TaxTMI 
TaxTMI 
2023 (11) TMI 1173
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.... Charges of Professional Misconduct by the EP F. Penalty & Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India's independent regulator, in respect of matters relating to accounting and auditing, of prescribed classes[Rule 3 of NFRA Rules, 2018] of entities which can be broadly described as 'Public Interest Entities' (PIEs). 4. NFRA initiated action under Section 132(4) of the Companies Act, 2013 (the Act) for investigating into professional or other misconduct of the statutory auditor of MIIL, a listed company, following information received from Securities and Exchange Board of India (SEBI) vide letter dated 23.06.2022 regarding financial irregularities committed by MIIL. 5. MIIL is a manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and Potable Water. By virtue of being listed, MIIL falls under the jurisdiction of NFRA under Rule 3 of NFRA Rules, 2018. 6. M/s Rohira Mehta & Associates, Chartered Accountants (presently RMA & Co.), Firm Registration No 118777W, was the statutory auditor of MIIL and CA Nilesh Chheda was the Eng....
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....ara 18-21), credit risk evaluation of Trade Receivables (para 43-44) and failure to perform risk assessment procedures and response to such risks (para 64-72). e) The EP failed to demonstrate sufficiency and appropriateness of audit work in virtually every critical building block of an audit of Financial Statements i.e., Audit Strategy, Planning (para 45 to 48), Analytical Procedures (para 50-54), Determining Materiality (para 55 to 61), identification and assessment of ROMM through an understanding of the entity's environment and internal control (para 62 to 66), resulting in non-compliance with Standards on Auditing, notified under Section of 143 (10) and made mandatory under section 143 (9) of the Act. 9. Considering the professional misconduct of the EP, this Order imposes upon CA Nilesh Chheda a monetary penalty of Rs.5,00,000 (Rupees Five Lakhs Only). CA Nilesh Chheda is also debarred for 5 (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 and Background 10. NFRA is a statutory authority se....
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....tern of MIIL for the FY 2016-17, FY 2015-16, and FY 2014-15, which indicate substantial public interest. Table 1: Some key financial features of MIIL (Numbers except percentages are in Rs Crores) Particulars 31.03.2017 31.03.2016 31.03.2015 Shareholding Pattern Public 54.94% 54.94% 54.21% Individual 38.92% 38.92% 40.6% Revenue from Operations 1060.49 1391.68 1364.02 PBT 43.39 92.86 64.14 Equity Borrowing from Banks 221.65 276.50 264.68 14. M/s Rohira Mehta & Associates, Chartered Accountants (presently RMA & Co.), Firm Registration No 118777W, was the statutory auditor of MIIL and CA Nilesh Chheda was the Engagement Partner (EP) for this statutory audit for the FY 2016-17. The EP & the Firm (statutory auditors) were instructed on 03.08.2022 to submit the Audit File and other relevant information, which they did on 18.08.2022. 15. The examination of the Audit File revealed that the audit had been conducted in disregard of most of the SAs and the requirements of the Act but the EP had issued an unmodified opinion in Independent Auditor's Report [Audit Report dated 30.5.2017] for the Standalone Financial Sta....
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.... failure to appropriately modify his audit opinion as per SA 705, even though the accounts of MIIL's wholly owned subsidiary viz., Merino Shelters Pvt. Ltd (MSPL), were not consolidated in the Financial Statements of MIIL, as per Ind AS 110 [Indian Accounting Standard (Ind AS) 110, Consolidated Financial Statements] The EP had qualified his Audit Report for non-consolidation of MSPL in the Financial Statements of MIIL. MSPL was the wholly owned subsidiary of MAN Infra Projects Private Limited (MIPL), which in turn was the wholly owned subsidiary of MIIL. Pursuant to the Scheme of Arrangement approved by Hon. High Court of Bombay vide order dated 20.03.2015, which was to be made effective from 01.04.2013, the shares held by MIPL in MSPL were transferred to MIIL and accordingly MSPL became wholly owned subsidiary of the MIIL from 01.04.2013. MIIL gave effect to this Scheme of Arrangement in its Financial Statements for the FY 2014-15 but discontinued the consolidation from FY 2016-17. 19. The EP replied that they had been informed of an ongoing legal dispute between the promoters in relation to the control of MSPL pending in Hon. Bombay High Court, and that the consolidation of the ....
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....tion of Financial Statements of MSPL into that of MIIL was material and pervasive, as the assets and liabilities of MSPL constituted about 19.20% and 28.96 % respectively of the assets and liabilities of MIIL (Table 2) and resulted in exclusion of additional information, required under Schedule III to the Companies Act, 2013, of enterprises consolidated as subsidiary/ associates /joint ventures. Table 2 (In Rs. Crore) Particulars MIIL (Published Consolidated Financials) As on 31.03.2017 MSPL as on 31.03.2017 MSPL as % of MIIL Total Assets 1356.39 260.43 19.20 % Total Liabilities 758.11 219.57 28.96 % Net Worth 598.28 40.85 6.83 % In light of above, we conclude that the qualified opinion by the EP, when there was sufficient basis for an adverse opinion, was without due diligence and without obtaining sufficient appropriate audit evidence, and thus the EP failed to comply with Para 8 of SA 705. As mentioned above, the EP too during personal hearing has acknowledged this lapse. C2. Failure to prepare audit documentation 22. The EP was charged with non-compliance with Para 8, 9 and 10 of SA 230 [SA 230 Audit Documentation]. 23. Responding to the charge, the EP sub....
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....per requests for details regarding payment made towards GST, which had not even been introduced in the period under audit. iv) Clause (B) 10 requests for details of lease rental paid as per Ind AS 116, Leases, which came into force for accounting period starting 01.04.2019 and therefore was not relevant for FY ending 31.03.2017. In view of the above, it is clear that this important work paper has been inserted in the Audit File after the SCN was issued by NFRA and the Audit File has been tampered with while submitting to NFRA pursuant to issuance of SCN by NFRA. 25. When confronted with these facts during the personal hearing, the EP attributed it to a typographical error. Mr. Nirav Mehta, the EQCR Partner, stated that all such information requests to the Company were sent by email, which they shall provide along with Section 65B Certification under Indian Evidence Act. We have reviewed the copies of the emails sent by the EP vide email dated 22.09.2023 and note that the EP had sought information with reference to Accounting Standards such as, revenue recognition in accordance with AS-9, list of all related parties as per AS-18, lease rental received and paid as per AS-19, list ....
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....he Audit File but there is no evaluation by the EP of the valuation done. Actuarial Valuation report was dated 04.08.2017, after the audit report was signed on 30.05.2017. This working paper is incorporated after 60 days of Audit casting serious doubt on the integrity of Audit File. IV Working Paper at Page 299 to 614 of Audit Paper Book Working Paper regarding confirmation for bank balance, outstanding bank loan, bank guarantee and letter of credit directly from the bankers As per Para 16 of SA 505, the Auditor shall evaluate whether the results of the external confirmation procedures provide relevant and reliable audit evidence, or whether performing further audit procedures is necessary. No such evaluation is made by the EP and no conclusion is drawn by EP and reviewed by EQCR. 28. Based on the above observations, it is evident that the EP has not prepared audit documentation as per Para 8 of SA 230 which requires the auditor to 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....
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.... An audit file should contain sufficient detail for an experienced auditor to understand the work performed and relied on in forming conclusions. Where this detail has not been documented, our presumption is that the work has not been performed. We have used this approach for several years and it is consistent with the approach applied globally by other audit regulators and in most firm internal quality review programs."[Refer Page 7 of ASIC Audit Inspection Report - Report 743 October 2022] (Emphasis supplied) 33. Lack of sufficient documentation has been viewed seriously by national and international regulators as well. For example, in the matter of Bharat Parikh & Associates Chartered Accountants, dated 19.03.2019, the US audit regulator PCAOB took a serious view of the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB order states that "....Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to: (a) understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclu....
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....illustrates the disclosures required by Paragraph 35M and 35N. Table-4 37. Further, the Company should have shown disclosures as per Ind AS Implementation Guidance-Example 12-Provision Matrix of Illustrative Examples of IFRS 9 [https://indasaccess.icai.org/download/2019/asb052019/147/147BB2019_B_IFRS9%20Financial%20Instruments.pdf] Financial Instruments (shown in Table 5 & 6 below), which illustrates the disclosures required for impairment loss allowance of Trade Receivables. Table 5 Table 6 38. As can be seen from Table 4, 5 and 6, the EP failed to report in his audit report the nondisclosure by the Company of material information regarding credit risk profile of Trade Receivables as per Para 35M and 35N of Ind AS 107. 39. The EP was required to obtain independent external confirmations according to the requirements of SA 505 in respect of Trade Receivables which constituted a material (25.09%) percentage of total assets of MIIL to ascertain the accuracy, existence, genuineness, and recoverability of these balances. On perusal of the Audit File, no documentation was found evidencing that EP had performed the critical, generally accepted audit procedure of obtaining independe....
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....o Rs.17 Crores (5% of the total Trade Receivables as on 31.03.2017), which was not material. The EP also stated that he had obtained Management Representation Letter dated 30.05.2017, which stated that there was strong chance of recoverability of the total Trade Receivables including the disputed ones. 43. The EP reiterated the position during the personal hearing adding that the unsecured Trade Receivables accounting for over 49% of the total outstandings balances were within the ageing bucket of 6-8 months; that there was no previous outstanding and that the recovery was regular and some of it was recovered during the audit. Based on this, the EP stated that he had identified the credit risk as low; and that most of the transactions were with foreign customers with Tecnimont being the major debtor. He, however admitted that this analysis and judgment is not documented in the Audit File. 44. We observe that there is no evidence in the Audit File of the Letter of Credit stated as security for the secured Trade Receivables. There is no evidence of receipts from M/s. Tecnimont after 31.03.2017 and no ageing analysis of the Trade Receivables performed by the EP. In the absence of su....
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....ial respect with the Indian Accounting Standards prescribed in the new Companies Act, 2013 and Companies (Accounting Standards) Rules, 2006. It is to be noted that the Companies (Accounting Standards) Rules, 2006 was no longer applicable to MIIL but the Companies (Indian Accounting Standards) Rules, 2015(Ind AS Rules) was applicable to MIIL. This shows EP's ignorance of the applicable standards and the related statutory requirements. Further, the working paper was signed by the EP and EQCR partner, however, no date is mentioned on such work paper casting doubt on its integrity. III. Working Paper at Page 28 to 41 of Audit Paper Book Working Paper regarding CARO and Ind AS checklist It is observed from the check list of Ind AS signed by EP that the Ind AS 101 [Indian Accounting Standard (Ind AS) 101, First-time Adoption of Indian Accounting Standards] is shown as not applicable to the Company which is incorrect as the Company was required to and has reportedly adopted the Ind ASs from the FY 2016-17 under audit by the EP. This shows ignorance of the EP regarding applicable financial reporting framework, the relevant standards and the related statutory requirements. Further, the ....
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....n FY 2015- 2016 to Rs. 43.39 Crore in 2016-2017). Further, the Company had written off substantial Rs. 28.12 Crore of Trade Receivables as bad debts in the previous FY 2015- 2016, compared to no write off for the year 2016-2017, which appears unusual in view of the fact that substantial amount (Rs 17.00 crore) of Trade Receivables were under litigation and a significant part (49%) of outstanding balances was unsecured. 51. In response, the EP submitted that he relied on management representation stating strong recoverability of the Trade Receivables in the year under consideration [Para 8 @ Page 86 of the Audit Paper Book] and has referred to the final audit discussion letter wherein he had raised concern regarding nonprovisioning for expected credit loss on Trade Receivables but after satisfactory reply of the Company and applying professional judgement, had concluded that no provision for write-off of Trade Receivables was required to be made [Para 5 @ Page 43 of the Audit Paper Book]. 52. We observe the following deficiencies (Table 8) in the work papers referred to by EP in his reply to the charge regarding non-performance of Analytical Procedures: Table 8 S.No. Working Pa....
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....a 6 of SA 520. C6. Failure to determine Materiality 55. The EP was charged for failure to comply with Para 10 and 14 of SA 320, which requires an auditor to determine materiality for the Financial Statements as a whole while establishing the overall audit strategy and document the amounts and the factors considered in his determination of materiality for the Financial Statement as a whole and for performance materiality. 56. Responding to the charge, the EP responded that ".... nothing has been set out in the SCN or let alone proved to indicate that alleged misstatements have significantly impacted the usability of financial statements. It is submitted that materiality for the audit of financial statements as a whole had been determined, to form a true and fair opinion on the same". 57. According to Para 10 of SA 320, when establishing the overall audit strategy, auditor shall determine the 'Materiality' for the Financial Statements as a whole. In addition, Para 11 of SA 320 states that the auditor shall determine 'Performance Materiality' for the purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures.....
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....tion and represented by use of "shall". Hitherto, the word, "should" was used in the Standards, for this purpose. ..." 60. The EP's assertion that nothing has been set out to indicate or prove that alleged misstatements have significantly impacted the usability of Financial Statements is false and misleading. Examination of the Audit File revealed that EP did not even determine materiality or performance materiality in the audit of Financial Statements of MIIL. As brought out in this Order, non-consolidation of a material subsidiary (para 18-21 of this Order), failure to report non-disclosure of Related Party loans on gross basis (para 84-86 of this Order), failure to report non-disclosure of Trade Payable under MSME Act (para 87-90 of this Order) and failure to report full particulars of RPTs (para 91-93 of this Order) constitutes material misstatements impacting the Financial Statements materially and pervasively. The stand of the EP that such misstatements have not impacted the Financial Statements cannot be accepted. We emphasise that materiality is one of the most important concepts in the audit of Financial Statements. Where material information is omitted or misstated, the....
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....o any work paper where he has performed risk assessment procedures for material misstatements at the Financial Statement and Assertion levels and his audit responses to such risks etc. 65. As per Para 5 of SA 315, the auditor is required to perform risk assessment procedures at the Financial Statement and Assertion levels. Assertions generally used by the auditor to consider the different types of potential misstatements that may occur are shown in the Table 10 below: Table 10 Assertions used by the Auditor to consider different types of material misstatements. (Refer to Para A110-113 of SA 315 for more details) Assertions Material Misstatement Categories Class of Transactions/Events during the audit period Account balances at the period end Presentation and Disclosure Occurrence √ - √ Completeness √ √ √ Accuracy √ - - Cut-off √ - - Classification √ - - Existence - √ - Rights and obligations - √ - Valuation and allocation - √ - Classification and understandability - - √ Accuracy and valuation - - √ 66. Para 11 (c) of SA 315 states that "The auditor s....
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.... 69.2.1 To obtain sufficient evidence to support the auditor's opinion on IFCoFR as of year-end, and 69.2.2 To obtain SAAE to support the auditor's control risk assessments for the purposes of the audit of Financial Statements. 69.3 Planning the audit, role of risk assessment, addressing the risk of fraud, materiality, identifying entity-level controls, identifying significant accounts and disclosures and their relevant assertions., testing controls-testing operating effectiveness, forming an opinion. 69.4 Audit Documentation: It requires that the auditor should comply with the requirements of SA 230, Audit Documentation to the extent applicable. 70. In respect of the audit work relating to IFCoFR, there is no evidence at all except for a copy of the unsigned and unauthenticated copy of a document titled "Policies & Procedures on Internal Financial Control' [Ref: Page 1532 to 1543 of Audit File 4]. Further, as elaborated in para 62 to 64, the EP has not performed any work relating to SA 315 which is the benchmark to be used by the management and auditors to assess and state adequacy and compliance of the system of internal control. Further, as elaborated in para 47,....
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.... of audit: (i) Non-consolidation of a material subsidiary (Para 18-21), (ii) Credit risk evaluation of Trade Receivables (Para 40-44) and (iii) Failure to perform risk assessment procedures and response to such risks (Para 62- 72) The EP during the personal hearing held on 21.09.2023 admitted that he had not kept in the Audit File a copy of stay order granted by Hon. Bombay High Court regarding Scheme of Arrangement as explained in para 19 and 20 of this Order. The EP also admitted that instead of a qualified opinion, he should have given an adverse opinion in view of the material and pervasive effect of non-consolidation. The EP has also not documented in the Audit File the analysis and judgement regarding credit risk of Trade Receivables and need for impairment loss, if any. Further, performing risk assessment by understanding the entity and its internal control requires obtaining extensive audit evidence. However, as mentioned at para 64 of this Order, there is no evidence at all of work done in this fundamental audit area. In the light of the EP's failure to adhere to the requirements of SAs and failure to report non-compliance of Ind AS and Companies Act, 2013 provision....
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....s an auditor, overview of planned scope, timing of the audit and deficiencies in Internal Control etc. The EP was also required to maintain audit documentations of such communication with TCWG. The SCN noted that the examination of Audit File revealed that there is no documentation indicating that there was any communication with TCWG. Thus, the EP did not exercise due diligence and was grossly negligent in not communicating with TCWG and, therefore, failed to comply with the requirements of SA 260 [Standard on Auditing (SA) 260: Communication with Those Charged with Governance (Para 15,11,14,16 & 23)] and SA 265 [Standard on Auditing (SA) 265: Communicating Deficiencies in Internal Control to Those Charged with Governance and Management]. 80. Responding to the charge, the EP submitted that he had maintained an Audit Engagement Letter [Page 04 to 10 of Audit Paper Book] which confirms the acceptance of the audit besides the planned scope, statutory and professional duties; that the Audit Engagement Letter had been signed by the auditee thereby promoting two-way communication; that as per the discussion with TCWG, valuation report was obtained for impairment testing of investments ....
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.... others, censured the Firm, revoked its registration, and imposed a civil money penalty of $12500. D. Other Lapses in Audit D1. Failure to report non-disclosure of Related Party Loans on gross basis 84. The Company in its Annual Report for 2016-2017 has disclosed loan to subsidiary and its receipt on net basis. Para 18 of Ind AS 24 requires an entity to disclose the amount of the transactions entered into with a related party. The EP was charged with failure to comply with Para 15 & Para 25 of SA 550 by not reporting such non-disclosure as per Ind AS 24 which rendered the financial statements misleading. 85. Responding to the charge, the EP submitted that there is no requirement that the amount of loan transactions must be disclosed on gross basis; that Para l8 of Ind AS 24 only states that the entity shall disclose the amount of transactions entered in the relevant FY and the outstanding balances at the year end with related parties. The EP cited example of related parties shown on net basis in disclosure of other entities and stated that the allegation of non-compliance with SA 550 does not sustain. 86. We observe that the EP's understanding is erroneous. The objective and....
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....ME Act and hence such disclosure had not been made. In view of the above, the EP sated that no further reporting was required to be made. 89. The disclosure of information related to MSMEs is an important aspect of corporate reporting. If a Company has not made adequate disclosure related to MSMEs, it is considered a material non-compliance and can have implications for the Financial Statements and the audit report. The auditor in such situation is required to assess the materiality of the missing disclosure and evaluate the impact it has on the Financial Statements. If the auditor determines that the missing disclosure is material, they will need to modify their audit opinion to reflect this. The auditor may also need to perform additional procedures to gather evidence to support the modified audit opinion. Auditors play a critical role in ensuring that the Financial Statements are fairly presented and that any material non-compliances are identified and addressed. 90. In his audit report, the EP has failed to address the non-disclosure in respect of MSME and explain its impact on the Financial Statements. The EP also failed to state his opinion on the Financial Statements, taki....
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....ce to show that the EP discussed this issue with the management and TCWG. As Related Party Transactions are often prone to misuse, including diversion of funds and therefore a material area of audit and subject to stricter legal scrutiny, the EP was required to be more cautious and exercise professional skepticism in this sensitive area of audit. We, therefore, conclude that this is a clear case of afterthought, and the EP has failed in his attempt to cover up for his nonchalant attitude by not performing the duties of a statutory auditor of a PIE. D4. Failure to report non-disclosure of Material Information relating to pledge of fixed deposits 94. The EP was charged with failure to report non-disclosure of material information in accordance with Para 14 of Ind AS 107 "Financial Instruments: Disclosures", wherein a lien created on the fixed deposits held by MIIL amounting to Rs. 83 crores for overdraft facility availed by MRL (related party of MIIL) was not disclosed in the Financial Statements of MIIL. The EP was charged that he had falsely reported that the Financial Statements comply with Ind AS, despite the violation of the requirements of Para 14 of Ind AS 107 in the audit ....
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.... Part I of the Second Schedule of the CA Act which states that an EP is guilty of professional misconduct when he "fails to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity". This charge is proved as explained in para no. C.3, D.1 to D.3 above. (ii) CA Nilesh Chheda committed professional misconduct as defined in 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, and being grossly negligent in the conduct of professional duties". This charge is proved as explained in para no. C.1 to C.10 and D.1 to D.3 above. (iii) CA Nilesh Chheda committed professional misconduct as defined in 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....