-team member in preparing audit documentation raised concerns about the integrity of the audit file. The auditor's explanation of inadvertent omissions was not accepted, and the lack of proper documentation was considered a serious lapse.4. Non-compliance with Indian Accounting Standards (Ind AS 16 and Ind AS 107):The auditor failed to report non-compliance with Ind AS 16 regarding disclosures of restrictions on property, plant, and equipment. The auditor's disclaimer of opinion on borrowings did not absolve him of the responsibility to report these non-compliances. However, the charge related to Ind AS 107 was not pursued further due to the disclaimer of opinion on trade receivables and ECL provisioning.5. Basis for Disclaimer of Opinion on Internal Financial Control over Financial Reporting (ICOFR):The auditor's disclaimer of opinion on ICOFR was based solely on the NCLT order, without documenting other relevant facts. This was deemed deficient, showing gross negligence and lack of due diligence.6. Inadequate Disclosures in the Statement of Cash Flows:The auditor was charged with inadequate disclosure of non-cash transactions in the Statement of Cash Flows. Although the auditor acknowledged the error and promised to be more cautious in the future, the charge was not pursued further.7. Non-compliance with Other Standards on Auditing (SAs):Charges related to non-compliance with other SAs were not pursued further due to the disclaimer of opinion and the auditor's explanations.Conclusion and Penalty:The auditor was found guilty of professional misconduct for not exercising due diligence and displaying gross negligence. A monetary penalty of Rs. 5,00,000 was imposed under Section 132(4)(c) of the Companies Act, 2013. The order emphasized the importance of maintaining audit quality to protect the interests of investors and the public. The penalty was limited to Rs. 5,00,000 in light of the retrospective jurisdiction of NFRA and the nature of violations related to FY 2017-18. The order will become effective 30 days from its issue date.