TaxTMI 
TaxTMI 
2023 (8) TMI 203
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....ry B. Introduction & Background C. Major lapses in the Audit D. Other non-compliances with Laws and Standards E. Omissions and commissions by the Audit Firm F. Points of Law raised by the Auditors. G. Articles of Charges of Professional Misconduct by the Auditors H. Penalty & Sanctions A. EXECUTIVE SUMMARY 3 Pursuant to Securities and Exchange Board of lndia ('SEBI' hereafter) sharing in April 2022 its investigation regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL, NFRA initiated investigations into the professional conduct of the statutory auditors under Section 132(4) of the Companies Act 2013 ('Act' hereafter). Tanglin Developments Limited is a subsidiary company of CDEL. 4 NFRA's investigations inter alia revealed that the TDL's Auditors for the FY 2018-19, had failed to meet the relevant requirements of the Standards on Auditing ('SA' hereafter) in a number of significant aspects and demons....
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.... and sanctions with effect from a period of 30 days from issuance of this Order: i. Imposition of a monetary penalty of Rs One crore upon Mis Sundaresha & Associates. In addition, M/s Sundaresha & Associates. is debarred for a period of two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; ii. Imposition of a monetary penalty of Rs Five Lakhs upon CA C. Ramesh. In addition, CA C. Ramesh is debarred for a period of five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. B. INTRODUCTION & BACKGROUND 6 The National Financial Reporting Authority ('NFRA' hereafter) is a statutory authority set up under section 132 of the Companies Act 2013 (' Act' hereafter) to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such stan....
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.... from MACEL to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, whose outstanding balances payable to MACEL were Rs 3,238.95 crores as on 31.03.2019. On examination of FS of MACEL, it transpired that MACEL did not have any business transactions with the 6 of the 7 subsidiary companies except CDGL, and was used as a conduit to transfer funds from CDEL's subsidiaries to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, as loans and advances that were never returned to MACEL/CDEL. 13. The modus operandi of the alleged diversion of funds discovered by the SEBI during its investigation was that "VGS used to ask the Authorized Signatories to sign a bunch of cheques which were kept in his possession and used them as and when required". Such pre- signed blank cheques of bank accounts of various Coffee Day Group companies were used for the diversion of funds. 14 TDL is engaged in setting up a fully integrated Information Technology Park ("Industrial Park") and campuses for software development at Bangalore and Mangalore. It had three subsidiaries viz., Giri Vidhyuth India Limited, Tang....
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....re to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion, and e) Failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances. 16 The Auditors sought an extension of time of 45 days for submitting response to SCN, which was allowed. The Audit Firm vide letter dated 18.01.2023 submitted its reply to SCN. The EP vide letter 19.01.2023 submitted that the reply of the firm may be considered as his reply and that he was not giving separate reply. 17 In the interest of natural justice, the opportunity of personal hearing was also given to the Auditors on 17.03.2023 at 2:30 PM. However, the Firm and CA C. Ramesh vide letters dated 28.02.2023 withdrew their requests for personal hearing and further requested NFRA to decide the case based on their written submission. Accordingly, this Order is based on examination of the facts of the matter, charges in the SCN, written replies of the Auditors and other materials available on record. General submissions by the Auditors 18 The Auditors have submitted that S....
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....rofits of Mis Sundaresha & Associates, which had five partners. Her father CA A. S. Sundaresha is proprietor of Mis Sundaresh & Co. that had provided audit and non-audit services to 29 entities belonging to Coffee Day Group including its promoters. CA A. S. Sundaresha also had 81 % share in the profits of another partnership firm Mis ASRMP & Co., which had four partners. Further, Mis Sundaresha & Associates was actively participating in making audit presentation etc. in respect of statutory audit of CDGL, whereas Mis ASRMP & Co. was the statutory auditor of CDGL. Further, CA Pradeep Chandra C., Partner of Mis Sundaresha & Associates represented as partner of Mis ASRMP & Co. in the Audit Committee meeting of CDGL. All these audit firms operated from the same office address. 20 The SCN referred to SA 2005 that requires the auditor to comply with relevant ethical requirements, including those pertaining to independence relating to financial statements audit engagements. Para 18 of SQC 1 requires the Audit Firm to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence require....
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....le that the Audit Firm and the engagement team had complied with these Independence requirements as per SQC-1, SA 200 and SA 220. Auditors' Reply & Our Findings 24 The Auditors denied this charge stating that they had complied with the Independence requirements by reducing self-interest threat & familiarity threat; that their firm & partners do not have any financial interest in any of the CCD group companies; that they did not quote lower fees to obtain new engagements; and that they did not have close business relationship with CCD group nor have they stored any confidential information in their server to be used for any personal gain. They further stated that no partner or their family are Directors or Officers in CCD group companies; that CCD group Directors and Officers did not have significant influence over their engagement; that their audit team will be regularly rotated and that they did not provide any prohibited service under section 144 of the Act etc. They also stated that they had ensured that total fees from auditee did not exceed prescribed limits and where the amount formed large portions of total fees they had taken the following safeguards to mitigate the r....
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....repared by CA Megha Sundaresha Andani, partner of M/s Sundaresha & Associates. (As per properties of PDF document containing the presentation). 28 The inter- relationship among the three firms is corroborated by another fact that CA Pradeepa Chandra C. and CA Chaitanya G. Deshpande (both Partners of M/s Sundaresha & Associates) were involved in the statutory audit of CDGL for FY 2018-19, of which M/s ASRMP & Co. was the statutory auditor. As per the Audit File of CDGL for FY 2018-19, the above said two partners of M/s Sundaresha & Associates were involved in 4 7 out of 67 audit areas identified in the audit plan. Out of these 47 audit areas, 44 were not reviewed by any partner of M/s ASRMP & Co. This shows that they were not only supervising the day to day audit work being performed by the article assistants but were practically doing a major part of the audit. This also shows that the audit of CDGL was performed not merely by M/s ASRMP & Co. but by M/s Sundaresha & Associates also. But to hide this fact, both partners of M/s Sundaresha & Associates were named as external reviewers in the audit file of CDGL, a fact that has also been pointed out in our order dated 12.04.2023 in th....
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....gating action. Para 100.6 of the Code states that a professional accountant has an obligation to evaluate any threats to compliance with the fundamental principles when the professional accountant knows, or could reasonably be expected to know, of the circumstances or relationships that may compromise compliance with the fundamental principles. Para 100.9 of the Code states that compliance with the fundamental principles may potentially be threatened by a broad range of circumstances which inter alia includes self interest threat and familiarity threat. Chapters 2 of the Code provide examples of circumstances that may create threats for professional accountants in public practice. Para 120.2 of the Code states that relationships that bias or unduly influence the professional judgment of the professional accountant should be avoided. Para 200.4 of the code states that examples of circumstances that may create self-interest threats for a professional accountant in public practice include, but are not limited to, inter alia, "Concern about the possibility of losing a client". Para 200.7 of the Code states that examples of circumstances that may create familiarity threats include, but ....
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....lity to act with integrity, to be objective and to maintain an attitude of Professional Skepticism. An auditor is required to be independent, and without any bias with respect to the client so as to ensure impartiality, which is necessary for the dependability of his findings. It is of utmost importance to the profession that the general public to have confidence in the independence of the Auditors. Public confidence would be impaired by any evidence that independence was actually lacking, and it might also be impaired by the existence of circumstances, which reasonable people might believe, are likely to influence independence. 33 In this case, the Auditors failed to perform appropriate audit procedures to evaluate and maintain their independence from TDL. In spite of the Auditors having an independence threat, they accepted the audit engagement as statutory auditor of TDL from FY 2018-19 by disregarding and grossly violating the principles of lndependence mentioned in the Standards on Auditing and the Code of Ethics. In view of this, the charge stands proved that the Auditors have violated SQC 1, SA 200 and SA 220. C.2 Tampering of Audit File and related lapses - SA 230, Audit ....
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....apers nor are the names of the team members who reviewed the audit work and the extent of review. No information about engagement team is available in the Audit File. Accordingly, the Auditors were charged with failure to comply with para 14 of SA 200, para 9 of SA 220, para 14, A21 of SA 230 and para 14 & 75 of Standard on Quality Control-I. Auditors' Reply & Our Findings 36 The Auditors denied this charge stating that there has been no tampering of the Audit File. They submitted that maintenance of editable Excel file is not prohibited in SA 230 and modification of audit file is allowed as per para 16 of SA 230; that they have only formatted those files to make it pleasant to view & for easy referencing; that the workings maintained in loose sheets were compiled in Excel format after receipt of NFRA notice, and during this process the date modified could have been changed to the latest date; and that cosmetic changes had been made for better presentation but the contents of the Audit File have not been changed. 37 Having considered the reply, we observe that in terms of SA 230, modification in the audit file after the assembly period is allowed only to clarify any existing....
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....ng, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements; (b) The results of the audit procedures performed, and the audit evidence obtained; and (c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. c) Paragraph 9 of SA 230: In documenting the nature, timing and extent of audit procedures performed, the auditor shall record: (a) The identifying characteristics of the specific items or matters tested; (b) Who performed the audit work and the date such work was completed; and (c) Who reviewed the audit work performed and the date and extent of such review. d) Paragraph 14 of SA 230: The auditor shall assemble the audit documentation in an Audit File and complete the administrative process of assembling the final Audit File on a timely basis after the date of the auditor's report. e) Paragraph 16 of SA 230: In circumstances where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall,....
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....was added, the name of the person who prepared the additional documentation, and the reason for adding it. " ... "Accordingly, KPMG India violated QC§ 20 and QC§ 30 by failing to implement, communicate, and monitor adequate policies and procedures to provide the Firm with reasonable assurance that its personnel complied with PCAOB audit documentation standards including standards concerning documentation of the date audit work was completed, of the date audit work was reviewed, and of any changes to the work papers after the documentation completion date". For this misconduct, a civil money penalty in the amount of $1,000,000 was imposed on KPMG Assurance and Consulting Services LLP, and a civil money penalty in the amount of $75,000 was imposed on Sagar Pravin Lakhani besides suspending Lakhani from being an associated person of a registered public accounting firm for a period of one year, censuring both and requiring KPMG India to undertake and certify the completion of certain improvements to its system of quality control. 44 In another similar case of Deloitte Canada11 relating to tampering of audit file, PCAOB observed "PCAOB standards require auditors to prepare au....
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....alized by the PCAOB, e.g., KPMG Singapore-Tan Joon Wei (2021), BOO-Mexico (2019), and Deloitte Brazil (2016) etc. 46 We further note that while submitting the Audit File12 to NFRA, through a duly notarized affidavit dated 30.08.2022 signed by CA Pradeepa Chandra C., a partner of the Audit Firm, it was averred that "The Audit File for the financial year 2018-19 as defined in Para 6(b) of SA 230 has been submitted" .... "It is certified that the above information is true and complete in all respects, and nothing has been concealed". The Auditors are expected to know what constitutes an "Audit File" as per SA 230 and accordingly, all audit work papers were expected to be available in the Audit File submitted to NFRA. The submission by the Auditors of additional documents now, subsequent to the submission of Audit File, to defend the charges in the SCN, points to the incorrect and misleading averments made in the affidavit submitted by the Firm. 47 Therefore, considering the provisions of the auditing standards and the affidavit filed by the Firm, we do not find any merit in the submission of the Auditors regarding the additional documents and we treat the same as an afterthought to ....
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....t". 49 A perusal of the above shows that nowhere it has been stated by the ICAI that the timing of performing audit procedures is to be documented only if it is critical to the audit opinion. In this regard, the reply of ICAI to question no- 23 of above guidelines is also relevant. It states as follows: "Q23. What should the auditor record in documenting the nature, timing and extent of audit procedures performed? A 23. The auditor should record: * The identifying characteristics of the specific items or matters tested; * Who performed the audit work and the date such work was completed; and * Who reviewed the audit work performed and the date and extent of such review. SA 220 (Revised) requires the auditor to review the audit work performed through review of the audit documentation. The requirement to document who reviewed the audit work performed does not imply a need for each specific working paper to include evidence of review. The requirement, however, means documenting what audit work was reviewed, who reviewed such work, and when it was reviewed". 50 Thus, it is clear that even the ICAI had also advised to document the timing of performing audit procedures in t....
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....o 27.89 35.25 6 Profit before tax 3.83 17.09 7 Total assets 2,386.38 2,620.61 8 Loans to related parties 614.05 505.09 9 Land advance given to related parties 417.87 618.61 10 Revenue from operations 142.51 134.26 11 Other income 90.57 15.60 12 Finance costs 178.27 97.01 13 Total expenses 229.25 132.77 14 Finance cost as % of total expenses 77.76% 73.06% 56 The SCN noted that the Auditors were required14 to perform risk assessment procedures to provide a basis for the identification and assessment of RoMM at the financial statements & assertion levels and to respond to identified RoMM but there was no evidence in the Audit File that they had performed such procedures to identify & respond to RoMM despite the unusual balances as mentioned in Table-2. Thus, they were charged with non-compliance with SA 300, SA 315 and SA 330. Auditors' Reply & Our Findings 57 While denying this charge, the Auditors have stated that the audit was well planned and attached a copy of the audit plan along with reply to SCN. They stated that they had conducted audit of TDL during FY 2017-18 also and were reappointed as statutory auditors for FY 2018-19 to 2021-....
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....formed every year by understanding the company and its environment. There is no evidence in the Audit File about performing any risk assessment procedure at planning stage during the Audit for the FY 2018-19. Further, as per the Memorandum of Association submitted alongwith reply to SCN, TDL was not authorized to give loans to MACEL, GVIL and TRRDPL as financing activities are not covered in the Objects clause of the MOA. TDL was only authorized to invest surplus money (short term investment) in investments, shares or stocks of a company (as per clause 3(8)(11) of MOA), which is not the case in TDL. The Auditors failed to understand this major non-compliance by TDL. 60 There is no audit plan available in the Audit File. The Auditors were required to plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. As per SQC-1, the Audit Firm was required to communicate the identity & role of Engagement Partner to TDL and assign appropriate staff with necessary competence to perform the audit of TDL. Appropriate staff was not assigned for the audit of TDL as details of engagement team are not available in the Audit File. The A....
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....uditors failed to report fraudulent loan transactions of Rs 2614.35 crores with MACEL, fraudulent understatement of loans of Rs 474.00 crores given to MACEL and evergreening of loans through structured circulation of funds. Accordingly, the Auditors were charged with failure to comply with SA 200, SA 240, SA 250, SA315, SA 330, Section 143(1), 143(12) & 179(3) of the Act and The Companies (Auditors Report) Order 2016 (CARO). 64 MACEL, an entity owned by family members of promoters of TDL, has no business relationship with TDL. Loan transactions of Rs 2614.35 crores with MACEL were more than the balance sheet size of TDL i.e., Rs 2386.38 crores, therefore, these were unusual transactions. Disbursal of loans to MACEL was an indication of fraudulent diversion of funds. The Auditors were required to exercise Professional Skepticism and Judgement to evaluate the appropriateness of disbursal of such large amount of loans to a group entity without any business relationship/transaction, examine terms & conditions of such loans including tenure of loans & rate of interest etc. The Auditors were also required to evaluate the purpose and utilisation of loans given to MACEL. There is no evide....
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....the normal course of business or otherwise appear unusual and evaluate whether such transactions may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of funds. There is no evidence in the Audit Files that any audit procedure was performed to comply with SA 240. There is no evidence in the Audit File that the Auditors asked any question to TCWG and Management about these fraudulent transactions, indicating that the Auditors did not perform audit with professional skepticism as required under SA 200. 69 Cheques worth Rs 474 crores received up to 31.03.2019 but not credited in bank accounts constituted 19.86% of TDL's total assets of Rs 2386.38 crores. This indicated a Risk of Material Misstatement due to fraud. The Auditors were required to perform audit procedures as per SA 315 and SA 330. There is no evidence in the Audit File that the Auditors performed such audit procedures to identify and respond to RoMM due to fraudulent reduction of related party loans, fraudulent diversion of funds and evergreening of loans through structured circulation of funds. 70 The Auditors had a statutory duty to report the fraud to the Central Gov....
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....t there was no diversion of funds by referring to definition of diversion in Black's Law Dictionary i.e. "A deviation from the natural course of things esp. unauthorised alteration of a watercourse to the prejudice of a lower riparian owner, or the unauthorised use of funds". (Emphasis supplied). Further, they also cited para 2.2.1 of RBI master circular on wilful defaulter i.e. "2. 2.1 Diversion of funds, referred to at para 2.1 (b) above, would be construed to include any one of the undernoted occurrences: (a) utilisation of short-term working capital funds for long term purposes not in conformity with the terms of sanction; (b) deploying borrowed funds for purposes/activities or creation of assets other than those for which the loan was sanctioned; (c) transferring funds to the subsidiaries/Group companies or other corporates by whatever modalities; (d) routing of funds through any bank other than the lender bank or member of consortium without prior permission of the lender; (e) investment in other companies by way of acquiring equities/debt instruments without approval of lenders; (f) shortfall in deployment of funds vis-a-vis the amounts disbursed/drawn and....
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....h banking channel, therefore cannot be alleged as fraudulent diversion of funds. In this connection, we observe that there is no record in the Audit File about the purpose of loans taken from the financial institutions viz IFCI, therefore this part of the reply is an afterthought of the Auditors. It is unacceptable that TDL borrowed funds from financial institutions for the purpose of diversion to promoter owned entity MACEL without any business purpose. Further, routing of fund through banking channel does not provide it immunity from fraud. In fact, big corporate frauds like this one, happen through banking channel only. 79 Regarding understatement and evergreening of loans, the Auditors have replied that they did not have access to the books and bank statements of MACEL, TRRDPL and CDGL. They argued that as Statutory Auditor of TDL, they would not be aware that cheques to TDL were issued without sufficient balance in MACEL. They stated that all the cheques were realized and none of the cheques bounced. They checked the clearance of cheques and they are not required to delve into the examination of source of funds for clearance of those cheques. They further stated that even if ....
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....) were cleared on 10-04-2019. A glimpse of the same is depicted in the bank statement of MACEL given hereunder in Table 5: 84 As depicted in Table 5, MACEL had issued four cheques of Karnataka Bank of total amount of Rs 350 crores to TDL on 31.03.2019, which were cleared on 10.04.2019 in a series of sham transactions by rotating smaller funds among TDL, MACEL and GVIL to legitimize transactions of Rs 350 crores. Such as on 10.04.2019, CDGL paid Rs 90 crores to MACEL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to GVIL, which then paid Rs 90 crores to MACEL, which then paid Rs 50 crores to GVIL, which then paid Rs 50 crores to MACEL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to GVIL, which then paid Rs 90 crores to MACEL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to GVIL, which then paid Rs 90 crores to MACEL, which then paid Rs 90 crores to TRRDPL, which then paid Rs 90 crores to TDL, which then paid Rs 90 crores to MACEL, which then paid Rs 80 crores to TDL, which then paid Rs 80 crores to GVIL, which then paid Rs 80 crores to MACEL. Fraudulent understatement of loans by Rs 350 crores given to MACEL and evergre....
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....Chandra C. and CA Chaitanya G. Deshpande) were part of the team which conducted audit of CDGL. Therefore, evergreening of loans through structured circulation of funds was evident and could easily be detected by the Auditors, had the audit been performed with professional skepticism. 87 Thus, it is clear that there was a well-thought-out plan to bring down related party loans by just passing accounting/book entries on or before 31.03.2019 to show that loans had been repaid by the related party. Thus, the actual loans outstanding from MACEL of Rs 462.32 crores as on 31.03.2019 was fraudulently shown as loan due to MACEL of Rs. 11.68 crore resulting in understatement of loan to MACEL by Rs 474.00 crores (Rs. 462.32 crore plus Rs 11.68 crores). 88 MACEL's account was maintained as current account with regular receipt and payment and no specific approval of the Board was obtained before disbursal of funds. No agreement was entered into with MACEL for such huge transactions. Grant of huge amount of loans without any written agreement & without approval of the Board, to an entity owned by the promoters' family & not having any business relationship with TDL, were proof of fraud....
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....was done without proper authorization by the Board of Directors, without entering into any agreement and without obtaining any security. Money has ultimately moved to promoter owned company-MACEL. These are ample proof of cheating and dishonesty. Therefore, this is a clear case of money laundering as per PMLA, which Auditors failed to report in the Independent Audit Report. 91 The Auditors' contention that section 143(1) of the Act provides certain rights to auditor and does not cast any duty on the auditor is not acceptable as the auditor is required by section 14 3 (1)(b) to inquire whether the transactions of the company which are represented merely by book entries are prejudicial to the interest of the company. Obviously, the Auditors have failed to comply with these provisions in this case. 92 In view of the foregoing analysis, we conclude that the charge that the Auditors have violated section 143(1)(b), 143(12) of the Act, CARO, SA 200, SA 240, SA 250, SA 315, SA 330 and failed to report violation of section 179(3) of the Act by TDL, is proved. C.5 Lapses in audit of fraudulent recognition of Interest income of Rs 75.58 crores: 93 The Auditors were charged with failu....
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....e books of MACEL and disclosures thereof in the Financial Statements. They further stated that no loan was given to MACEL and it was a current account facility and interest cost was transferred to MACEL. They stated that TDL has accounted for interest income; that interest income was disclosed in the note on related party transactions; that they had obtained balance confirmations; and that there was no difference between the books of TDL & MACEL, hence there was no fraud. 97 The Auditor's reply that MACEL's account was maintained as current account is not accepted as already discussed in Section C.4 of this Order. We note that presumption of fraud in recognition of interest income requires critical evaluation of the genuineness of revenue recognition. There was no agreement for charging of interest from MACEL. The interest income shown as recoverable from MACEL was 98.34% of total interest income of TDL (Rs. 75.58 crore out of Rs. 76.84 crore). The materiality of the quantum of the interest income recoverable required the Auditor to carry out sufficient audit due diligence and procedure. The Audit File shows that the Auditors did not verify the ledger account of MACEL main....
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....ble 6: Table-6 Sr No Particulars Rs in crores 1 Loan taken from TDL 507.05 2 Loan taken from TRRDPL, a fellow subsidiary 70.00 3 Other liabilities 0.01 4 Negative net worth (17.12) 5 Total of loan + liabilities - net worth 559.94 6 Loan given to Sical Logistics Ltd (SICAL), a related party 150.00 7 Bank balance 370.00 8 Investment in shares of SI CAL 39.94 9 Total assets 559.94 10 Revenue from operation Nil 100 The SCN noted that there was no record in the Audit File that Board of Directors of TDL had passed any resolution under section 179(3) of the Act to borrow funds & grant loans to GVIL. Further, the loan given to GVIL was unusual keeping in view the nature and size of GVIL, which should have attracted suspicion about the nature and purpose of these financial transactions and the terms & conditions of loan were required to be evaluated alongwith utilisation of loan for the intended purpose. There is no evidence in the Audit File that any such audit procedure was performed nor was any risk assessment procedure was performed to identify & respond to RoMM. (SA 200, S....
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....urther replied that no agreement was entered for funds advanced; and such an agreement is legally not compulsory, therefore the question of verifying terms and conditions does not arise. They stated that GVIL was created to execute power projects, however due to several hurdles, GVIL decided to drop the same. They stated that loan given by TDL to GVIL was for furtherance of its business by investing in SI CAL (a group company) through equity and debt in FY 2018-19. They further stated that loan given by GVIL to MACEL was returned at the end of the year. They lastly stated that they were not aware of any offence of frauds as these funds were not diverted from intended purpose. 106 We note that the Audit Firm was the Auditor of GVIL also, thus it was privy to all the business and transactions of GVIL. TDL gave loans of Rs 507.05 crores to GVIL, which in turn loaned out a sum of Rs 150 crores to SICAL. GVIL also invested Rs 56.91 crores in 29,81,570 equity shares of SICAL. As regards the balance amount of Rs 300.14 crores (Rs 507.05 crores Rs 150 crores Rs 56.91 crores) advanced to GVIL, the Auditors' reply is silent. There is no record either in the Audit File or in the Financia....
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....nt of such loans by writing off these loans, based on the recoverability of such loans in terms of Para 5.4.4 of Ind AS 109. Examination of the Financial Statements of TDL and the Audit File shows that TDL did neither. Thus, TDL did not comply with Ind AS 109 and the Auditors did not report the same, therefore the Auditors were charged with non-compliance with section 143(3)(e) of the Act. 110 While denying this charge, the Auditors have stated that Loans of MACEL were fully recovered during the year, therefore the question of impairment or write off does not arise. They further stated that GVIL made a strategic investment in fully operational profitable SICAL Logistics Ltd ('SICAL' hereafter). The Loan given to SICAL was partially recovered during the year and was expected to yield a good return in long run. The Loan given by GVIL to MACEL was also recovered during the year. Accordingly, at the time of finalization of audit, there was no indicator of impairment, therefore the question of impairment loss does not arise. According to them, there was no non-compliance with Ind AS 109. 111 We have already detailed how the loans were not actually recovered from MACEL but frau....
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.... made loans & investment of Rs 2054.20 crores to related parties. Salient features of FS of TRRDPL for FY 2018-19 are as under in Table 7: Table-7 Sr No Particulars Rs in crores 1 Borrowing through debentures 2960.12 2 Other liabilities mainly accrued interest & statutory dues 12.94 3 Net worth of TRRDPL (negative) (50.96) 4 Total equity & liabilities (1 to 3) 2922.10 5 Total loans & Investment in related parties 2054.20 6 Bank balance 863.18 7 Other assets 4.72 8 Total assets (5 to 7) 2922.10 9 Revenue from operations Nil 10 Finance cost 3.30 11 Loss during the year 2.51 116 As per audit work paper 'Related Party Transaction Workings' in the Audit File of TDL, transactions with TRRDPL were as under in Table 8: Table- 8 Rs in crores Sr No Particulars 2018-19 1 Loans outstanding as on 31.03.2018 497.95 2 Loans given during the year 750.76 3 Loans recovered during the year 750.76 4 Loan received during the year 992.66 5 Loan received & outstanding as on 31.03.2019 -494.71 6 Total of loan given & loan taken (2 + 4) 1743.42 117 No ....
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....itor to question and evaluate them rather than rely on discussions which are not in any way documented in the Audit File, therefore explanations given by the Auditor are treated as an afterthought and not accepted. 121 In respect of compliance with section 179 of the Act, the Auditors have given the same reply as given in previous charge relating to loan given to GVIL, thus adopt the same analysis. TRRDPL was a non-operational company, thus the loan of Rs 750.56 crores was not used for its principal business activity i.e., infrastructure business, and therefore the benefit of exemption from section 185(3)(c) is not available. Accordingly, the loans given to TRRDPL remain unauthorised. 122 Regarding the loan taken during the year, the Auditors stated that the Coffee Day Group held 20% shares in Mindtree Ltd and decided to sell these holdings to L&T in order to repay the group loans which had been secured by pledging shares of Mindtree Ltd. TRRDPL was the nodal intermediary for this sale. Group loans had to be cleared off, for releasing the pledged shares before sale. TRRDPL received a consideration of Rs 3000 crores from Standard Chartered for issue of debentures. Out of this sum,....
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....crores given to related parties. Accordingly, the Auditors were charged with non-compliance with SA 200, SA 240, SA 315, SA 330 and 143 (12) of the Act. 127 TDL had a total outstanding advance of Rs 415 crores given as advance for land. These constitute 17.39% of the total assets of Rs. 2,386.38 crores. These advances were given to 3 parties: (a) Rs 275 crores given to Mrs. Vasanthi Hegde (Mother of VGS-Chairman of holding company CDEL) for purchases of land at Mumbai, (b) Rs 140 crores given to Sivan Securities Private Limited ('SSPL' hereafter), a related party, towards purchase of26 acres and 38 guntas of land with clear title, (c) Rs 200 crores to Mr Hallappa for purchase of land jointly owned by Mr Hallappa and Mrs Vasanthi Hegde. This Land advance was outstanding at the beginning of FY 2018-19 and was recovered during FY 2018-19. 128 The SCN noted that the materiality of such advances for land (17.39% of the assets) necessitated the Auditors to perform substantive audit procedure to obtain audit evidence like agreement to purchase lands, ownership documents of lands, valuation of lands to be purchased and TDL's plan to utilize those lands etc. Return of land adv....
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....ioned that NFRA has not stated as why it has concluded the transactions to be fraudulent. 132 Having considered the reply, we observe that even if advances were made in earlier years; the Auditors were required to critically analyse the reason of non-registration of lands in the name of TDL during 2018-19, which was not done. As per the agreement with Mrs Vasanthi Hegde, completion of sale was subject to conversion of land from Agriculture to Non-Agriculture purpose within two years from the date of agreement. Vacant possession of the land was to be handed over to TDL free from encumbrances and litigations. Disbursal of advance of Rs 275 crores i.e., 98.21 % of the total cost of Rs 280 crores was an unusual activity given the fact that two years' time was given to Mrs Vasanthi Hegde for conversion of land from agriculture to non agriculture purpose and making it free from encumbrances and litigations. The Auditors could not give any reply about valuation of lands to be purchased and TDL's plan to utilize those lands. This transaction was required to be evaluated with professional skepticism, whether it was done at Arm's Length basis and was not prejudicial to the inter....
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.... of huge amount to related parties on the pretext of land advance, title disputes of land for which money is advanced and return of advance on the flimsy explanation of non-suitability of land, were required to be evaluated by the Auditors with professional skepticism. But this was not done indicating that the Auditors had performed the audit in a perfunctory manner. 136 In view of above analysis, we find that the charge that the Auditors have violated section 143(12) of the Act, SA 240, 315 and SA 3 3 0 is proved. D. Other non-compliances with Laws and Regulations In addition to the major charges mentioned in Section -C of this Order, the Auditors were also charged with the following non-compliances with Laws and Regulations: - a) Lapses in audit of Internal Financial Control over Financial Reporting (IFC) resulting in violation of section 143(1)(i) of the Act. b) Failure to ensure compliance with section 134(1) of the Act. c) Non-compliance with SA 260, Communication with Those Charged With Governance & SA 265, Communicating deficiencies in Internal Control to Those Charged With Governance and Management. d) Non-compliance with SA 500, Audit Evidences & SA 505, Extern....
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.... financial reporting is designed and implemented to prevent, and detect fraudulent transactions. However, based on above analysis, we note that controls were totally absent in TDL in the area of release of loans & banking transactions and there was total management override of controls in these areas. Any significant deficiencies or material weaknesses in internal controls must be revealed by the auditor, but we find that instead of reporting absence of IFC, the Auditors falsely reported that TDL had adequate Internal Financial Controls with reference to financial statements and it was operating effectively. Thus, they violated section 143(1)(i) of the Act. 139 With respect to compliance with section 134(1) of the Act, the Auditors stated that they had obtained constructive evidence, in the form of receipt of signed copies of the financial statements, before they signed on the same and issued audit report thereon. Further, considering the 'Doctrine of Indoor Management', they had ensured the compliance with section 134(1) of the Act. They further stated that the company has complied with section 134(1) of the Act and the Auditor is not required to make any report on this issue. 1....
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....anks & financial institutions provide loans on the basis of fair market value. While attaching copy of valuation reports, they stated that they had verified valuation report at serial no 39 of audit work paper- Ind AS and SA check list. 144 On verification of serial no 39 of audit work paper replied upon by the Auditor, it is seen that this is a verification done by the Auditor to verify the carrying value of the assets in the Balance Sheet i.e. Rs 799.34 crores. The Auditor had verified the capitalisation and depreciation method used in valuation of property showing Rs 799.34 crores. This in no way refers to or evaluates the Fair value of property, which is disclosed at Rs 2609.60 crores as per Ind AS 42 - "Investment Properties". The moot point is that the Auditor did not evaluate this fair value or ask for the valuation report at the time of Audit. There is no evidence in the audit work papers that the Auditors had verified & evaluated the valuation reports related to the properties. Further, the Auditors could not give any reply about evaluation of the valuation expert, valuation methodology and assumptions used in valuation report. Therefore, we find that this charge is prove....
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....f huge borrowings, which they failed to do. Therefore, we find that the charge for violation of SA 500 & SA 505 holds. 147 With reference to the charge relating to SA 550, the Auditors replied that they had undertaken IFC test check for certain material areas to understand RoMM; that they had obtained management representation; verified related party transactions; obtained balance confirmations, that all related party transactions were approved by stakeholders and these are recorded in the Audit File. According to them all related party transactions have been disclosed in the Financial Statements. 148 On considering the reply and examination of the Audit File, we note that there is no evidence regarding understanding related party relationships and identification of ROMM associated with related party transactions. Further, fraudulent diversion of funds to related parties & circulation of funds among related parties (as already discussed) shows gross failure of the Auditors in identification of RoMM associated with related party transactions. Therefore, we find that the charge that the Auditors violated SA 550 stands proved. 149 While responding to the charge relating to non-comp....
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....etter for various aspects relating to this engagement and reported u/s 143(2) of the Act. b) They rely on the replies in forgoing para in respect of NFRA's observation on alleged non- compliance with accounting and auditing standards. c) They confirmed the "Report on other legal and regulatory requirements" of audit report in compliance to section 143(3) of the Act. d) Section 143(4) is not applicable as there were no negative answer or answer with a qualification. e) They have complied with the Auditing Standards {section 143(9) of the Act}. f) In compliance with section 143(12) of the Act, the Audit Firm replied that there is no fraud identified by them, hence there is no reporting requirement to the Central Government. g) The Firm has a Quality Control Manual in place and the same has been adhered to while conducting the audit of CDGL. h) Based on the facts and circumstances they had complied with the applicable Standards on Auditing, SQC 1 and ethical requirements. Accordingly, there was no act of omission and commission on their part, which will have impact on their audit opinion. 154 Statutory Audits are performed by Engagement Team on behalf of the Audit Firm ....
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.... agree with this. The SCN was based on facts of the matter and the documents in the Audit File submitted by the Auditors. The words 'believe/suspicious' were used in the SCN to convey a prima-facie view in the SCN, to be further probed and established with an open mind after offering an opportunity in the interest of natural justice to the Auditors to rebut the charges and provide their reply to the SCN. No conclusions were reached before analysis of the reply of the Auditors. 157 There is also no truth in the Auditors' contention that no investigation was conducted by NFRA. The SCN was issued after duly examining the material contained in the Audit File and other materials on record in accordance with Rule 11 of the NFRA rules 2018 and the conclusion reached in this Order are based on due consideration of the Auditors' replies on each point of charge in the SCN. G. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE AUDITORS 158 As discussed in the foregoing paragraphs, the Auditors have made a series of serious departures from the Standards and the Law, in their conduct of the audit of TDL for FY 2018-19. Based on above discussion, it is proved that the Auditors had issued u....
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....pliances made by the Company, as explained in Section - C and D above. iv. The Auditors committed professional misconduct as defined by clause 8 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 obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion" This charge is proved as the Auditors failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his total failure to report the material misstatements and non-compliances made by the Company in the financial statements, as explained in the Section - C-3 to C-8 and Section - D above. v. The Auditors committed professional misconduct as defined by clause 9 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 invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the Auditors failed to conduct the audit in accordance with the SAs as explained i....
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.... and internal control over financial reporting have invited serious action by audit regulators in other jurisdictions too. For example, in case of Cheryl L. Gore, CPA and Stanley R. Langston, CPA, PCAOB24 had observed that "Gore failed to obtain sufficient appropriate audit evidence and to perform sufficient procedures concerning whether Issuer A's financial statements accurately disclosed its related party transactions" ..... "Gore failed to exercise due professional care, including professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with Issuer A's identification, accounting, and disclosure of related party relationships and transactions....... Specifically, as part of her risk assessment procedures, she was required to obtain an understanding of the design and implementation of Issuer A's internal control over financial reporting ("ICFR") in connection with related parties, to evaluate the design of those controls that were relevant to the audit, and to determine whether those controls had been implemented. Gore failed to perform any of these procedures during the 2016 Audit"". This case resulted in debarment and imposition of monito....
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.... on Kandi's behalf constituted prohibited non-audit services that would impair Mui's independence, as well as AWC's and its associated persons. Albert Wong took, or omitted to take, actions during the Kandi 2012 Audit, that he knew, or was reckless in not knowing, would directly and substantially contribute to the Firm's violation of independence requirements, in contravention of PCAOB Rule 350". For misconducts including independence violations, PCAOB censured audit firm & partner, revoked the audit firm's registration & barred partner from being an associated person of a registered public accounting firm, and imposed a civil money penalty on the audit firm and the partner. 166 In a case relating to fraud in revenue recognition, in the Matter of Scott J. Reams, CPA, Brandon R. Keyes, CPA, and James C. Budge, CPA, PCAOB27 has observed that "The Engagement Partners also failed to gather sufficient appropriate audit evidence to evaluate commission revenue that Freedom recognized on the Belize Affiliate trade orders"'----- "The Belize Affiliate paid certain fixed monthly fees to Freedom. There was a risk of material misstatement that the Belize Affiliate could mak....
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....y to be aware of their individual responsibility to act honestly and with integrity in all areas of their work. 172 The Auditors were required to ensure compliance with Standards on Auditing, Laws and Regulations to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate their users. As detailed in this Order, substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of the Auditors establish their professional misconduct and lack of due diligence. Despite being qualified professionals, the Auditors have not adhered to the Standards and have thus not discharged the duty cast upon them. 173 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- (1) 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....
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....Audit of Financial Statements. 5 Para 14, A14, A16 of SA 200. 6 Para 11 & 24 of SA 220 -Quality Control for an audit of financial statements. 7 The Code of Ethics 2009 was issued by ICAI and applicable during FY 2018-19 and FY 2019-20. 8 Para 14 of SA 200 read with paras A 14 to A 17. 9 Refer para 74 & 75 of Standard on Quality Control 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements 10 PCAOB Release No. 105-2022-033 dated 06.12.2022. 11 PCAOB Release No. 105-2021-014 dated 29.09.2021. 12 Audit file is defined in para 6(b) of SA 230 Audit Documentation as "one or more folders or storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement", 13 SA 300 - Planning an Audit of Financial Statements. SA 315 - Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment. SA 330 - The Auditor's Response to Assessed Risks. 14 Para 5 of SA 315 and para 5 of SA 330. 15 Professional skepticism is defined at para 13(1) of SA 200 as - 'An attitude that i....