TaxTMI 
TaxTMI 
2023 (12) TMI 319
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....iminary Legal Matters D. Major Lapses in the Audit E. Articles of Charges of Professional Misconduct F. Sanctions and Penalties A. EXECUTIVE SUMMARY 1. In January 2019, some media reports brought to light the alleged siphoning by the directors of DHFL of around 01000 crore of public money. NFRA, pursuant to the duty cast upon it under Section 132 (2) (b) of the Companies Act, 2013 (the Act, hereafter) and Rule 8 of the NFRA Rules, 2018, took up the Audit Quality Review of the Statutory Audit of DHFL for the Financial Year 2017-18 carried out by C&S. Based on the extensive review of audit documentation, proceedings for professional misconduct were initiated against the Engagement Partner (EP) and EQCR Partner. An Order [Order No. 63/2023] under Section 132 (4) of the Act for professional misconduct dated 05.12.2023 has been passed in the case of EP, which is available on the NFRA website [https://nfra.gov.in] . An SCN was issued to the EQCR Partner of this Engagement, CA Amit Vinay Chaturvedi, Partner of M/s Chaturvedi & Shah LLP, (C&S), asking him to show cause why action under Section 132 (4) of the Act should not be initiated against him for profe....
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....opportunity to present his case, we find the EQCR Partner guilty of professional misconduct and impose through this Order, the following monetary penalties, and sanctions, which will take effect after 30 days from issuance of this Order. In light of the judgment of the Hon'ble National Company Law Appellate Tribunal (NCLAT) dated 01.12.2023, we have limited the monetary penalty to Lakh only since the violations relate to FY 2017-18 a. Monetary penalty of Lakh on the EQCR Partner, CA Amit Vinay Chaturvedi. b. In addition, CA Amit Vinay Chaturvedi is debarred for 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 4. This Order is being passed pursuant to an investigation by the National Financial Reporting Authority (NFRA) into the professional conduct of CA Amit Vinay Chaturvedi for his role as the EQCR Partner in the audit of DHFL. DHFL is a company listed on both Bombay Stock Exchange and National Stock Exchange (BSE & NSE, hereafter), and was one of India's....
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....nt to professional misconduct as conceived in Section 132 (4) of the Act, and thus a Show Cause Notice dated 29th September 2021 (the SCN, hereafter) was issued to the EQCR Partner. He was charged with professional misconduct of: (a) failure to exercise due diligence, and being grossly negligent in the conduct of professional duties; (b) 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 (c) failure to invite attention to any material departure from the generally accepted procedures to audit applicable to the circumstances. C. PRELIMINARY LEGAL MATTERS 9. The EQCR Partner has raised objections with regard to the powers and jurisdiction of NFRA under the Act and the process followed by NFRA during this proceeding. 10. The Audit Firm and the EQCR Partner had filed writ petitions, WP (C) 5326/2022 and 1 19/2022, in the Hon'ble Bombay High Court challenging NFRA's jurisdiction to issue the SCNs. The Hon'ble High Court vide its order dated 13th June 2023 disposed of Writ Petition 1399 OF 2023 along with Writ Petition No....
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....mined these submissions in detail and found that NFRA has required jurisdiction under Section 132(4)(c) of the Companies Act, 2013} as discussed in paragraphs 13 to 22 below. Jurisdiction of NFRA 13. Section 143 (9) of the Companies Act, 2013 mandates an Auditor to comply with the Auditing Standards, The proviso to Section 143 (10) states that until the Auditing Standards are notified by the Central Government, the Auditing Standards specified by the ICAI would be deemed to be the Standards on Auditing. The notification of NFRA with effect from 01-10-2018, as the body responsible inter alia for investigating professional misconduct and other misconduct, did not alter the Auditor's liability to fully comply with the Standards and the law as it existed before the formation of NFRA. 14. Section 132 (4) of the Companies Act gives exclusive jurisdiction to NFRA in matters of professional or other misconduct of Auditors of entities that fall within the jurisdiction of NFRA, which is evident from the following: a. The Proviso to Section 132 (4) (a) of the Act states - "Provided that no other body or institute shall initiate or continue with proceedings in such matter....
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.... the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440). This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant: (1) general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law, and (iv) what it was the legislature contemplated. (p. 388). ' In the instant case the language used, viz, "other misconduct committed" clearly implies jurisdiction over past conduct ie before 24.10.2018, the day when the said section came into force. 19. Further, the presumption against retrospective applicability arises when a vested right is sought to be impaired. The exp....
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....in, D. MAJOR LAPSES IN THE AUDIT 23. Vide letter dated 28.07.2023, the EQCR Partner was informed about NFRA's decision on the issue of jurisdiction and he was requested to submit his reply to the SCN. The EQCR Partner approached Hon'ble NCLAT vide Comp. App. (AT) No. 167 of 2023 wherein he raised the issue of non-supply of reasons for arriving at the issue of jurisdiction. The appeal was dismissed as withdrawn vide NCLAT order dated 05.09.2023. 24. The EQCR Partner was required to submit his reply to the SCNs on or before 1 November 2021. After availing multiple extensions of time the EQCR Partner submitted his reply to the SCN, vide letter dated 06.09.2023, and requested an opportunity for a personal hearing. The EQCR Partner was granted the opportunity of a personal hearing along with his legal representative on 05-10-2023. However, on request from the EQCR Partner, the hearing was rescheduled to 12.10.2023, The EQCR Partner requested an adjournment of the hearing again and it was then rescheduled to 19.10.2023. The EQCR Partner again requested for adjournment and he was informed that he should avail of the hearing on 19.10.2023 itself. The EQCR Partner was repeatedl....
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....predefined questions. We reject this as admissible evidence of compliance with the requirements of the EQC Review contained in SA 220 and SQC-I for the following reasons. a. Para 25 of SA 220 provides specific documentation requirements for EQCR. The checklist does not meet the specific documentation requirements of Para 25 (a) and (c) of SA 220 regarding the procedures required by the firm's policies on EQCR and significant judgments made by the ET. There is no documentation of the procedures required by the Firm. There is no identification of the significant judgments made by the ET. The EQCR, being an evaluation of significant judgements by the ET, involves the identification of such significant matters at the first instance. No working papers evidence the significant matters noted by the EQCR Partner during the audit. b. The Checklist was a general template used by the firm, not specific to the engagement. For instance, a branch audit, management's assessment of going concern, ever-greening of loans, and verification of materiality are all significant matters but find no place in the checklist. There is no evidence of involvement of EQCR Partner in the....
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....low. SA 230 explicitly states in para I that the specific documentation requirements of other SAS do not limit the application of SA 230. As per SA 230, Audit documentation serves several purposes including evidence that the audit is planned and performed in accordance with the SAS. Therefore, performance by the EQCR Partner of the mandatory requirements of SA 220 shall be evidenced by documentation, adhering to the principles of SA 230, particularly Paras 8, 9 and 10. The mandatory requirements for EQCR are specified in paras 20 and 21 of SA 220. The key procedures specified include a discussion of significant judgements made by the ET, a review of Financial Statements and a review of selected audit documentation. Documentation of a mandatory procedure in an SA is a compulsory requirement of SA 230 and it forms the base of any audit under the Companies Act, 2013 since SAS need to be statutorily complied with. The argument that EQCR Partner is not part of ET or EQCR Partner is not an auditor does not vitiate this position since it is the statutory responsibility of the Auditor [As per Section 139 read with Section 141 and 143 (9) the Companies Act 2013] to comply with all the SAS i....
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....ent appropriate audit evidence and whether appropriate conclusions were reached and documented for those audit areas. While doing so, the matters discussed by the EQCR, the additional evidence or procedures required by the EQCR etc, shall form part of the documentation so that the work of the EQCR is evidenced and identifiable. Even when the EQCR Partner agrees with all significant matters documented by the ET, there is still a need to document the discussions. 32. Para 6 of SQC 1 defines "engagement quality control review" as a process designed to provide an objective evaluation, before the report is issued, of the significant judgments the ET made and the conclusions they reached in formulating the report. Thus, the process requires objective evaluation and separate work needs to be done for the evaluation of significant judgments and to verify the results. The absence of any evidence of the involvement of the EQCR Partner as envisaged in SA 220 shows that the EQCR did not comply with the requirements of SQC I and SA 220. 33. The absence of objective evaluation is further evidenced by the following violations of the EP which were unquestioned by the EQCR Partner. a....
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....to show that there is no material misstatement in the financial statements due to non-compliance with laws and regulations having a direct effect on the disclosures in the financial statements. The EQCR Partner failed to review this significant matter. e. The EP failed to obtain sufficient appropriate audit evidence regarding the entity's ability to continue as a going concern. The EP ignored clear indications/events that should have raised concerns over the entity's ability to continue as a going concern. The EP failed in the discharge of his professional duties by not challenging management's assessment of the applicability of the going concern assumption, by failing to test the adequacy of the supporting evidence, and by failing to evaluate the risk of management bias. The EQCR Partner failed to review this significant matter. f. In the absence of adequate audit procedures in the identification, assessment and conclusions of Risk of Material Misstatement (RoMM) and documentation as required by Para 32 of SA 315 [Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment] and SA 230, the EP faile....
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....r of Cheryl L. Gore, CPA and Stanley R. Langston, CPA, charged Stanley R. Langston (CPA) for his failure in connection with his role as Engagement Quality Reviewer in the audit of financial statements of some of the issuer clients and noted in its order dated 14.12.2021 that "Langston violated AS 1220, Engagement Quality Review, by providing his concurring approval of issuance of the Firm's audit reports without performing the required engagement quality reviews with due professional care." For this misconduct, PCAOB imposed restrictions on Langston, barring him from being an "engagement partner" or EQC Reviewer for 1 year and also imposed a monetary penalty of $ 10,000. Furthermore, in another case, [PCAOB Release No. 105-2021-012 (Sept. 29, 2021)] found that Donald R. Burke, CPA, failed to evaluate properly the engagement team's assessment of, and audit responses to, significant risks identified by the engagement team, including fraud risks. As a result of his failure to perform Engagement Quality Reviews with due professional care, among other things, Donald R. Burke, CPA was suspended from being an associated person of a registered public accounting firm for a period of....
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....tered Accountant is guilty of professional misconduct when he "fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the EQCR Partner failed to conduct the review in accordance with the SA 220 and SQC-I as explained in Paras 28 to 35 above but falsely certified that he had performed the review as per SAS. 39. Therefore, we conclude that the charges of professional misconduct in the SCN, as detailed above, stand proved based on the evidence in the Audit File, the audit reports on the standalone financial statements and consolidated financial statements for the FY 2017-18 and the submissions made by the EQCR Partner. F. SANCTIONS AND PENALTIES 40. 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. 41. An EQC Reviewer must conduct a review of the work of the ET and ensure that the Independent Auditor's Report is appropriate. As per the sta....