TaxTMI 
TaxTMI 
2023 (8) TMI 262
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....xecutive Summary B. Introduction & Background C. Major lapses in the audit D. Other lapses in the audit E. Articles of Charges of Professional Misconduct F. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. Pursuant to the information received from the Ministry of Corporate Affairs regarding irregularities observed by Financial Reporting Review Board (FRRB, hereafter) of ICAI in the Financial Statements of FY 2013-15 of Bartronics^1 , whose equity shares are listed at Bombay Stock Exchange ('BSE' hereafter) and National Stock Exchange of India Ltd ('NSE' hereafter), NFRA initiated an investigation under Section 132(4) of the Companies Act 2013 (the Act, hereafter) into the role of the statutory auditors, CAT. Raghavendra, for the audit of financial statements for FY 2013-15. 4. Despite repeated communication, CAT. Raghavendra did not submit the Audit File and SQC^1 policy of the audit firm forcing NFRA to conclude that he either had no such documents with him or is unwilling to cooperate with NFRA in discharge of its statutory responsibility. This is a professional misconduct as NFRA has powers of Civil Court under Sec....
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.... The statutory auditors, including the Engagement Partners and Engagement Team, that conduct the audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, Standards on Auditing (SA, hereafter), including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Section 132(4)(c) of the Act. 9. On a reference received vide letter dated 05.11.2019 from the Ministry of Corporate Affairs indicating gross financial irregularities observed by FRRB of ICAI in the Financial Statements of Bartronics for FY 2013-15, NFRA initiated investigation into the role of statutory auditor in the audit of the financial statements for FY 2013-15 under Section 132(4) of the Act. 10. During FY 2013-15, Bartronics was a company engaged in manufacturing of Smart cards and RFID (Radio Frequency Identification) equipments and in a Financial Inclusion Project. Its equity shares were listed on the BSE and NSE. The Foreign Currency Convertible Bonds Order in the matter of statutory audit of Mis Bartronics India Limited for FY 2013-15 Page 2 of 12 of the Compa....
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....cise due diligence and being grossly negligent m 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 procedure of audit applicable to the circumstances. 14. As no reply was received from EP within the said timeline, the EP was given one more opportunity vide email and letter dated 02.11.2022 to submit his response to the SCN by 15.11.2022. It was also conveyed that no further extension of time for submission of response would be given and in case of failure of submission of response by 15.11.2022, it will be construed that EP had nothing to say in the matter and NFRA would proceed to decide the matter based on the material on record. As no response was received from the EP, another final opportunity vide letter dated 28.11.2022 was given to submit his response to the SCN by 05.12.2022, stating that if no response was received, NFRA would proceed based on materials available on record. 15. Despite sufficient time ....
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....e 3 of NFRA Rules, 2018. These require NFRA to exercise oversight of auditing functions performed by auditors and investigate cases of professional misconduct under Section 132 of the Act, 2013. For the purpose of monitoring and enforcing compliance with Standards on Auditing ('SA', hereafter) under the Companies Act, 2013 and under Rule 3 of NFRA Rules, 2018, NFRA is mandated to review working papers and communications related to the audit and to require the personal presence of the auditor for seeking additional information or explanation in connection with the conduct of an audit. 19. Failure to co-operate with NFRA and non-submission of the required information and documents such as audit work paper files constitute professional misconduct by a Chartered Accountant. In the case of R.C. Dutta vs. Kailash C. Mishra^7 , a Chartered Accountant was held guilty of professional misconduct under clause 7 of Part I of Second Schedule and other misconduct under Section 22 of the Chartered Accountants Act 1949 (the CAs Act, hereafter) for his failure to appear before Tax Authorities. CA Gora Chand Mukherjee^8 was also held guilty of Professional Misconduct falling within the me....
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.... the "Emphasis of Matter" part in the audit report the EP reported the following: a) "Reference is invited to Note IO of the financial statements, the company has not provided interest on unsecured loans as terms are not clearly available with the Company and consequently uncertainty arises in Financial Statements as to the exact amount. b) Reference is invited to Note I 5(i)(a) of the financial statements, the Company's capital advances to the extent of Rs. 9,062.09 Lakhs. We are unable to ascertain whether such balances are fully recoverable. Accordingly, we are unable to ascertain the impact, if any, that may arise in case any of these advances are subsequently determined to be doubtful of recovery. Had the Company provided for the same, the loss for the period would have been higher by the said amount. c) Note 17 forming part of the financial statements regarding the Trade Receivables to the extent of Rs.81,264.11 Lakhs are more than three years old and in respect of which the company provided only Rs. 7,030.67 lakhs. We are unable to form an opinion on the extent to which the debts may be recoverable. d) Note 32 forming part of the finan....
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....een that Trade receivables which are more than three years old account for more than 50% of the Balance Sheet size and FCCB which have not been paid are more than 20% of the Balance Sheet size. These are material balances warranting sufficient appropriate audit procedures before forming audit opinion. The EP has abdicated his responsibility by simply including them in the EoM section of his report. 27. In view of the above, it is clear that the EP misused the Emphasis of Matter part of the Audit Report to include matters that should have been evaluated separately and considered for effecting modification to the audit opinion under para 6 of SA 705^15 Para 6 of SA 705 clearly states that auditor should modify the opinion when he concludes that the financial statements are not free from material misstatements or if he is not able to obtain sufficient appropriate audit evidence for the same. Resorting to EoM para in the matters detailed above is a clear violation of provisions of SA 706. D. OTHER LAPSES IN THE AUDIT D.1 Erroneous Application of Financial Reporting Framework by the Company 28. In the Independent Auditor's Report dated 20.05.2015, the EP has reported tha....
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....r of the loan liability by creditor, a separate disclosure should have been made by the company in accordance with para 12 of AS 5^20 This was not done by the company and the EP has not pointed out the error in his audit report. 32. In Note 30 to the Financial Statements, the company has only disclosed the adjustment relating to waiver of balances and its accounting treatment. However, it has not disclosed the terms of concessions, revised loans balances, repayment period, and rate of interest of One Time Settlement with the lenders. As per para 25 of the Framework, qualitative characteristics of Financial Statements are the attributes that make the information provided in financial statements useful to users. Two of the qualitative characteristics are 'understandability' and 'relevance' given in para 26 and 27 of the Framework. In view of these requirements, the company should have disclosed the important terms of One Time Settlement with lenders, which it did not do. The EP has not pointed out the error in his audit report. This indicates lack of professionalism on his part and his failure to report the company's non-compliance with AS 5 is proved. D.3 D....
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....gnificant Accounting Policies not as per applicable accounting standards 37. Note 24: Employee Benefit Expense of financial statements states that the provision for gratuity fund and leave encashment is made on ad hoc basis and not as per the actuarial valuation as required by AS 15^24 . In contrast, in note 2(i) in Significant Accounting Policies, it is stated that the estimated liability for the employee benefits is determined in accordance with the requirements of AS 15 and liability for gratuity is determined and charged to Profit and Loss account based on valuation by independent actuary. The EP did not report these contradictory disclosures and non-adherence of provisions of AS 15, which shows lack of due diligence on his part. E. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT 38. Given the above-mentioned actions and omissions, it is established that CA T. Raghavendra committed professional misconduct by not submitting the Audit File and related documentation to NFRA, by not responding to the SCN issued by NFRA under Section 132 Order in the matter of statutory audit of M/s Bartronics India Limited for FY 2013-15 Page 10 of 12 (4) of the Act and by being grossly neg....
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....ompany being its statutory auditor for five financial years from FY 2012-13 to FY 2017-18. As per information available in Annual Report for FY 2013-15, EP was paid Rs 12,20,000 (which included audit fees of Rs 8,00,000 and limited reviews of Rs 4,00,000 and Rs.20,000 for other services). 41. Considering that the professional misconducts by the EP have been proved and considering the nature of the violations and principles of proportionality, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, order: i. Imposition of a monetary penalty of Rs.5,00,000 (Rupees Five Lakhs) on the EP, CAT. Raghavendra, proprietor of M/s T. Raghavendra & Associates. ii. Debarment of CAT. Raghavendra, proprietor of M/s T. Raghavendra & Associates, for ten 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. 42. This Order will become effective after 30 days from the date of its issue. --------------- Foot Notes ^1 Bartronics India Limited is a company registered at Registrar of Companies, Hyd....
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....audit evidence that the matter is not materially misstated in the financial statements. Such a paragraph shall refer only to information presented or disclosed in the financial statements. " ^14 Note 10 of the Annual Report of the Company for FY 2013-15 reads as follows: Note 10: Other Current Liabilities Current maturities of long-term debt (Refer note No. 5) 45,571.54 45,924.72 Interest accrued but not due on borrowings - 3.87 Interest accrued and due on borrowings 10,194.84 4,999.74 Inter corporate Deposits 4.660.70 4,686.00 Other Liabilities 784.62 730.36 Unclaimed dividends 12.83 12.95 Statutory remittances 41.23 154.74 Payables for Capital works 161.42 271.87 Advances from customers 205.96 185.86 61,633.14 55,000.10 Note: The company has not provided for interest on Unsecured Loans ^15 Para 6 of SA 705, Modifications to the Opinion in the Independent Auditor's Report, reads as under: "6. The auditor shall modify the opinion in the auditor's report when: (a) The auditor concludes that, based on the audit evidence obtained, t....