TaxTMI 
TaxTMI 
2023 (8) TMI 129
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....sections: A. Executive Summary B. Introduction & Background C. Lapses in the conduct of audit D. Article of Charges of Professional Misconduct by the EP E. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) against CA Shekhar Sharad, the Engagement Partner, for professional misconduct in statutory audit of BCL for FY 2017-18, pursuant to information received from Registrar of Companies ('ROC' hereafter), West Bengal vide letter dated 24.11.2020. M/s Shekhar Sharad & Co., the Statutory Auditor of BCL for FY 2017-18, had resigned within one month after the issuing a Qualified Independent Auditor's Report dated 28.05.2018. 4. BCL^1 is a company dealing in the business of Cement Manufacturing and was listed on National Stock Exchange ('NSE' hereafter) and therefore falls under NFRA domain^2 BCL was required to prepare its Financial Statements ('FS' hereafter) for the FY 2017-18 in accordance with Indian Accounting Standards ('Ind As' hereafter), as notified by Ministry of Corporate Affairs. ....
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....s prescribed in the Act, the rules made thereunder, the Standards on Auditing, including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed u/s 132 (4) (c) of the Act. 10. A letter dated 24.11.2020 was received from Registrar of Companies (ROC), West Bengal regarding M/s Shekhar Sharad & Co., Statutory Auditor of BCL for FY 2017-18, had, after issuing the 'Qualified' Audit Opinion in its Independent Auditor's Report dated 28.05.2018, resigned within one month on the ground (as stated by him) that it was not possible for him to continue as Statutory Auditor due to reasons like ill health of his wife and shortage of qualified staff. NFRA took up the matter suo moto under Section 132 (4) and vide letter dated 21.12.2021, asked M/s Shekhar Sharad & Co., and the EP, to submit the Audit File along with other information within 30 days' time. The EP submitted the Audit File for FY 2017-18 on 23.02.2022. 11. The examination by NFRA showed that the EP had issued Qualified opinion on the matters mentioned below: a) Inability to comment on the correctness ....
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....ncluding the written responses of the EP. The identified lapses in the audit are regarding failure of the EP to assess the use of Going Concern basis by BCL, Improper Reporting of the same in the Independent Auditor's Report and Inconsistency in Audit Documentation, which have been discussed in Part 'C' of this Order. Part C C.1 Improper Assessment of Going Concern Basis 14. The EP was charged^5 with improper assessment of the appropriateness of the use of Going Concern basis of accounting by BCL. For the FY 2017-18, BCL prepared the financial statements on going concern bas is, despite presence of following factors raising serious questions on its going concern status: a) BCL reported loss Rs 44.49 crores for the year ended 31.03.2018 and accumulated loss of Rs 102.97 crores, which resulted in erosion of its net worth to Rs (-)0.416 crores. b) BCL had a negative working capital i.e.(-) Rs 238.85 crores. c) BCL was highly debt ridden i.e., its Total Debt was 80.32% of its Total Assets. d) BCL was defaulting in payment of debts amounting Rs 233.09 crores. 15. The SCN noted that as per Para 6 of SA 570^6 , the EP was requ....
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....ing Concern basis was based on discussion with the management and projected cash flow presented during the course of the audit. Cash Flow Statement, Quantitative Forecast for increasing capacity utilisation, and comparison of historical trends with the projection of next 12 months was checked, but the documents regarding the same were not kept in the audit file. The auditor has also stated that his assessment of the going basis possibly lacked additional quantitative details and documentary support but he had concluded that: "due to closure of Asansol plant, clinker division and huge financial liabilities as well as erosion of net worth and negative NWC, going principle is doubtful". The EP added that he had gone through the bank correspondence file regarding OTS, but documents were not retained in the audit file due to its voluminous nature. The EP also stated that he had obtained unsigned copy of the MRL, and relied on the management assurance that signed MRL shall be submitted by the management to the EP and accordingly he signed audit report on 28.05.2018 after receiving signed copy of the MRL. 17. We observe that: a) Under the going concern basis of accounting, ....
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....the EP needed to perform his analysis on the basis of an unsigned copy of MRL, he needed to document appropriately in the audit file. d) The EP submitted that he had doubts regarding appropriateness of the use of going concern and accordingly incorporated it in the Emphasis of Matter (EOM) para in the audit report. Such treatment is not in conformity with not only the applicable provisions of SA 570, as explained in the foregoing discussion, but also with SA 706^7 , according to which the Emphasis of Matter paragraph is used to draw the users' attention to a matter presented or disclosed in the financial statements provided the auditor would not be required to modify the opinion as a result of the matter (para 8 of SA 706). It is evident that the EP's use of the Emphasis of Matter to include the Going Concern basis, without determining if he needed to modify his opinion on this account, was in clear violation of SA 706. In light of the above, we conclude that the EP failed to comply with SA 230, SA 570, SA 705 and SA 706 in applying the prescribed audit procedures to evaluate BCL's assumption of the use of going concern basis for the preparation of its....
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....essive reliance on One time settlement of huge financial liabilities. Accordingly, the SCN stated that as per the requirement of Para 19 of SA 570, the disclosure made by BCL for the use of Going Concern Basis was not appropriate and the SCN charged that the EP did not comply with SA 570 and SA 705 in reporting on the Going Concern basis. 20. The EP stated that in his opinion, the doubt regarding going concern was not significant enough to consider the same as entirely inappropriate and accordingly he incorporated EOM for the same. He also acknowledged that proper interpretation of SA 570 by him could have resulted in issuing a qualified or adverse opinion rather than inclusion of EOM. He admitted that this was an error in making a professional judgement. 21. We have analysed in para 17 of this Order that the EP failed to comply with SA 570. We have already noted that as per Para 22 of SA 570, if adequate disclosure about the material uncertainty is made by the entity in its financial statement, the auditor shall express an unmodified opinion and the auditor's report shall include a separate section under the heading "Material Uncertainty Related to Going Concern". How....
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....eview Notes". The EP was reportedly assured by BCL that a signed copy of the unsigned MRL will be submitted. There was delay by BCL in furnishing MRL and on 28.05.2018, signed copy of the MRL was submitted which was identical to the unsigned MRL. The EP stated that he had signed the statutory audit report on 28.05.2018 i.e., after receipt of signed copy of MRL. 25. In this regard, we observe that as per para 13 of SA 580, the date of written representation shall be as near as practicable to, but not after, the date of the auditor's report on the financial statements. In light of this, we are not proceeding further with this charge. D. Articles of Charges of Professional Misconduct by the EP 26. As discussed in the foregoing paragraphs, the EP has made departures from the Standards and the Law, in his conduct of the audit of BCL for FY 2017-18. The EP has accepted the charges listed out in paragraph 18 (a) to 18 (e) of the SCN, reproduced below: (a) The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he "fails to disclose a material fact ....
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.... This charge is proved since the EP failed to conduct the audit in accordance with the SAs as explained in Para 14 to 22 above. Therefore, we conclude that the charges of professional misconduct enumerated in the SCN dated 03.11.2022 stand proved based on the evidence in the Audit File , the Audit Report issued by auditor, the submissions and admissions made by auditor, the annual report of BCL for the FY 2017-18 and other materials available on record. E. PENALTY & SANCTIONS 27. It is the duty of an auditor to conduct the audit with professional scepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity ^11 28. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law. 29. The EP in the present case was required to ensure compliance with SAs ....