Auditor due diligence and NFRA jurisdiction over prior misconduct upheld, with professional misconduct findings and sanctions imposed

NFRA held that it could proceed against auditors for alleged misconduct relating to an audit period before its constitution, because the misconduct was already prohibited under the governing disciplinary law and the forum merely changed. It also found that the auditors failed to exercise due diligence and professional skepticism, did not obtain sufficient appropriate audit evidence, inadequately assessed valuation reports and expert competence, and failed to test recoverability, existence, and bank evidence for material balances. The engagement partner's supervision and the engagement quality control review were also found deficient. These breaches of the Standards on Auditing and the disciplinary framework resulted in findings of professional misconduct, with penalty and debarment imposed.

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Issues: (i) whether NFRA had jurisdiction to proceed against the auditors in respect of alleged misconduct relating to an audit period preceding the constitution of NFRA; and (ii) whether the auditors committed professional misconduct by failing to exercise due diligence and by conducting deficient audit procedures in relation to guarantees and securities, loans and advances, investments, engagement partner supervision, and engagement quality control review.

Issue (i): whether NFRA had jurisdiction to proceed against the auditors in respect of alleged misconduct relating to an audit period preceding the constitution of NFRA.

Analysis: The order held that Section 132(4) of the Companies Act, 2013 confers power on NFRA to investigate professional or other misconduct of chartered accountants and that the provision applies to misconduct committed earlier as well, because the forum changed but the underlying misconduct was already prohibited and punishable under the disciplinary law then in force. Reliance was placed on the exclusivity of NFRA jurisdiction under the statutory scheme and on the merger of the earlier appellate ruling with the Supreme Court's dismissal of appeals. The challenge based on retrospectivity was rejected.

Conclusion: NFRA had jurisdiction to initiate and complete proceedings for the alleged pre-2018 misconduct, and the objection to jurisdiction failed.

Issue (ii): whether the auditors committed professional misconduct by failing to exercise due diligence and by conducting deficient audit procedures in relation to guarantees and securities, loans and advances, investments, engagement partner supervision, and engagement quality control review.

Analysis: The order found that the auditors did not obtain sufficient appropriate audit evidence, did not apply professional skepticism, did not properly evaluate valuation reports or the competence and objectivity of valuation experts, did not carry out adequate testing of recoverability and existence of material balances, did not verify key bank and fund-movement evidence, and did not substantiate the basis for treating major matters as emphasis items while qualifying an immaterial item. It further held that the engagement partner failed to direct and supervise the audit and that the engagement quality control reviewer did not objectively review significant judgments. These failures were held to amount to violations of the applicable Standards on Auditing and professional misconduct under the disciplinary framework.

Conclusion: The charges of professional misconduct were proved against both auditors, with penalty and debarment ordered.

Final Conclusion: The proceedings culminated in findings of professional misconduct, followed by monetary penalty and debarment against the auditors for the specified periods.

Ratio Decidendi: An auditor must exercise due diligence, professional skepticism, and obtain sufficient appropriate audit evidence for material areas of the audit, while the regulatory forum empowered to discipline professional misconduct may proceed even where the audited period predates the forum's creation if the misconduct was already actionable under the governing law.

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