TaxTMI 
TaxTMI 
2023 (9) TMI 823
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.... Burnpur Cement Limited, West Bengal ('BCL' or 'the company' hereafter) for the Financial Year ('FY' hereafter) 2018-19. 2. This Order is divided into the following sections: A Executive Summary B. Introduction & Background C. Lapses in the audit D. Specific Lapses of the Audit Firm E. Article of Charges of Professional Misconduct by the Auditors F. Additional Articles of Charges of Professional Misconduct specific to the Audit Firm G. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) against the Auditors of Burnpur Cement Limited, West Bengal, for professional or other misconduct in relation to statutory audit for FY 2018-19, pursuant to information received from Securities and Exchange Board of India ('SEBI' hereafter). The SEBI vide letter dated 11.03.2022, shared information pertaining to non-reporting of contingent liability arising out of the Income Tax ('IT' hereafter) Department order dated 31.12.2018, which identified additional income of Rs 63.11 crores and....
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....ons, the PPE were the major assets available with the lenders and other stakeholders of BCL for recovery of their dues and warranted proper presentation of their valuation in the balance sheet after consideration of impairment in accordance with the applicable provisions of lnd AS 36^4. 8. While the standards lay significant emphasis on the Engagement Quality Review Process and appointment of EQCR, the Auditors failed to perform their obligation under Standard on Quality Control ('SQC 1' hereafter), that the Auditors shall determine that an Engagement Quality Control Reviewer ('EQCR' hereafter) was appointed for the audits of listed entities. The Auditors also made an effort to hide such failures, as they provided false information and thereby misled NFRA regarding such appointment. 9. The Auditors failed in applying sufficient appropriate audit procedure and professional skepticism in identifying and reporting of material misstatements in the financial statements. The Auditors were grossly negligent in the conduct of the audit, which led to erroneous reporting and portraying a misleading picture of the company to the investors and stakeholders. 10. Based o....
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....^6. BCL was required to prepare its Financial Statements ('PS' hereafter) for the FY 2018-19 in accordance with Indian Accounting Standards ('Ind AS' hereafter), as notified by Ministry of Corporate Affairs. 14. NFRA took up investigation under Section 132 (4) of the Companies Act, 2013 after receipt of a letter dated 11.03.2022 from SEBI, which pointed out non-reporting by BCL of contingent liability arising out of the IT Department order dated 31.12.2018. The IT order identified additional income of Rs 63.11 crores and imposed additional tax (including interest) of Rs 17.53 crores. The SEBI letter also conveyed the failure of the Auditors in reporting in the CARO 2016 report about the dispute regarding levy of this additional income tax. 15. Vide letter dated 29.03.2022, the Audit File for the FY 2018-19 along with other information, was called from the Auditors, giving 30 days' time for submission of the required documents. The Auditors submitted the Audit File on 28.04.2022. As part of the investigation, a questionnaire dated 19.07.2022 was also sent to the Auditors and their response was received on 17.08.2022. 16. On examination of the Audit File,....
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....e Auditors replied on 12.11.2022 to the SCN and refuted all the charges and did not ask for the personal hearing offered to them. 19. We have perused all the material on record including the written responses of the Auditors. The major lapses include non-recognition of interest cost on borrowings classified as Non-Performing Assets (NPAs), non-recognition of provision for liability / disclosure of contingent liability arising out of Income Tax dispute and non-reporting of the same under CARO 2016, nonassessment of going concern basis, non-evaluation / verification of Property, Plant and Equipment (PPE), non-assessment of risk of material misstatement in balances of Trade Receivables, non-appointment of EQCR and improper planning of audit. These have been discussed in Part 'C' of this Order. Part 'D' deals with the specific lapses of the Audit Firm. Part C C.1 Failure to report non-recognition of Interest Cost on Borrowings classified as Non-Performing Assets (NPAs) 20. The Auditors were charged with failure to report non-recognition of lnterest Cost on Borrowings classified as Non-Performing Assets (NPA). It was observed^8 that BCL had availed of credit facilities fr....
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....n response to the SCN, the auditor replied as follows - "We had made reporting about NPAs. It was clearly mentioned that loans and borrowings of Company had become NPA s. In notes to accounts it was mentioned that: - "The Company had not provided for accrued interest on loans taken from bank in its books of company is under process of arriving at a settlement for repayment of these dues. Accordingly, interest will be provided only when the liability crystallizes. " When any loan is declared as NPA we don't recognize interest on it. Management did not agree to charge interest as loans had become NPA. Banks from which loan was taken had not charged any interest from company during that period. Negotiation was going on with bank for settlement of loan and waiver of interest, so interest could not be charged. As a general accounting practice, we don't charge interest when any loan becomes NP A. Same principle was applied by us in accounting of BCL also. No interest was charged by the lending banks for the said date hence there was no obligation on company to pay interest, hence no material misstatement was there." 24. On the Auditors' reply, we....
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....awed accounting treatment by BCL resulted in understatement of liability and reported loss for the FY 2018-19 by t 15 .66 crores. The Auditors were required to report this material misstatement in their audit report, which they failed to do. Therefore, the charge against the Auditors of failing to report nonrecognition of interest cost on borrowings is established. C.2 Failure to report effect of Income Tax order in the Financial Statements of the company 25. The Auditors were charged with failure to perform audit procedures to analyse and point out nonreporting of the effect of Income Tax Assessment Order in the form of provision for liability or disclosure of the contingent liability. As per the information received from SEBI, the IT department had issued an assessment order ('ITAO' hereafter) dated 31.12.2018 against BCL, identifying additional undisclosed income of t 63.11 crores pertaining to FYs 2010-11 to 2016-17, on which additional income tax (including interest) of n 7.53 crores was levied. The company was required to make provision for such liability or had to disclose it as contingent liability, which it failed to do. The Auditors also failed to challen....
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....nagement dated 29.04.2019, asking about details of all contingent liabilities and the user credentials of Income tax and other such online portals. In response, BCL had replied on 30.04.2019 that the user credentials could not be provided due to some medical emergency. The Auditors stated that they were unaware of any IT order (ITAO) and also submitted that" .... The management also failed to provide us with necessary information on contingent liability. We relied on all papers and documents present at that time in office. The examination of the documents and other material on record didn't have any indication o[existence o[liability. So as on that date reporting was done seeing the documents and scenario present at that time. We were totally unaware of any such liability existing on that date ... .... " The Auditors claimed that they first came to know about the contingent liability vide the SEBI letter, and since they were unaware of the ITAO, Ind AS 37 was not to be invoked and that nothing was concealed while reporting under CARO 2016. 27. In this regard, we observe the following: a) In his reply dated 13.02.2022 to SEBI in this connection, the EP didn'....
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....ter) and must determine whether it is possible to perform alternate audit procedures to obtain sufficient appropriate audit evidence. On perusal of the audit file, we neither found any communication with TCWG nor any determination of adoption of alternative audit procedures to mitigate the risk arising due to the said limitation posed by the management. In light of Para 11 - 13 of SA 705, as the limitations remained, the Auditors could not issue unmodified opinion in the Independent Auditor's Report, as they did. 28. It is evident from the preceding discussion that the Auditors were aware about the ITAO and, therefore, they were required to ensure that its impact was reflected as a provision for the liability or as disclosure of the contingent liability, which they failed to do. Accordingly, we hold the Auditors responsible for the charge pertaining to their failure to report non-recognition of provision for liability or failure to report non-disclosure of contingent liability on account of additional income tax. C.3 Non-assessment of going concern assumption 29. The Auditors were charged with non-evaluation of the appropriateness of the going concern assumpti....
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...., the management representation submitted was not on the letterhead of the BCL, whereas all the representations originally part of the Audit File were on the letterhead of the company. Therefore, such representation is deemed an afterthought and cannot be accepted. The contention of the Auditors that they had considered the off-take agreement with Ultratech, the taking over of the loan of Central Bank of India by UV Asset Reconstruction Company and had carried out analysis of trading estimates & future cash flow, cannot be established, as these are not part of the Audit File. 32. The Auditors incorporated^18 an Emphasis of Matter on the going concern basis, however, we did not find any working paper in support of inclusion of such EoM. According to SA 706^19 , an EoM can be included by an auditor if he has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. Therefore, it was incumbent on the Auditors to evaluate the matter accordingly, especially in view of the qualified opinion given by the previous auditor and several other factors (as mentioned in Para 29 above), that raised a question mark on the going conce....
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....as more than the value recorded in the books. 36. We observe that the internal audit report was a part of the audit file and therefore, as per Para 11 of SA 500^23 , any inconsistency in the findings of the internal audit report vis-a-vis the findings of the Auditors had to be resolved and the Auditors had to determine what modifications or additions to audit procedures were necessary to resolve the matter, and had to consider the effect of the matter, if any, on other aspects of the audit. However, we did not find any working paper that conclusively records that physical verification of PPE was carried out by the management and concluding that the internal audit report was not reliable. The Auditor's submission that as per their assessment, valuation of the PPE was more than the above value recorded in the books of accounts, is not supported by documentation in the audit file containing assessment of the value of PPE and their impairment testing as per applicable provisions of Ind AS 36. As per Para 12 (f) of lnd AS 36, an entity needs to consider the following indication for testing of the impairment of assets: "Significant changes with an adverse effect on the en....
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....nificant risk of material misstatement in the balances of trade receivables of BCL for the FY 2018-19 a. The ITAO, as referred to in Para 25 of this Order, had pointed out unreported additional income of Rs 63 .11 crores, which indicated that there was a high risk of material misstatement in revenue recognition. As there is a direct link between revenue recognition and balances of Trade Receivables, the professional skepticism warranted the Auditors to ascertain the correctness of the amounts of Trade Receivables reported by the company. b. The previous auditor in his Independent Auditor's Report for 2017-18 had qualified^25 the audit report due to inability to comment upon the correctness of Trade Receivables. The opening balance of Trade Receivables for FY 2017-18 (Rs. 34.39 crores^26) had reduced significantly to Rs. 1.13 crore on the closing date i.e., 31.03.2018, mainly by making provision for doubtful debts and write-offs of the bad debts. 39. In light of the above, the SCN charged that the Auditors were required to assess the risk of material misstatement in the balances of trade receivables as per SA 315^27 and perform procedures as per Para 5 and 6....
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....but the Auditors failed to do so. The contention of the Auditors that all the sales were made to a single party and therefore external confirmation was not done, cannot be accepted as there is no such exception available under para 3 of SA 505. 25 As per Point No I of Basis for Qualifed Opinion of the Independent Auditor's Report on page no 68 of Annual Report of the BCL for the FY 2017 18. We also observe that the Auditors have given contradictory replies. Their submission that they had considered the qualification on trade receivables from the previous financial year's audit report is in contradiction of their reply dated 17.08.2022 that since the previous auditor had not made any adverse comments on the balances of trade receivables, they did not verify the opening balances. Para 5 of SA 510^30 states that" The auditor shall read the most recent financial statements, if any, and the predecessor auditor's report thereon, if any, for information relevant to opening balances, including disclosures". Para 7 of SA 510 states that "If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period'....
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.... done by EQCR and documentation to be carried out by the EQCR. Vide para 7(b) of SA 220, engagement quality control review is defined as "process designed to provide an objective evaluation, before the report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report". Para 64 of SQC 1 casts a duty upon the EQCR partner to review important working papers relating to the significant judgments that the engagement team made and the conclusions they reached. Para 66 of SQC1 requires that the engagement quality control reviewer conducts the review in a timely manner at appropriate stages during the engagement so that significant matters may be promptly resolved to the reviewer's satisfaction before the report is issued. Paras 68-72 of SQC1 prescribe the criteria for the eligibility of engagement quality control reviewers and lay down the guidelines for ensuring his independence and objectivity for the assigned work of quality control in the engagement. For the listed entities, the SA 220 [Para 19(a)] makes it mandatory to ensure appoint an EQCR. 47. In the backdrop of the above requirements of the sta....
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....rm and imposed a civil money penalty of $5000. 49. In another case, the PCAOB^33 charged Labrozzi & Co., P.A. (the "Firm") for its repeated failure to cooperate with a Board investigation and comply with PCAOB rules and standards and noted that the non-cooperation with a Board investigation also includes knowingly making any false material declaration or making or using any other information, including any book, paper, document, record, recording, or other material, knowing the same to contain any false material declaration. In the referred case, the respondent failed to cooperate with a Board investigation by submitting audit documentation to the Division that they knew to contain false declarations. For this misconduct, including others, PCAOB censured the Firm and revoked its registration permanently. Further, Douglas A. Labrozzi, CPA, the Engagement Partner, was barred from associating with any registered public accounting firm. C.7 Non-planning of Audit 50. The Auditors were charged with: (a) failure to perform the procedures as required by Para 6 of SA 210^34, which deals with ensuring the existence of pre-conditions for an audit; (b) non-compliance....
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....etailed audit plan was prepared by CA Manjeet Kumar Verma, Managing Partner of the Firm, and implemented by the team; the Audit Plan was reportedly checked by CA Gaurav Vijay and Aayush Kejriwal; that both the audit team members had left the audit firm in July 2020, and some documents were left unreturned by CA Gaurav Vijay at that time. Such documents were enclosed by the auditor along with the reply to the SCN. The Auditors further submitted that all the requirements to check purchase, sales, bank accounts and stock etc. were fully met and there was no negligence in this regard; that they had reviewed the off-take agreement with Ultratech Cement Ltd. and that all the sales were made in accordance with off-take agreement; and that the audit papers were prepared regularly but a copy of the same had not been kept, since there was no requirement to keep and maintain every working paper. 53. We have examined the replies submitted by the Auditors for non-compliance with the provisions of SA 210 & 220 and note that: a) Para 6 of SA 210 provides for pre-conditions of audit and Para 10 of SA 210 requires that the agreed terms of the audit engagement shall be recorded in an ....
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.... for the communication made with the previous auditor. The independence of the audit team and audit firm is fundamental for an audit engagement. As per Section 141(3)(d) of the Companies Act 2013, there is a legal requirement to ensure the independence of the statutory auditors of a company, which includes restrictions on holding any security or interest in the company or its subsidiary or of its holding or associate companies or a subsidiary of such holding company. Failure in compliance with such requirements shall lead to the auditor not being eligible for appointment as an auditor of a company. However, in the present case, the Auditors failed to ensure such fundamental requirement of independence. c) As per Para 14 of SA 220, the auditor was required to be satisfied that the engagement team collectively had appropriate capabilities and competence to perform the audit engagement in accordance with professional standards and regulatory and legal requirements. On perusal of the audit file, we did not find any audit document specifying the composition of the engagement team and analysis of their competencies and suitability to the extant audit. This clearly estab....
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....The Auditors have referred to unreturned documents by CA Gaurav Vijay, which clearly establishes that the Auditors failed to compile the audit file within 60 days of conduct of audit^39 , as per the requirement of SQC 1 read with Para 14 of SA 230. We note that the Auditors had filed an affidavit dated 28.04.2022 that the submitted audit file was complete in all aspects and nothing was concealed. The Auditors had clearly made a wrong averment through the said affidavit. c) The statement of the Auditors "that audit papers were prepared regularly but there is no requirement to keep and maintain each and every working paper'', is in contravention of the provisions of para 8 of SA 230 that the auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the procedures performed. d) Such lapses have been viewed seriously by international regulators as well. For example, PCAOB^40 , the US Audit Regulator, charged L.L. Bradford & Company, LLC (the "Firm") in connection with audit of WebXU Inc.'s ("WebXU") for the year ended December 31, 2011 for failure to properly a....
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.... from the auditor, no Audit Documentation regarding SQC 1, Quality control systems, policies and procedures is found. 59. In its reply to SCN, the audit firm has not responded to the above charges and therefore we conclude that the audit firm has nothing to say in its defence of the systemic lapses in ensuring quality control in the audit. Accordingly, we conclude that the Audit Firm failed to establish and maintain a system of quality control and ensure compliance with the Standards on Auditing and Section 143 of the Act and was therefore grossly negligent in the conduct of its professional duties and in observance of due diligence in conducting the audit of BCL for FY 2018-19. E. ARTICLE OF CHARGE OF PROFESSIONAL MISCONDUCT BY THE AUDITORS 60. 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 BCL for the FY 2018-19. Based on the above discussion, it is proved that the auditor issued unmodified opinion on the Financial Statements without any basis. The poor quality of audit, tampering of audit files, the cover up in terms of submission of additional documents tha....
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....th Section 22 and clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor 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 Auditors failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to their failure to report the material misstatements and non-compliances of the Company in its financial statements, as explained in the paras 20 to 54 above. iv. The Auditors committed professional misconduct in terms of by Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor 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 i....
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....entity^41. 64. Without a credible audit, Investors, Creditors and other users of Financial Statements would be handicapped. The entire corporate governance system would fail and result in a breakdown in trust and confidence of investors and the public at large if the auditors do not perform their job with professional skepticism and due diligence and adhere to the standards. 65. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law. 66. As we have explained in this Order, substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of M/s K. Pandeya & Co. (Audit Firm) and CA Manjeet Kumar Verma (EP) establish their professional misconduct. The Auditors chose to place blind reliance on the assertions of the management without applying professional skepticism to the assessment of impact of IT AO, accounting of interest cost on borrowings classified as NP As and assumption of Going Concern basis for the preparation of F....
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....nternal audit of the functions and activities of any company or body corporate. 70. This Order will become effective after 30 days from the date of issue of this Order. Foot Notes ^1 A s per Financial Statements on page no 70 72 of Annual Report of the BCL for the FY 2018-19 ^2 As per Annexure 3 of the Independent Auditor's Report on page no 69 of Annual Report of BCL for FY 2018 19 ^3 As per Financial Statements on page no 70 of Annual Report of the BCL for the FY 2018 19 ^4 Ind AS 36 "Impairment of Assets" ^5 BCL's CIN is L27104WB1986PLC040831 ^6'Vide Rule 3(l)(a) of National Financial Reporting Authority Rules, 2018. ^7 As per the Opinion para of the Independent Auditor's Report on page no 60 of the Annual Report of BCL for the FY 2018 19 ^8 As per Annexure 3 of the Auditor's Report on page no 69 of Annual Report of BCL for FY 2018-19 ^9 As per Note no 34 of the notes to accounts on page no 115 of Annual Report of BCL for FY 2018 19 ^10 Ind AS I 09 "Financial Instruments". ^11 SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing" ^12"Indian Accounti....