TaxTMI 
TaxTMI 
2023 (8) TMI 203
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....e following sections: A. Executive Summary 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 requirem....
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....Partner, guilty of professional misconduct and imposes through this Order the following monetary penalties 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 acco....
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....As per the Financial Statements ('FS' hereafter) of MACEL, Rs 3,535 crore received from the subsidiaries of CDEL was further transferred 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 ("Industria....
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....e concerned in a professional capacity. c) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties. d) Failure 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....
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....daresha & Associates had provided audits as well as non-audit services to 27 entities of the Coffee Day Group. CA Megha Sundaresha Andani, daughter of CA A. S. Sundaresha, had 72% share in the profits 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 200^5 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 req....
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....milarly, the EP was required by the Audit Manual of the Firm to evaluate acceptance/continuation of audit engagement and prepare Client/Engagement Acceptance and Continuance Form; however, there is no evidence in the Audit File 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....
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....related to review of quarterly results of CDGL by the Auditor, scope of engagement, audit approach and observations of the Auditor on the Statutory Audit of the annual financial statements for FY 2018-19. Further, the presentation given on 24.05.2019 was prepared 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 ....
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....the Code states that the circumstances in which professional accountants operate may give rise to specific threats to compliance with the fundamental principles. It is impossible to define every situation that creates such threats and specify the appropriate mitigating 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 t....
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....eckless in accepting this audit engagement. 32 An Auditor's independence from the entity being audited safeguards the auditor's ability to form an audit opinion without influence that might compromise that opinion. Independence enhances an auditor's ability 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 grossl....
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....ssion of significant matters with management & Those Charged With Governance ('TCWG' hereafter) etc. An examination of the Audit File shows that the names of the engagement team members & date of performing audit procedures are not mentioned in any of the audit work papers 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 tha....
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....ly to be less accurate than documentation prepared at the time such work is performed. b) Paragraph 8 of SA 230: The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, 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 t....
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....d the date of such review".... "PCAOB standards further require an auditor to archive a complete and.final set of audit documentation as of a date not more than 45 days after the report release date (i.e., the documentation completion date). Any documentation added after the documentation completion date must indicate the date the information 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 r....
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....mpletion of work performed and the dating of the review of work papers and also directed the firm to ensure that all Firm professionals involved in any "audit," have received four (4) hours of additional training concerning compliance with PCAOB audit documentation standards. 45 There have been many other instances of such wrong doings being penalized 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 File^12 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 char....
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.... * For a procedure requiring inquiries of specific entity personnel, the auditor may record the dates of the inquiries and the names and job designations of the entity personnel. * For an observation procedure, the auditor may record the process or matter being observed, the relevant individuals, their respective responsibilities, and where and when the observation was carried out". 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 pe....
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....lated party transactions, very high borrowing costs, and had given very high land advances to related parties, as evident from Table -2 as under: Table -2 Rs in crores Sr No Particulars 2018-19 2017-18 1 Net worth 80.84 70.28 2 Total borrowings/deposits 2,254.45 2,477.54 3 Borrowings from Bank & Financial Institutions and rental security deposits 1,532.60 1,703.83 4 Borrowings from related parties 721.85 773.71 5 Debt equity ratio 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 required^14 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 iden....
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.....01 crores to Rs 178.27 crores, other income had increased substantially from Rs 15.60 crores to Rs 90.57 crores and debt equity ratio reduced from 35.25 to 27.89. This is indicative of a major shift in the manner of borrowings and the manner of investments by TDL during FY 2018-19. Despite this major change, the Auditors contended that there was no change in the types of investment and how it is financed during FY 2018-19. This proves that they did not perfom sufficient risk assessment procedure to identify and assess RoMM. Further, risk assessment procedures are required to be performed 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 ....
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....35 crores), fraudulent understatement of loans (Rs 474 crores) and evergreening of loans through structured circulation of funds 63 It was charged that the Auditors failed to exercise Professional Skepticism^15 and Judgement^16 while auditing loan transactions, which were not only fraudulently given to MACEL but also fraudulently understated at year end by receipt of cheques without adequate bank balance with MACEL. These cheques were realised in next year i.e., FY 2019-20 by evergreening of loans done through structured circulation of funds amongst the Coffee Day Group entities. Thus, the Auditors 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 tha....
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....e that the Auditors performed any procedure to verify clearance of these cheques, which is evidence that the Auditors did not perform audit of bank transactions. 68 SA 240^17 provides that the objectives of auditor are to identify and assess the risk of material misstatement in the FS due to fraud, obtain audit evidence and respond to identified or suspected risk. It requires the auditor to maintain professional skepticism recognizing the possibility of existence of material misstatement due to fraud, to evaluate the business rationale (or lack thereof) of the significant transactions that are outside 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 r....
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....neral Meeting held on 23.01.2019 and board resolution passed on 21.01.2019. In this connection, we observe that while passing the special resolution, the shareholders of TDL had authorised the Board of Directors ('Board' hereafter) of TDL to invest/lend up to Rs 10,000 crores. However, there is no record that any specific resolution was subsequently passed by the Board of TDL to lend money to MACEL or any other entity. Further, the loan given to MACEL was not for its main object i.e., Infrastructure business as defined in MOA. Thus, loans given to MACEL were unauthorised transactions. 74 The Auditors argued that 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 worki....
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....ave admitted that TDL had no business relationship with MACEL. Despite that TDL had given loans worth Rs 2,614 crores to MACEL ( as per Financial Statements of MACEL ). Further, the repayment of loans given to MACEL was done by evergreening of loans as discussed in subsequent paras. We are of the view that repayment of such a fraudulently disbursed loan does not legitimise non compliances committed during its disbursal. 78 The Auditors further stated that loan taken from financial institution was advanced to MACEL and the related cost was reimbursed by MACEL. They claimed that the Loan taken by TDL was used for the purpose for which it was availed and fund was routed through 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 no....
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...., which then paid Rs 40 crores to TRRDPL, which then paid Rs 40 crores to MACEL. There was no economic rationale in these transactions, which were designed to fabricate the books of accounts. This indicates fraudulent intent of TDL/MACEL to understate related party balances in the books of TDL in FY 2018-19, and thereafter evergreening of loans was done through structured circulation of funds. This fraud could have been detected by the Auditors from the bank statement of TDL had they applied professional skepticism during the course of audit. 83 Similar fraudulent rotation of funds among related parties were observed when cheques of Rs 350 crores issued by MACEL to TDL (in FY 2018-19) 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 t....
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....in this argument as the Auditors were having access to the books of accounts and bank statements of TDL, GVIL, CDGL and TRRDPL, therefore they were in a position to detect this evergreening of loans had they picked up the telltale signs, as illustrated in the preceding paragraphs and tables. As discussed, Rs 40 crores was rotated among MACEL, TDL and TRRDPL. Similarly, Rs 90 crores was rotated among MACEL, CDGL, TDL, TRRDPL and GVIL. The Audit Firm had audited TDL & GVIL (a subsidiary company of TDL) whereas CDGL & TRRDPL (a subsidiary company of TDL) were audited by M/s ASRMP & Co., a related audit firm of the Auditors. Two partners of this Audit Firm Mis Sundaresha & Associates (CA Pradeep 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 par....
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....esentation relating to laws and regulations in relation to audit of FS. Accordingly, there is no violation of SA 250. 90 We observe that disclosure of related party transactions in the Financial Statements and its routing through banking channel does not provide immunity to such transactions from PMLA. The fact is that Rs 474 crores was diverted to promoter owned company-MACEL and attempts were made to conceal this diversion by fraudulently understating this balance in the financial statements. Total fraudulent transactions with MACEL during the year were Rs 2614.35 crores. There was large scale evergreening of loans through structured circulation of funds involving many group companies. All this 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 ....
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....he auditor concludes that such presumption is not applicable, the auditor is required to document the reason for that conclusion. The Auditors had neither presumed fraud risk in revenue recognition nor evaluated interest income. The Auditors also did not record in the Audit File that fraud risk presumption was not applicable. Accordingly, the Auditors were charged with violation of SA 200, SA 240, SA 315, SA 330 and 143 (12) of the Act with reference to overstatement of Rs 75.58 crores in interest income in the Statement of Profit and Loss. Auditors' Reply & Our Findings 96 The Auditors replied that they did not have access to MACEL books and were unable to comment on any accounting queries arising from the 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....
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....udgement and failure to perform risk assessment procedure while performing audit of loans of Rs 507.05 crores given to GVIL, which was fraudulent diversion of funds. GVIL was fully owned subsidiary of TDL and the Audit Firm was the statutory auditor of GVIL also for FY 2018-19. During 2018- 19, TDL had given total loans of Rs 856.91 crores to GVIL, which had repaid loans of Rs 350 crores to TDL and outstanding loan was Rs 507.05 crores as on 31.03.2019. Further, GVIL gave loan of Rs 200 crores to MACEL, which was reportedly repaid by MACEL during the year. GVIL was not engaged in any business activity but was used by TDL as a conduit for diversion of funds, as is evident from the summary of Balance Sheet of GVIL given in Table 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 ....
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....o its wholly owned subsidiary without any further approval. They further stated that there is no reporting obligation on the Auditor u/s 179 of the Act. 104 We note that exemption u/s 185(3)(c) of the Act is available to a company for loans given to its subsidiary only if such loans are utilised by the subsidiary company for its principal business activities. GVIL's principal business activity was to execute power projects as mentioned by the Auditors in their reply. GVIL's principal business activity was not financing activity. Accordingly, this contention of the Auditors is not acceptable. Further, we note that not obtaining approval u/s 179 of the Act shows that loan transactions were not authorised by the Board of Directors, which was additional evidence of fraudulent diversion of funds. 105 The Auditors further 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 fur....
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....s purpose, without authorisation of the Board, without any agreement, and without obtaining any security, clearly indicate fraudulent diversion of funds. The Auditors did not exercise professional skepticism and did not perform risk assessment procedures and chose to tum a blind eye to these manipulations while doing the audit of the loan given to GVIL. 109 Both GVIL and MACEL did not have the financial strength to repay loans given by TDL as is evident from their operational inadequacy and the fact of evergreening of loans already discussed in this Order. In accordance with para 5.5.1 of Ind AS 109-'Financial Instruments', TDL was required to recognize an impairment loss allowance for expected credit losses on the loans & advances given to these companies. Alternatively, TDL was required to reduce the gross carrying amount 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-complianc....
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....ation of provisions of SA 200, SA 240, SA 315, SA 330, Section 179 (3) of the Act and CARO with respect to unusual loan transactions with TRRDPL. 114 TRRDPL is a fully owned subsidiary of TDL. M/s ASRMP & Co. (a related party of M/s Sundaresha & Associates) was the statutory auditor of TRRDPL for FY 2018-19. As per audit work paper 'Related Party Transaction Workings', TDL had disbursed loans of Rs 750.76 crores to TRRDPL, which repaid the loan during the year. Further, TDL received loan of Rs 992.66 crores from TRRDPL. Therefore, total loan transactions with TRRDPL were worth Rs 1743.42 crores (Rs 750.76 crores + Rs 992.66 crores). 115 TRRDPL was reportedly engaged in the business of property development, however, it can be observed from Table- 7 that TRRDPL was used by TDL for diversion of funds, as it had no business activity and 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 ....
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....er the years, they understand that TRRDPL did not actively undertake operations, however, has substantial investment in infrastructure companies. They replied that there was no loan agreement with TRRDPL for loan taken or loan given but stated that funds were lent to TRRDPL to invest in SICAL, a subsidiary company of TRRDPL and to give loans to SICAL. The Auditors further stated that loans were given to TRRDPL to lend to other group companies to the extent of Rs 500 crores which was recovered at the end of the year. 120 We note from para A5 of SA 230 that "Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation". The Auditors admitted that no agreement was entered into with TRRDPL and the Audit File does not support the above reply. The quantum of these transactions and their materiality should have warranted an Auditor 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 aftert....
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....he fact that TRRDPL was used by the TDL for evergreening of loans and understatement of loans given to MACEL. This shows that the Financial Statements of TDL and TRRDPL were manipulated to hide diversion of funds to promoter controlled entity-MACEL. It was the Auditors' duty to exercise due diligence while conducting Audit of transactions with TRRDPL. Failure to do so shows their gross negligence in discharging the statutory duty cast upon them by the Auditing Standards and the Act. 125 The above proves the charge that the Auditors have violated the CARO, SA 200, SA 240, SA 315, SA 330 and failed to report violation of section 179(3) of the Act by TDL. C.8 Lapses in audit of suspected fraudulent diversion of Rs 415 crores given as land advances to related parties 126 The Auditors were charged with failure to exercise professional skepticism and judgement and failure to perform risk assessment procedures while performing audit of fraudulent diversion of funds in the garb of land advance of Rs 415 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 ....
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....TDL. 131 They further stated that the advance to Mrs Vasanthi Hegde was given in October 2017 for procurement of land in Mumbai. They had verified the agreement in 2017-18 and the company was waiting for a clear title. Alongwith the reply to SCN, they attached a copy of agreement between TDL & Mrs. Vasanthi Hegde and one of many sale deeds in favour of Mrs Vasanthi Hegde. In respect of advance given to SSPL, they stated that amount was pending from earlier years and there was no progress in the case before High Court. They had verified these documents and they are not required to maintain documents of the clients as per implementation guideline to SA 230 published by ICAI. In respect of land advance given to Mr Hallappa, they stated that Mr Hallappa, a land aggregator, was supposed to acquire agriculture lands in Chikkamagaluru and Mysore for the Company and convert these lands into non-agriculture land and sell to the company. Since, identified lands were not found suitable, the advance was returned. Lastly, they mentioned 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....
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....gde) which, as NFRA's investigation revealed, was surreptitiously orchestrated by promoters through round tripping of CDGL's own funds. Two partners of this Audit Firm were also part of the Audit Team which conducted audit of CDGL. NFRA's order dated 12.04.2023 in CDGL matter is available at https://nfra.gov.in/document-category/orders/. Mrs Vasanthi Hegde was mother of the Chairman of the Holding Company and related party transactions have high Risk of Fraud. Despite all these red flags, the Auditors failed to exercise professional skepticism and failed to perform sufficient and appropriate audit procedure. 134 Similarly, despite not having clear title, Rs 140 crores was given as land advance to SSPL, a related party. There is no record in the Audit file about assessment of valuation of these lands, basis which such huge land advances were given. These indicators were required to be analysed by the Auditors with professional skepticism. However, we could not find any such analysis in the Audit File. 135 Release 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 e....
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....ent of TDL. They mentioned that the alleged lapse can only be called as poor governance and not misstatement by itself. 138 We are aware that the Auditors were Statutory Auditors and not Forensic Auditors. However, laws and regulations lay down certain responsibilities of Statutory Auditors with respect to internal financial control and internal controls. Use of pre- signed cheques for diversion of funds and circulation of funds are enough evidence of complete absence of internal control and internal financial control in TDL. Further, we also notice from guidance note issued by ICAI that it expects the auditor to review the segregation of duties relating to authorisation of transactions, handling/issuance of cheques, proper authorisation of banking transactions and safe custody of cheque books etc. The Audit File shows that the Auditors have not performed any such procedures. We note that the Auditors did not perform any test of control with reference to use of cheques leaves, management override of control and authorisation of transactions etc. Internal financial control over financial reporting is designed and implemented to prevent, and detect fraudulent transactions. However....
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.... discussion with TCWG in this sheet. Further, we could not find the names of the members of TCWG with whom the discussion was held and the date of discussion is also not mentioned in this sheet. SA 260 requires Auditors to determine TCWG and communicate with TCWG about the responsibilities of the Auditor, overview of the plan, scope & timing of the audit, and deficiencies in Internal Control. Further, large scale diversion of funds & circulation of funds were evident deficiencies in internal control. We note from the Audit File & reply of the Auditors that they neither determined TCWG nor communicated these matters to TC WG, thus did not comply with SA 260 & SA 265. 143 SA 500: With reference to non-evaluation of the valuation report of investment in property, having fair value of Rs 2609.60 crores, which was more than the balance sheet size of TDL (Rs 2386.38 crores), the Auditors replied that these properties consisted of land & buildings, whose fair market value was more than their cost as the land was acquired over a decade ago and buildings were constructed over a period of time. Banks & financial institutions provide loans on the basis of fair market value. While attaching....
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....f this Order, we have detailed why additional documents submitted alongwith the reply to SCN are not acceptable. Direct confirmations from banks are an important audit procedure to ensure existence of account balances, which the Auditors did not perform. Regarding purpose and utilisation of huge borrowing of Rs 3569.51 crores, the Auditors could submit details of borrowings for Rs 1215 crores only. Thus, details of the entire amount are not available in the Audit File. The Auditors have opined that the financial statements of TDL gave true and fair view of its state of affairs. Outstanding borrowings of Rs 2254.45 crores on 31.03.2019 constituted 94.47% of the total balance sheet size of Rs 2386.38 crores. Bank balances of Rs 10.54 crores and fixed deposits of Rs 176.55 crores were also material items of the financial statements. Before opining on the truthfulness and fairness of such material balances in the financial statements, the Auditors were required to obtain sufficient appropriate audit evidence about the existence of these balances, source of creation of FDs and purpose & utilization of huge borrowings, which they failed to do. Therefore, we find that the charge for viola....
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....n-compliance with SA 210, Agreeing the Terms of Audit Engagements. Based on their reply, we drop this charge. E. Omissions and commissions by the Audit Firm Responsibility of the Audit Firm for the audit work done by the Engagement Team 152 The Audit Firm was also charged with various omissions and commissions attributed to the Auditors in section C and D above. Para 2 of SA 220 and para 3 of SQC 1, stipulate that Quality Control Systems, Policies and Procedures are the responsibility of the Audit Firm. The Audit Firm was charged with failure to establish and maintain a system of quality control to provide it with reasonable assurance that: a) The firm and its personnel comply with professional standards, regulatory and legal requirements; and b) The reports issued by the firm or engagement partners are appropriate in the circumstances. 153 Responding to the charge, the Audit Firm stated that: a) They have issued audit report after taking into account the provisions of the Act, Ind AS prescribed u/s 133 and Standards on Auditing u/s 143(10) of the Act. They have taken management representation letter for various aspects relating to this engage....
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....Y 2019-20. We note that NFRA's authority to monitor and enforce compliance with the accounting and auditing standards is with reference to such standards as were established by law even earlier and were fully binding on Statutory Auditors. Hence, no new obligation is created on the Auditors as these standards were to be mandatorily followed even prior to NFRA's establishment. The constitution of NFRA has only changed the forum to check the compliances. The Auditors have stated that the accounting and auditing standards that have been notified as on date, are not on the recommendations of NFRA and thus issuance of SCN u/s 132(4) of the Act is beyond the powers of NFRA. This contention of the Auditors is not acceptable. The NFRA's authority to monitor and enforce compliance with the accounting and auditing standards is derived from section 132 of the Act. All the Accounting Standards and Auditing Standards have the force of law^22 and are required to be mandatorily complied with, from the date of their respective applicability, while conducting statutory audits. 156 The Auditors have stated that the issue of SCN is based on belief/suspicion and not on conclusive evidence. ....
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....disclose in their report the material non- compliances by the Company as explained in Section - C-4 to C-8 and Section - D (a) above. ii, The Auditors 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 Auditors failed to disclose in the audit report the material misstatements made by the Company as explained in Section - C-4 to C-8 and Section - D (a) above. iii, The Auditors 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 diversion of ....
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....of loan proceeds to the Agent as prepayments to buy equipment and materials that the Agent never delivered. The loans were obtained from Chinese lenders for the purpose of making these purchases. While the Agent returned a portion of the prepayments- some in unusual same-day, round-trip transfers-it did not return most of them"... "By failing to adequately respond to the known fraud risks, Marcum's engagement team breached its duty to perform the Audits with the due professional care and professional skepticism required by PCAOB standards. The team also failed to adequately understand the business rationale (or the lack thereof) for the significant unusual transactions and failed to obtain sufficient appropriate audit evidence to support Marcum's opinion on the Issuer's financial statements". For this misconduct, PCAOB censured Audit firm Marcum LLP ("Marcum"); imposed a civil money penalty of $250,000 on Marcum; prohibiting Marcum from audit works for a period of three years. PCAOB also imposed a penalty of $25,000 on the Engagement partner John E. Klenner besides barring him from being an associated person of a registered public accounting firm. 162 Similarly, failures to perf....
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.... partners. In Marcum Bernstein & Pinchuk LLP case, PCAOB observed "an accountant is not independent of an audit client if, at any point during the audit and professional engagement period, the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement." ..... "....MarcumBP failed to implement, effectively apply, and appropriately monitor quality control policies and procedures sufficient to provide reasonable assurance concerning the Firm's independence". In this case, PCAOB censured audit firm, imposed monetary penalty and required audit firm to undertake a review of its policies, procedures, staffing, and training with respect to auditor independence. 165 Similarly, in AWC (CPA) Limited, WONG Chi Wai, CPA, and WONG Fei Cheung, CPA, PCAOB observed "As the engagement partner, Albert Wong was responsible for AWC's compliance with independence requirements. Although Albert Wong knew at the time of the Kandi 2012 Audit that Mui had accepted a Power-of-Attorney from Kandi in ....
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....cisions. Quality audits bolster stakeholder's confidence in the credibility of financial reporting. 169 But stakeholder's confidence is not automatic. Trust must be earned, and it must be preserved. Auditors' Integrity and Diligence are of utmost importance to preserve the trust of users in Auditing Profession, which plays an important role in the economic development of India. 170 In the instant case, the Auditors, chose to preserve their professional relationship with the promoters of the auditee company, instead of discharging their statutory duty to protect public interest by exercising professional skepticism and questioning the promoters' dubious activities and transactions leading to diversion of shareholders and stakeholders' money on a large scale. Had they performed the required audit procedures with due professional skepticism, many of the dubious transactions would have been perhaps detected. But by failing to do so, they foreclosed this possibility causing immense harm to shareholders and stakeholders. 171 Further, when NFRA called for the Audit File for examination, the Auditors tampered with the Audit File. This is extremely serious because it obstructs the ....
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....ore upon M/s 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. 176 This order will become effective after 30 days from the date of issue of this order --------------- Foot Notes ^1 As defined in Rule 3 of the NFRA Rules 2018. ^2 Section 143(9) of the Act provides that every auditor shall comply with the auditing standard. Further proviso to section 143 ( l O) of the Act provides that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of lndia shall be deemed to be the auditing standards. ....
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.... ^18 Para X of Annexure -A (CARO report) of lndependent Auditor report dated 20.05.2019. ^19 As per section 3 of PMLA act 2002, 'Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering'. 'Proceeds of Crime', as defined at section 2 (u) of PMLA Act, means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. List of schedule offences in Part A of the schedule under PMLA Act 2002, covers section 420 of Indian Penal Code i.e. 'Cheating and dishonestly inducing delivery of property'. ^20 Section 420 of IPC states, 'Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable....