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of <h1>Auditors found guilty of professional misconduct under Section 132(4) for failing due diligence in public interest entity audit</h1> <h3>IM RE: In the matter of Zee Entertainment Enterprises Limited for the FY 2018-19 and 2019- 20</h3> IM RE: In the matter of Zee Entertainment Enterprises Limited for the FY 2018-19 and 2019- 20 - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the auditors, M/s Deloitte Haskins & Sells LLP, CA A.B. Jani, and CA Rakesh Sharma, committed professional misconduct under Section 132(4) of the Companies Act, 2013, in their audit of Zee Entertainment Enterprises Limited (ZEEL) for the financial years 2018-19 and 2019-20.Whether the auditors failed to disclose material facts, exercise due diligence, and obtain sufficient information necessary for expressing an opinion on the financial statements.Whether the auditors violated the Standards on Auditing (SAs) and the Companies Act by not reporting suspected fraud and unauthorized transactions involving related party transactions and the premature closure of a fixed deposit (FD) by Yes Bank.Whether the penalties and sanctions imposed on the auditors are justified based on the findings of professional misconduct.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Professional MisconductRelevant legal framework and precedents: The judgment references Section 132(4) of the Companies Act, 2013, and the Standards on Auditing (SAs), which outline the duties and responsibilities of auditors, including the requirement to disclose material facts and exercise due diligence.Court's interpretation and reasoning: The court found that the auditors failed to identify and report unauthorized transactions involving the premature closure of an FD by Yes Bank, used to settle loans of related parties without proper authorization from ZEEL's Board or Shareholders. The auditors were deemed grossly negligent and lacking professional skepticism.Key evidence and findings: The court highlighted the auditors' failure to obtain sufficient audit evidence, such as communications from Yes Bank explaining the premature closure of the FD, and their reliance on management's assertions without adequate verification.Application of law to facts: The auditors' actions were found to violate Sections 177 and 185 of the Companies Act, as they did not report the unauthorized use of ZEEL's funds for related party transactions, nor did they report suspected fraud under Section 143(12).Treatment of competing arguments: The auditors argued that they were not provided with certain critical documents by ZEEL and that they exercised professional skepticism by qualifying limited review reports. The court rejected these arguments, noting inconsistencies in the auditors' qualifications and their failure to follow up on significant audit evidence.Conclusions: The court concluded that the auditors committed professional misconduct by failing to disclose material facts, exercise due diligence, and obtain sufficient information necessary for expressing an opinion on the financial statements.Issue 2: Violations of Standards on Auditing (SAs)Relevant legal framework and precedents: The judgment references various SAs, including SA 500, SA 240, SA 330, and SA 700, which set standards for obtaining audit evidence, detecting fraud, assessing risks, and forming audit opinions.Court's interpretation and reasoning: The court found that the auditors failed to comply with these standards by not obtaining sufficient audit evidence, not maintaining professional skepticism, and not adequately addressing inconsistencies in audit evidence.Key evidence and findings: The auditors did not verify the basis for the premature closure of the FD, ignored red flags indicating potential fraud, and relied on management's assertions without independent verification.Application of law to facts: The auditors' failure to comply with the SAs resulted in an unreliable audit opinion and a failure to report material misstatements and suspected fraud.Treatment of competing arguments: The auditors claimed they performed additional procedures and communicated with those charged with governance. The court found these procedures inadequate and not aligned with the requirements of the SAs.Conclusions: The court concluded that the auditors violated multiple SAs, resulting in an unreliable audit opinion and failure to report material misstatements and suspected fraud.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The auditors did not exercise professional skepticism and were grossly negligent in the audit of the matter related to FD closure. The Audit report dated 24th July 2020 was baseless, erroneous and, hence, unreliable.'Core principles established: Auditors must exercise due diligence, maintain professional skepticism, and obtain sufficient audit evidence to support their opinions. Failure to do so constitutes professional misconduct.Final determinations on each issue: The court found the auditors guilty of professional misconduct, imposed monetary penalties, and debarred the individual auditors from auditing for specified periods.Penalties and SanctionsM/s Deloitte Haskins & Sells LLP was fined Rupees Two Crore.CA A.B. Jani was fined Rupees Ten Lakhs and debarred for 5 years.CA Rakesh Sharma was fined Rupees Five Lakhs and debarred for 3 years.
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