TaxTMI 
TaxTMI 
2021 (5) TMI 1069
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng sections: A. Executive Summary B. Introduction & Background C. Major lapses in the audit D. Other lapses in the audit E. Article of Charges of Professional Misconduct by the Engagement Partner (EP) F. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. The National Financial Reporting Authority ('NFRA' hereafter) received information from Securities and Exchange Board of India ('SEBI' hereafter) pertaining to overstatement in reporting of Sales and Purchase figures to the tune of Rs.1417 crores in the Financial Statements of Sun and Shine Worldwide Limited (SSWL), Ahmedabad for the FYs 2012-13 and 2013-14. Accordingly, an investigation under Section 132(4) of the Companies Act 2013 ('Act' or 'CA- 2013' hereafter) was initiated by NFRA for professional misconduct, if any, by the Engagement Partner (EP) CA Rakesh Puri in the audit of SSWL and the audit files were called for from the EP, who had performed the statutory audit of the SSWL for five years from 2010-11 to 2014-15 4. The SSWL [SSWL 's CIN is LS1100GJ1994PLC022388 and it was earlier known as Robinson Worldwide Trade Limited and pres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....culars Financial Year Reported Figures# Overstatement* Sales 2012-13 159.07 146 2013-14 1791.02 1310 Purchases 2012-13 159.13 146 2013-14 1790.94 1417 # As per Financial Statement of SSWL * As conveyed by SEBI vide its letter dated 08.07.2020 From December 2012 onwards, around the same time that SSWL started reporting its inflated purchase and sales figures, the price of the SSWL scrip on BSE jumped to Rs 42 and from then onwards the price kept on increasing, reaching around Rs 85 in February 2014 and thereafter the price started declining, again falling to Rs.25 .55 in August 2014. The SSWL published its financial statements which contained manipulated sales and purchase figures till March 2014. This Order observes that such accounting manipulation had serious adverse effect on public interest, as reflected in the share price movements, and holds that the failure of the EP to properly audit such figures is a clear evidence of his gross negligence and professional misconduct. It is relevant to mention that SEBI has charged SSWL and its Directors with violating various provisions of SEBI Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on receipt of a letter dated 08.07.2020 from SEBI pointing out overstatement in the reported sales and purchase figures in the financial statements of SSWL as mentioned below: (Amount in Rs.) Particulars [ As conveyed by SEBI vide its letter dated 08.07.2020.] 2012-13 2013-14 Overstatement of Sales 146 Crores 1310 Crores Overstatement of Purchase 146 Crores 1417 Crores 11. SSWL was required to prepare its Financial Statements ('FS' hereafter) for the FYs 2012-13 and 2013-14 in accordance with applicable provisions of the Companies Act 1956 ('CA-1956' hereafter) and the Accounting Standards ('AS' hereafter) notified under the Companies (Accounting Standards) Rules, 2006. 12. Mis Y.D. & Co. was the statutory auditor of SSWL for FYs 2012-13 & 2013-14 and CA Rakesh Puri was the EP for these audit engagements. Vide NFRA letter dated 09.08.2021, the Audit File along with other information were called from the EP, who submitted these on 31.08.2021. As part of the investigation, a Questionnaire dated 04.02.2022 was also sent to the EP and his response was received on 26.04.2022. Another letter dated 15.06.2022 was sent to the EP ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct of the charges in the SCN, but submitted that due care was taken in performance of the said audit; that the applicable accounting and auditing standards were complied with; and that the audit opinion was framed after taking professional judgement based on the information and records available and circumstances prevailed at that time. 17. An opportunity of personal hearing was given to the EP, who appeared before the Executive Body, NFRA on 17.10.2022 when the submissions made by him during the hearing were placed on record. During the personal hearing, the EP reiterated his written submissions as mentioned in his reply vide letter dated 29.09.2022 and further explained his replies. 18. We have perused the written and oral responses of the EP and all other material on record and now proceed to deal with the charges levelled in the SCN. The major lapses in audit on the part of the EP relating to evaluation of the accounting policy for revenue recognition has been discussed in Part 'C' of this order. Other lapses viz., improper audit planning, failing to understand the nature of the entity, non-verification of account balances of debtors and creditors, non-communicati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the books of the company i.e., Purchase aggregating to Rs. 32035500.00 and since it was not sold on that day also it was carried forward and treated in the books as sales aggregating to Rs. 31969000.00. * Further, on the end of the next working day i.e. on 17/09/2012, company has got Daily MTM Bill/Ref no. DLYMTM/11-1709 from broker where in 70 Lots of FUT COPPER 30- NOV-12 which were carried forward from previous day was brought forward and the same was treated as Purchase in the books of the company i.e. Purchase aggregating to Rs. 3, 19, 69,000.00 and correspondingly since it was not sold on that day the position was carried forward which was treated as sales aggregating to Rs. 3,17,20,500.00. * The same process of accounting was going on till the date of actual settlement of open position of 70 Lots of FUT COPPER 30-NOV-12. That is how turnover of the company was built up and Purchase aggregating to Rs. 159.13 Crores and Sales aggregating to Rs. 159. 07 Crores were recorded in the books of accounts of the company. * The accountant of the company had recorded all the MTM Bills in the books of accounts of the company with assumptions that all the tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....accordance with the provisions of Guidance Note ('GN' hereafter) issued by ICAI in 2015 on derivative accounting. However, in his reply to the SCN, the EP submitted that he had obtained guidance from the Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options as issued in 2003. 20. We have gone through the replies of the EP and observe that: a) The EP has been inconsistent in his replies. It is not clear how he obtained guidance from the GN on derivative accounting issued in 2015} which was not even in existence at the time of audit. b) The GN issued in the year 2003 was applicable for Equity Derivative Instruments and not for the Commodity Future Contracts. It was withdrawn with effect from 01.04.2009. Therefore, the EP's reliance on the GNs was misplaced. c) The GNs of 2015 and 2003 were neither documented in the audit file, nor was there any policy of management stating that SSWL had used any such guidance in the accounting of commodity futures contracts. We observe that the GN issued in 2003 deals with computation of Mark-to-Market Margin by the Client. Para 31 of GN states that " ...For computation of....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. The position taken by the EP militates against this fundamental characteristics of revenue recognition. In the extant case, the SSWL recognised the revenue corresponding to the closing position of Futures Commodity Contract on daily basis without actual settlement of such contract. The risk and reward of the contract remained with the company. The EP failed to consider the basic principle of the transfer of "risk and reward" while auditing the SSWL's accounting policy on in revenue recognition. 21. The EP also argued that there was no guidance available for accounting of commodity future contracts. We find that this is incorrect. AS 30, Financial Instruments: Recognition and Measurement, was issued by the ICAI in 2007. It was recommendatory in nature for the first two years commencing on or after 1.4.2009 and mandatory on or after 1.4.2011. Subsequently, in the wake of the financial crisis and the attendant modifications in the accounting standards undertaken by the accounting standard setting bodies, the status of AS 30 was modified. The preparers ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....figures, the price of the SSWL scrip on BSE jumped to 􀂉 42 and from then onwards the price kept on increasing, reaching around 􀂊 85 in February 2014 and thereafter the price started declining, again falling to􀂉 25.55 in August 2014. The SEBI Order noted that SSWL published its financial statements which contained manipulated sales and purchase figures till March 2014. We observe that such accounting manipulation had serious adverse effect on public interest, as reflected in the share price movements, and we hold that the failure of the EP to properly audit such figures is a clear evidence of his gross negligence and professional misconduct. The statement of the EP that, "I have followed the principle of Institute .... so that there will not be any mis-statement and there will not be any over/under statement of profit/loss and the statement of Affair (Balance Sheet) reflects the true and fair view" cannot be accepted in light of what has been discussed above. As pointed out earlier, there was overstatement of sales up to the extent of 1310 crores (i.e., overstatement by 1099% in FY 2012-13 & 272% in FY 2013-14), which is a material misstatement as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of the possibility of fraud in revenue recognition. In spite of this, the EP failed to presume existence of the fraud risk in the revenue recognition, as required by SA 240. If he had any other rationale for absence of such presumption, then he had to record the same, however the EP did not document any such judgement. 25. The EP has stated in his reply to the SCN that "In the present case, the rise in the revenue figure does not create a risk of fraud as the transactions are through the recognised commodity exchange and registered broker and all transactions are made through banking channel and hence it is not presumed any risk. Even you should appreciate that even SEBI has not found any such kind of indication of fraud which has occurred in the company. The said facts are properly documented on page no. 184 to 185 of the show cause notice." The reply of the EP is not supported by the facts and is liable to be rejected in view of the following; (Amount in Rs Cr.) Particulars[As per Annual Report of SSWL] 2012-13 2013-14 % Increase Revenue from operations 159.07 1791.02 1026% Purchase of Stock in Trade 159.13 1790.94 1025.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of actual existence of commodity futures transactions. Accordingly, the EP was required to verify the revenue transactions with the underlying contracts notes issued by the broker. 27. We find that in the statement submitted to SEBl [As mentioned in the reply to question no. 6 on page no. 8 of Relevant fnding in the matter of the Financial Statements of SSWL conveyed by SEBI vide letter dated 08.07 2020], the EP had stated that the sample of contract notes was selected by SSWL and not by the EP or by his team. The statement of the EP is quoted as below: "I had checked the contract notes on a sample basis. The sample was selected by the company, and I had not sought any specific sample I trade related contract notes. " We did not find any audit documentation in the Audit File regarding contract notes. Notwithstanding the same, if the reply of the EP to SEBI is to be believed, then there were glaring procedural deficiencies, as the contract notes were selected by the company and not by the EP. The sampling approach of the EP was also not in compliance with the Para 7 and 8 of SA 530[SA 530 "Audit Sampling"], which specify appropriate sample size and its selecti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of nature, timing and extent of audit procedures required to be performed to achieve the objective of audit. Para 11 of SA 3 00 requires the auditor to document the overall audit strategy, the audit plan and any significant changes made during the audit engagement to such plans. 30. The EP was also charged [Vide Para 4.1.2 of the SCN] with non-compliance with SA 315 [SA 315 "Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and its Environment"] . As per Para 11 of SA 315, the EP was required to understand the nature of the business of SSWL by gaining understanding of relevant industry, applicable regulatory structure etc. at macro level and gaining an understanding of nature of the entity, its operations, its ownership, its governance & capital structure and applicable financial reporting framework etc. at the entity level. However, no audit documentation reflecting the work of the EP to understand the nature of the business of the entity was found in the audit file. 31. The EP responded to the charge by referring to some of the WPs and stated that " ... I strongly believe that while doing the audit of the entity the SA 30....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rried on by the company. Is there any change in the business if any please provide details of the same ", without any response to this item having been recorded by the BP. It is further written in the WP that the details were checked and verified by CA Rakesh Puri, but there is no information recorded about the business being carried out by the company, therefore it is not clear what contents were checked and verified by the EP. We further note that there are no supporting documents to show what information was gathered for obtaining an understanding of the nature of business of SSWL; and the details checked and verified by the EP do not have date and signature of the person who checked and verified making the whole exercise of preparing the WPs an eyewash. The EP has also referred to Page no 182 and 183 of the SCN in support of his understanding regarding the transactions being carried out by SSWL and policies adopted by it. However, it is observed that these WPs were not found in the audit file, rather provided as an Annexure to the replies submitted by the BP in response to NFRA Questionnaire. Therefore, these WPs are an afterthought and cannot be accepted. 35. The s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Engagements"] requires the auditor to ensure that management acknowledges its responsibility to provide the auditor with: i. Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters; ii. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. Further, as per Para 8 of SA 210, if the preconditions for an audit are not present, then in ordinary circumstances, the auditor shall not accept such audit engagement. Therefore, by this Para, the SAs have emphasized to not to accept the engagement if the preconditions do not exist. Considering the above, the EP and the audit firm were required, before accepting the audit, to assess whether the limitations of lack of time and financial constraints in accessing the premises of the entity could present a restrictive precondition and impose significant limitations on the EP to perform audit functions including check of internal controls, authenticity of the credentials of the company and active communication with the management and TCWG....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lated SA 210. D2 Non verification of balances of debtors and creditors 42. The EP was charged[Vide Para 4.3 of the SCN] with non-verification of balances of debtors and creditors as per the provisions of Para 2 and 12 of SA 505[SA 505 "External Confirmations"] relating to External Confirmations as mentioned below: a. The EP had reportedly asked [As reply by the EP vide Page no. 2 of his reply dated 26.04.2022 in response to NFRA questionnaire]. SSWL to collect external confirmation of balances of debtors and creditors and accordingly letters were dispatched to relevant parties by SSWL, but no confirmations were received. Contrary to such exercise by the EP, he was required to perform external confirmation independent of SSWL in accordance with Para 2 of SA 505, which he failed to do. b. The EP failed to document the external confirmation process is evident from the fact that no documentation was found in the Audit File regarding such letters to the parties. c. The EP did not adhere to Para 12 of SA 505 by not adopting alternative procedures in case of non-receipt of confirmations from debtors and creditors. 43. Responding to the charg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e available to NFRA and is in sharp contrast to his affidavit that he had submitted complete audit file to NFRA. His later submission that he is having accounting software backup, which was not compiled with the Audit File is also not acceptable, as he was duty bound to compile his audit file within 60 days after the date of 26 SA 505 "External Confirmations" 27 As reply by the EP vide Page no. 2 of his reply dated 26.04.2022 in response to NFRA questionnaire. 28 SA 500 "Audit Evidence" 29 SA 230 "Audit Documentation"auditor's report as per the requirement of SQC 1 [As per Para 75 of SQC l "Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements" and Para 14 read with Para A2 l of SA 230 "Audit Documentation"].And SA 230. 47. In view of above, the reply and explanation of the EP cannot be accepted, and we conclude that: i. The EP neither adopted the Audit Procedure of external confirmation of balances of the debtors and the creditors, nor adopted the alternate Audit Procedures. It is only when the EP was questioned through NFRA questionnaire and the SCN, he came up with some ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nication. 50. In his reply to NFRA, the EP stated that he used to send a letter to the Audit Committee and presume that the points drawn in the letter were confirmed and no further adjustment and details were required if nothing was heard. The said policy of the EP is in contravention of Para 5 (d) of SA 260, which requires an effective two-way communication between the auditor and the TCWG. Responding to the charges in the SCN, the EP referred to Para 8 of the SA 260 and stated that "as per Para 8, Audit Committee is TCWG and the communication sent by me to audit committee is in compliance with SA 260 only. So far further sending communication to Board, it is considered that since, Audit committee is one of the major committee for accounts and financial statement, they are duty bound to consider the same and inform the management about the same. " The EP Further stated that "The two-way communication does not mean that for each and every letter TCWG will respond to the auditor. It is a matter of circumstances and interest which is to be informed by each other for the better conduct of the audit. The relevant para of SA are reproduced herewith (A2 and A3 of SA 260)" ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irm, revoked its registration, and imposed a civil money penalty of $12500. D.4 Non-appointment of Engagement Quality Control Reviewer (EQCR) 53. The EP was charged [Vide Para4.5 of the SCN] with failure to adhere to the Para 19 (a) of SA 220 [SA 220 "Quality Control for an Audit of Financial Statements"] which requires appointment of EQCR for the statutory audit of a listed company. Since SSWL is a listed company, the EP was required to determine that EQCR was appointed. In response to above charge, the EP stated that "Appointment of EQCR is only required for which the firm has determined that an engagement quality control review is required As discussed earlier since, there is no significant transactions, no EQCR was appointed. Obviously, such reply reflects the EP's poor understanding of the provisions of Standards on Audit. As per para 19 (a) of SA 220, in case of a listed company, appointment of EQCR is compulsory. Further, the contention of the EP that there were no significant transactions in the company is false because he himself has claimed to have verified revenue to the tune of Rs.1,791.01 crores for FY 2013-14. Secondly, presuming there were no signi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the material non-compliances by the Company as explained in Para 19 to 22 above. ii. The EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he ''fails 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 EP failed to disclose in audit report the material misstatements made by the Company as explained Para 19 to 22 above. iii. The EP committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties". This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations, failed to report the material misstatements in the financial statements arising from overstatement of purchase and sales figures and failed to report non-compliances made by the Company, as exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ailed to design sufficient appropriate audit procedures to test the veracity of such exponential growth, which resulted into misleading and presenting a rosy picture to the stakeholders. 60. Section 132(4)(c) of the Companies Act 2013 provides that National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for (A) imposing penalty of: (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms; (B) debarring the member or the firm from-(I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority. 61. As per information furnished by CA Rakesh Puri vide letter dated 20.04.2023, fees rece....