TaxTMI 
TaxTMI 
2023 (12) TMI 320
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.... by National Financial Reporting Authority (in short 'NFRA'). 2. It is the case of NFRA, the Respondent herein, that all four present Appeals before this Appellate Tribunal, belong to Branch Audit of 17 branches of Dewan Housing Finance Limited (in short 'DHFL'), which were assigned to K. Varghese & Co. (in short 'the firm') and the four Appellants in four Appeals were different Engagement Partners (in short 'EP') for different branches, as such these four appeals may be clubbed and taken up together. The plea of clubbing was also agreed by the Counsel of the Appellant in all the four cases. 3. The summary of all these four cases can be seen from the under mentioned table for the sake of convenience. DHFL Branch Auditors Auditor Harish Kumar AynaTamtam Baskaran Sam Varghese Appeal No. CA (AT) No. 68/2023 CA (AT) No. 87/2023 CA (AT) No. 90/2023 CA (AT) No. 91/2023 SCN 07.12.2022 07.12.2022 07.12.2022 07.12.2022 Impugned Order 13.04.2023 31.03.2023 13.04.2023 12.04.2023 Penalty Rs. 1,00,000 + Debarred for 1 year Rs. 1,00,000 + Debarred for 1 year Rs. 1,00,000 + Debarred for 1 year Rs. 1,00,000 + Debar....
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.... our earlier order dated 02.06.2023 passed in Company Appeal (AT) No. 68, 87, 88, 90, 91, 92, 93 & 94 of 2023, hence our endeavour would be to collect all relevant material, law, citations, etc., as far as possible, to make it comprehensive for clarity and convenience. 6. Heard the Counsel for Parties and perused the records made available including cited judgments. Company Appeal (AT) No. 68 of 2023 & I.A. No. 2007-2009 of 2023 [Arising out of Order dated 13.04.2023 passed by the National Financial Reporting Authority, in Nf-21/1/2022/03.] 7. The present Appeal in CA AT No. 68/2023 has been filed by CA. Harish Kumar T.K., who was EP in Impugned Order dated 13.04.2023, passed by NFRA under Section 132(4) of the Companies Act, 2013 r/w Rule 11(6) of National Financial Reporting Rules, 2018 (in short 'NFRA Rules, 2018'). The Appellant has been saddled with a penalty of Rs.1,00,000/- and is debarred for one year 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. Company Appeal (AT) No. 87 of 2023 & I.A. No. 2007-2009 of 20....
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....e Companies Act, 2013. 12. All four Appellants are practicing Chartered Accountants who joined the firm K. Varghese & Co. Chartered Accountants, which was assigned audit work of 17 Branches of DHFL, which in turn, assigned different set of branch audit work to different EP's. a.) CA. Harish T.K was assigned branch audit work as EP of three branches of M/s DHFL at Thrissur, Kotayyam and Coimbatore. b.) CA. Ayna Tamtam was assigned branch audit work as EP of two branches of M/s DHFL at Kannur and Calicut. c.) CA. M. Baskaran was assigned branch audit work as EP of nine branches of M/s DHFL at Zone Tamil Nadu, RPU Chennai, Chennai, Chennai Metro, Chennai OMR, Chennai Sales Vertical, Chennai Tambaram, Chennai Kodambakkam and Parrys. d.) CA. Sam Varghese was assigned branch audit work as EP of two branches of M/s DHFL at Kochi, Kerala. 13. DHFL appointed the Firm on 27.08.2014 as Auditors to Audit 17 Branches of DHFL for the Financial Year 2014-2015 in consultation with the then joint Statutory Auditors of DHFL i.e., M/s. TR Chadha & Co. along with M/s. Rajinder Neeti & Associates. 14. It is the case of the Appellants that most of the decisio....
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....nual reassessment based on discussions and validation of records gathered. 17. It has been stated that the Firm was appointed Branch Auditors in subsequent Financial Year of 2015 - 16, 2016 -17, 2017 - 18 and 2018-19, after receiving similar appointment letters from DHFL. As per the Appellants, the Firm did not receive any Appointment Letter for 2019-2020 and did not carry out any Branch Audit thereafter, the Firm was involved in Branch Audit for 5 years from 2014-15 to 2018-19. 18. It has been reiterated that DHFL appointed the Joint Statutory Auditors M/s. TR Chadha & Co. and M/s. Rajinder Neeti & Associate in 30th AGM and then were reappointed as the Statutory Auditor for period of four years (upto 34th AGM), however the Statutory Auditors did not make themselves available to continue at 32nd AGM of DHFL and therefore at 32nd AGM, DHFL passed a Resolution on 20.07.2016 to appoint M/s. Chaturvedi and Shah (in short the 'CAS) as Statutory Auditors to Audit all Company Offices including Zonal and Branch Offices for a period of five years (from conclusion of 32nd AGM to conclusion of 37th AGM). It has been highlighted that despite changes in Statutory Auditors, the Firm co....
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....es Act, 2013, whereby the Appellant was debarred for one year from appointment as Auditor etc., and was asked to pay a monetary penalty of Rs. 1,00,000/- . 23. The Appellant- CA M. Baskaran, in Company Appeal (AT) No. 90 of 2023, stated that, subsequent to furnishing audit files by the firm to NFRA, he received the SCN dated 07.12.2022, whereby NFRA, alleged that prima facie the appointment of Branch Audit was done without following due procedures as prescribed in the Companies Act, 2013, as well as violation of certain SAs and therefore Appellant was charged for professional misconduct. The Appellant- CA M. Baskaran submitted reply to the same on 04.02.2023 along with supplementary audit documentations. However, NFRA passed the Impugned Order on 13.04.2023 under Section 132 (4) (c) of the Companies Act, 2013, whereby the Appellant was debarred for one year from appointment as Auditor etc., and was asked to pay a monetary penalty of Rs. 1,00,000/- . 24. The Appellant- CA Sam Varghese, in Company Appeal (AT) No. 91 of 2023, stated that, subsequent to furnishing audit files by the firm to NFRA, he received the SCN dated 07.12.2022, whereby NFRA, alleged that prima facie the app....
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....s. 1,00,000/- and debarment for one year. 27. As a preliminary ground, it is the case of the Appellants that NFRA does not have any retrospective jurisdiction since NFRA itself was constituted on 01.10.2018 vide Ministry of Corporate Affairs (in short 'MCA') Notification dated 01.10.2018 and MCA also notified on 24.10.2018 as effective date for coming into force of Section 132(2), (4), (5), (10), (13), (14) & (15) of Companies Act, 2013. The Appellants submitted that NFRA Rules were notified on 13.11.2018, whereas the Financial Statements in question pertains to FY 2017-18 and Audit Reports for different Branch Audit were given on different dates for different branches which were prior to notification bringing NFRA into effect, therefore, the NFRA did not have any jurisdiction to look into the period prior to its own formation on 01.10.2018. It is further the case of the Appellants that there is no mention regarding retrospective applicability in Section 132 of the Companies Act, 2013 or in the MCA Notification issued for the same. 28. Few Judgements have been brought to the notice of this Appellate Tribunal which gives constitutional protection under Article 20 of the Consti....
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.... have received peer-review certification from ICAI for the FY 2017-18 which establishes that their job was satisfactory and the they conducted the Audit work in accordance with SAs and therefore allegations by NFRA are not sustainable. 32. It has been alleged by the Appellants that NFRA incorrectly applied the provisions of Chartered Accountant Act, 1949, which defines professional misconduct in Section 22 r/w first Schedule of the Chartered Accountant Act, 1949, according to which the Appellants were required to check that their appointments were in accordance with Section 225 of the Companies Act, 1956 and there was no reference in Companies Act, 1913, in fact the amendment for the same was brought out only in 2022. 33. The Appellant assailed the Impugned Orders where NFRA assumed that Chartered Accountant Act 1949 required compliance of Section 224 & 224(a) of Companies Act, 1956 and also required to check compliance with Section 139 of Companies Act, 2013. It is the case of the Appellant that since the Firm was appointed Branch Auditors for Financial Year 2014 - 15 at 30th AGM and in terms of Section 139 of the Companies Act, 2013 such appointments were for period of five....
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.... the Appellants in relation to each of the branches audited by them had an Annexure IX titled "Branch Auditor Audit of Branch's Financial Information: Summary Memorandum - As a Whole" and which had statements on how materiality was determined in the audit procedure. 41. The Appellants also denied allegation with regard to assessment of risk of misstatement and test of controls and elaborated that as per the business model of the DHFL, the branch offices were for interface with the customers. The Trial Balances reflected in the books of accounts of the branches predominantly reflected expenses incurred in administration and maintenance, Fixed Assets in the branch concerned, loans granted and their interest earnings were not retained in the books of accounts of the branches and the accounting effect of operational activities such as loans and deposit, used to be reflected in the books of accounts of the Head Office of DHFL. The Appellants emphasised that risk of misstatement in the accounts of DHFL for the Appellants were only with respect to expenses and income attributed to the branch and pointed out that for example - during F.Y. 2017-18, expenses incurred by Coimbatore ....
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....ented audit plans available in the audit files for previous years and therefore, documentation displaying an overall audit strategy and development of an audit plan for FY 2017-18 was felt not necessary. 45. It has been submitted that the total audit fees earned by the Firm was Rs 3,60,000, which indicated of the lower professional risk associated with the audit, low volume of transactions and lower risk of misstatement the Audit plan and strategy in such cases are not required to be complex that necessitate detailed documentation. 46. The EPs refuted that they have not complied with SA 520 and submitted that SA 520, deals with the auditor's use of analytical procedures as substantive procedures, and as procedures near the end of the audit that assist the auditors when forming an overall conclusion on the financial statements. It has been pointed out that as EPs their work was limited to auditing the Trial Balance of the branches, which did not reflect any operating assets or liabilities attributed to the Branches by virtue of ERP and therefore, no financial statements had been prepared for branches, nor was there any case to "form any overall conclusion" as provided in S....
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.... Orders. 52. Per contra, the Respondent denied all averments of the Appellant to be false, misleading and mischievous. The Respondent gave background for establishing NFRA and cited judgment of 'S. Sukumar' Vs. 'ICAI' [(2018) 14 SCC 360]. The Respondent also gave the legislative object behind regulation of auditors and cited judgment in the matter of 'Union of India' Vs. Delloit Haskins' [(2023) SCC OnLine SC 557]. 53. It is the case of the Respondent that after media report emerged in public regarding siphoning of public money of Rs. 31,000 Crores by promoters/ directors of DHFL and action by the Enforcement Directorate's reported action in April 2020 on an alleged banking fraud of about Rs.3700 crore by the promoter/ directors of DHFL, NFRA suo-motu initiated an Audit Quality Review (in short 'AQR') to probe into the role of the Statutory Auditors of DHFL for the FY 2017-18, the year in which the alleged fraud was primarily stated to have occurred. While examining the Audit Files of the statutory audit carried out by Chaturvedi and Shah (in short 'CAS'), certain prima-facie violations were observed relating to the appointment of Branch Audito....
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....ng one headed by the chairperson or fulltime member for purpose of carrying out its functions and duties. Since, at the time of issue of SCNs as well as the Impugned Orders to the Appellants, Clause 2(g) of NFRA Rules, 2018 clearly defined the division and as such as there was no illegality on the part of NFRA on this account. Moreover, the Appellants also were given opportunity for personal hearing which they denied and therefore, there have been no violation of natural justice. 58. It is case of the Respondent where power exists to prescribe the procedure and such power has not been exercised, the implementing authorities are at liberty to determine and adopt such procedure as they may deem fit subject to the same being fair and reasonable and relied upon the judgment of the Hon'ble Supreme Court in the matter of Ramjibhai Vs. State of Gujarat [(1965) 2 SCC 5] as well as om the matters of Chairman & MD, BP Ltd.' Vs. Gururaja & Ors. [(2003) 8 SCC 567]. 59. The Respondent argued that merely because the manner in which certain powers have to be exercised, has not yet been prescribed would not negate the existence of power itself. It is well settled that exercise of power c....
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....rrow sense, meaning a payment which has to be made for a deprivation of liberty which has to be suffered as a consequence of a finding that a person accused of a crime is guilty of the charge and cited case of the Hon'ble Supreme Court in the matter of Shiv Dutt Rai Fateh Chand' Vs. Union of India' [(1983) 3 SCC 529]. 64. The Respondent further argued strongly that the protection against ex-post facto laws under the Constitution, does not extend to modes of procedure and would be limited to increasing of punishment or change in ingredients of offence and cited judgment in his support :- (i) Gibson' Vs. State of Mississippi, [162 US 565 (1896)]. (ii) Rao Shiv Bahadur Singh' Vs. State of Vindhya Pradesh, [(1953) 2 SCC 111]. (iii) Sajjan Singh' Vs. State of Punjab, [(1964) 4 SCR 630]. (iv) Queens Vs. St. Mary Whitecaple, [116 ER 811]. (v) Om Prakash Shrivastava' Vs. State of NCT of Delhi', [2009 SCC OnLine Del 3264]. (vi) Hitendra Vishnu Thakur' Vs. State of Maharashtra, [(1994) 4 SCC 602]. (vii) 'Union of India' Vs, Sukumar Pune', [(1966) 2 SCR 34]. It is the case of the R....
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.... Companies Act, 1956 have been complied with. The Respondent submitted that as per Ministry of Corporate Affairs Circular No. 7/2014, dated 01.04.2014, the equivalent sections of the Companies Act 2013 for the above sections of the Companies Act 1956 are sections 139 and 140. The Companies Act 2013 is only a continuation of the 1956 Act with necessary modifications as deemed fit by the Parliament. All matters covered in the old act are mutatis mutandis, continue to be effective and there is no specific need to amend the Chartered Accountants Act, 1949 in this regard. 69. It is the case of the Respondent that the Council in addition to "professional misconduct" as defined in Section 22 of the Chartered Accountants Act, 1949 has been given power to inquire into the conduct of any member of the institution under circumstances other than those specified in the Schedules to the Act. The Respondent relied on judgments of Hon'ble Supreme Court which are as follows :- (i) Council of Institute of Chartered Accountants of India Vs. Y.K. Gupta [(2010) SCC OnLine Del 4192]. (ii) Council of Institute of Chartered Accountants of India' Vs. Mr. Rakesh Aggarwal, [(2010) SC....
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.... accepted for the reasons as the Appellants nowhere submitted any evidence to show that the peer reviewer has verified the matters contained in the SCN issued by NFRA. Moreover, there are inherent Limitations of Peer Review as the review would not necessarily disclose all weaknesses in compliance of technical standards and maintenance of quality of attestation services since it would be based on selective tests. As there are inherent limitations in the effectiveness of any system of quality control which happens to be subject-matter of review, departure from the system may occur and may not be detected. 73. It is the argument of the Respondent that mere sending copies of appointment letters to CAS or non- receipt of any special notice for their removal as branch auditors of DHFL as contemplated under Section 140(4)(i) and (ii) of the 2013 Act, did not absolve the Appellants of the mandatory requirements of Chartered Accountants Act, 1949 as detailed in the Impugned Orders. 74. The Respondent stated that in their Independent Branch Auditor's Report which Appellants had issued for the branches for as the EPs and certified under "Auditor's Responsibility" that "we have taken....
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....rules or notions ought to be had in the matter of grant of injunction but on the facts and circumstances of each case- the relief being kept flexible; (v) the issue is to be looked at from the point of view as to whether on refusal of the injunction the plaintiff would suffer irreparable loss and injury keeping in view the strength of the parties' case; (vi) balance of convenience or inconvenience ought to be considered as an important requirement even if there is a serious question or prima facie case in support of the grant;" (Emphasis Supplied) 77. The Respondent stated that since No prejudice caused to the petitioner hence the objection being purely technical deserves to be rejected based on the ratio of State of Karnataka' Vs. Kuppuswamy Gownder (1987) 2 SCC 74 and Fertico Marketing & Investment Pvt. Ltd. & Ors. Vs. Central Bureau of Investigation & Anr. [(2021) 2 SCC 525]. It is further argument of the Respondent that the doctrine of necessity is not allowed full play in certain unavoidable situations, it would impede the course of justice itself and the defaulting party would benefit therefrom and can be found in the judgments in the ....
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....ss the Appeals. Finding and Analysis 81. It is observed that DHFL is a company listed on the Bombay Stock Exchange and National Stock Exchange and therefore, as per Rules of the Companies (Indian Accounting Standards) Rules, 2015, it is required to comply with the Indian Accounting Standards (Ind AS) prescribed under these rules for the preparation and presentation of its annual financial statements. 82. From the detailed averments of the Appellants and the Respondent in all the four Appeals, which are based on common facts, background and charges regarding professional misconduct by the Appellants, this Appellate Tribunal observe that in order to finalize these Appeals, following issues are required to be deliberated and decided by us and we shall do accordingly. Issues framed by us 83. Issue No. (I) Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountants. Issue No. (II) Retrospective V/s prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018. Issue No. (III) Violation of Principle of natural justice w.r.t. separate division of NFRA. Issue No. (IV) Role of Statutory Auditors of t....
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....inancial Reporting Authority.- (1) The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act. [(1A) The National Financial Reporting Authority shall perform its functions through such divisions as may be prescribed.] (2) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall- (a) make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be; (b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed; (c) oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and (d) perform such other functions relating to clauses (a), (b) and (c) as may b....
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....t of financial statements or internal audit of the functions and activities of any company or body corporate; or II. performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.] Explanation.- For the purposes of this sub-section, the expression "professional or other misconduct" shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949 (38 of 1949). (5) Any person aggrieved by any order of the National Financial Reporting Authority issued under clause (c) of sub-section (4), may prefer an appeal before [the Appellate Tribunal in such manner and on payment of such fee as may be prescribed]. (10) The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed. 139. Appointment of auditors.- (1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an indiv....
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....ions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if- (a) he is not disqualified for re-appointment; (b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. (10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. (11) Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee. 140. Removal, resignation of auditor and giving of special notice.- (1) The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed....
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....ty of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company. (2) Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm. 142. Remuneration of auditors.- (1) The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein : Provided that the Board may fix remuneration of the first auditor appointed by it. 143. Powers and duties of auditors and auditing standards.- (1) Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely:- (a) whether loans and advances made by the company o....
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....ired by an officer of the rank of Joint Secretary or equivalent in the Ministry of Corporate Affairs and the Committee shall have the representatives from the Institute of Chartered Accountants of India and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards and the office of the Comptroller and Auditor General. (3) The auditor's report shall also state- (a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him; (c) whether the report on the accounts of any branch office of the company audited under subsection (8) by a person other than the company's auditor has been sent to him under the proviso to that sub-section and the manner in....
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.... by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority : Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. (11) The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor's report shall also include a statement on such matters as may be specified therein. (12) Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Go....
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....ers or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the renumeration of the auditor, whichever is less. (3) Where an auditor has been convicted under sub-section (2), he shall be liable to- (i) refund the remuneration received by him to the company; and (ii) pay for damages to the company, statutory bodies or authorities or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report. (4) The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of subsection (3) and such body, authority or officer shall after payment of damages to such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification. (5) Where, in case of audit of a company being conducte....
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....and clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) and "subsidiary bank" as defined in clause (k) of section 2 of the State Bank of India (Subsidiary Bank) Act, 1959 (38 of 1959). (d) Any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the Authority by the Central Government in public interest; and (e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if the income or networth of such subsidiary or associate company exceeds twenty per cent of the consolidated income or consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d). (2) Every existing body corporate other than a company governed by these rules, shall inform the Authority within thirty days of the commencement of these rules, in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules. (3) Every body corpor....
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.... other misconduct" shall be deemed to include any act or omission provided in any of the Schedules, but nothing in this Section shall be construed to limit or abridge in any way the power conferred or duty cast on the Director (Discipline) under sub-section (1) of Section 21 to inquire into the conduct of any member of the Institute under any other circumstances. THE FIRST SCHEDULE PART I : Professional misconduct in relation to chartered accountants in practice A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he − (1) allows any person to practice in his name as a chartered accountant unless such person is also a chartered accountant in practice and is in partnership with or employed by him; (2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than a member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualifications as may be ....
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....ion or expressions other than chartered accountant on professional documents, visiting cards, letter heads or sign boards, unless it be a degree of a University established by law in India or recognised by the Central Government or a title indicating membership of the Institute of Chartered Accountants of India or of any other institution that has been recognised by the Central Government or may be recognised by the Council: Provided that a member in practice may advertise through a write up setting out the services provided by him or his firm and particulars of his firm subject to such guidelines2 as may be issued by the Council; (8) accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing; (9) accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of Section 225 of the Companies Act, 1956* in respect of such appointment have been duly complied with; (10) charges or offers to charge, accepts or offers to accept in respect of any professi....
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....nduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he− (1) is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months; (2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work" THE SECOND SCHEDULE PART I : Professional misconduct in relation to chartered accountants in practice A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he− (1) discloses information acquired in the course of his professional engagement to any person other than his client so engaging him, without the consent of his client or otherwise than as required by any law for the time being in force; (2) certifies or submits in his name, or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partn....
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....or the Appellate Authority any particulars knowing them to be false; (4) defalcates or embezzles moneys received in his professional capacity. PART III : Other misconduct in relation to members of the Institute generally A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional other misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months." (Emphasis supplied) Rule 12 (1) of Company (Audit and Auditors) Rules 2014 "(1) For the purposes of sub-Section (8) of Section 143, the duties and powers of the company's auditor with reference to the audit of the branch and the branch auditor, if any, shall be as contained in sub-Sections (1) to (4) of Section 143 which makes it clear that even for the audit of the branches of a company, the responsibility of auditors as provided in Section 143(1) 143(4) are on the company's auditor and not on the Branch Auditor." (Emphasis Supplied) 85. Issue No. (I) Role of NFRA V/s ICAI on disciplinary matters of Chartered Accountant. ➢ At the....
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....y approved by Government of India on 01.03.2018 and subsequently necessary amendments were made in Section 132 of the Companies Act, 2013 to create NFRA. The objective of NFRA is to act as an independent regulatory body for improving transparency and reliability of financial statements and information of companies in India after Statutory Audit by the Chartered Accountants. ➢ Prior to formation of NFRA, the responsibility of regulating the accounting and auditing professionals was within sole dominance of ICAI who used to regulate Auditors under Chartered Accountants Act, 1949. However, over the period; somewhat impression was created that the required level of discipline and accountability from Chartered Accountants was becoming the challenge due to self-regulation and therefore, the SCOF recommended for NFRA. ➢ It is worthwhile to note that ICAI continues to be responsible and authority for conducting examination, registering members, investigate conduct of its members who are auditors of all private companies and those public companies which are not covered under Section 132 of the Companies Act, 2013. ➢ As per data available on th....
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....ight mechanism has the potential of infringing public interest and Rule of law which are part of fundamental rights Under Articles 14 and 21. It appears necessary to realise that auditing business is required to be separated from the consultancy business to ensure independence of auditors. The accounting firms could not be left to self regulate themselves." (Emphasis Supplied) ➢ We therefore, note important aspects arising from above judgment:- a) Audit is very critical for economy. b) Audited financial statement are relied and acted upon by the Stakeholders including investors. c) Failure of Auditors may lead to scams and frauds. d) Auditing profession needs to be properly regulated. e) Audit professional should not be left self regulated. f) Absence of proper audit oversight mechanism leads to infringing public interest and violate Art 14 and 21 of the constitution. ➢ NFRA assist and suggest the Government, regarding the Accounting and Auditing policies and standards that the companies need to adopt and follow. NFRA also monitor enforcement of accounting and auditing standards. It overs....
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....ily followed even prior to NFRA's establishment. Section 132(4) merely designates NFRA as the forum for determination of professional misconduct. No. litigant has or can have vested rights in a particular forum. ➢ NFRA has jurisdiction to enforce compliance with auditing and accounting standards with respect to the entities listed in the NFRA Rules, 2018 and Companies Act, 2013 which we have already taken note our earlier discussion. ➢ We also note that the Hon'ble Supreme Court in another matter of Union of India and Another V/s Deloitte Haskins and Sells LLP & Anr., Criminal Appeal Nos.2305- 2307 of 2022 reiterated the role and importance of auditors and, inter-alia, observed as under: "13. It is required to be noted that the role of auditors cannot be equated with directors and/or management. Auditors play very important role in the affairs of the company and therefore they have to act in the larger public interest and all other stakeholders including investors etc." ( Emphasis Supplied ) ➢ After going through provision of Chartered Accountant Act, 1949 and Companies Act, 2013 it becomes clear that discipl....
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....of the Companies Act, 2013 or in the MCA Notification issued for the same. ➢ Two judgements have been brought to the notice of this Appellate Tribunal by the Appellant which gives constitutional protection under Article 20 of the Constitution of India regarding non-Application of retrospectivity of penal statute: (a) Maya Rani Punj' Vs. CIT, Income Tax, Delhi, (1986) 1 SCC 445. (b) S.K. Ganesan' Vs. A.K. Joscelyne', 1956 SCC Online Cal 43. ➢ It has been alleged by the Appellants that the issue regarding retrospective or prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018, have not been appreciated by the Respondent in right perspective and exercised jurisdiction wrongly in all four cases by NFRA.' The Appellants claims that it is the settled law that no law which has got penal element or any law prescribing new offense can be done retrospectively. ➢ It is the case of the Appellants that if legislature had intentions of retrospectively, it would have made an express provision for same in Section 132 of the Companies Act, 2013 on this as....
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....e, the element of mens rea which is always a constituent of offences, unless specifically excluded, will also be lacking, because one cannot have a criminal intention in doing an act which is not a crime at the time at all. It may be said that cases of professional misconduct do not differ essentially from cases of offences. Two tests, however, must be looked for. Is the offence or misconduct created for the first time by the Act concerned and, secondly, does the Act contain any indication that activities of the kind mentioned are intended to be covered by its provisions, whenever they may have been done? In the present case whether acts of the types charged against the respondent would amount to misconduct under the prior law cannot be said for certain, because the Auditor's Certificate Rules, which constituted the prior law, left it to the Central Government to determine in each case whether a particular conduct on the part of an Auditor was or was not professional misconduct. As to indications in the Act itself regarding its retrospective operation, I shall presently examine its provisions. I may state, however, that in spite of the ordinary and I might almost say cardinal r....
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....on had been withdrawn. It was difficult to establish that. nevertheless, the respondent had failed to disclose a material fact known to him or to report on a misstatement similarly known. For what purpose and for what reason he would fail to disclose the fact in one case and report it in the other is not intelligible, if he appreciated the fact to be material and appreciated the statement to be a misstatement, inasmuch as there is no longer any allegation or wilful participation in the concealment or connivance at it. All that can be said on the facts proved is that he failed to take normal and reasonable care in informing himself of the true position under S. 132(3) and Regulation 107 in relation to the Agreement and the Profit and Loss Account, as drawn up. The position, therefore, seems to be that in view of the absence of any charge of negligence and the withdrawal of the particular allegation, it is not possible to hold that the charges actually framed had been established, although, as I have found, the respondent does not appear to me to have acted with reasonable care. (Emphasis Supplied) ➢ We find above quoted judgments although in context of Artic....
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....d not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished. (v) A Statute which not only changes the procedure but also creates a new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. 25. In fairness to the learned Additional Solicitor General Mr. Tulsi, it may be stated that he did not controvert the legal position (both in his oral submissions and written arguments) that Amendment Act 43 of 1993 regulating the period of compulsory detention and the procedure for grant of bail, being procedural in nature, would operate retrospectively. We need not, therefore, detain ourselves to further examine the question of retrospective operation of the Amendment Act. On the basis of the submissions made by learned Counsel for the parties, we uphold the finding of the Designated Court, for the reasons recorded by it and those noticed by us above that the Amendment of 1993 would apply to the cases which were pending investigation on 22nd May 1993 a....
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.... "34. We will now deal with the legality of the propositions canvassed, at the hands of learned counsel for the rival parties. In our considered view, the legal position expounded by this Court in a large number of judgments including New India Insurance Co. Ltd. v. Shanti Misra, (1975) 2 SCC 840; Securities and Exchange Board of India v. Ajay Agarwal, (2010) 3 SCC 765; and Ramesh Kumar Soni v. State of Madhya Pradesh, (2013) 4 SCC 696, is clear and unambiguous, namely, that procedural amendments are presumed to be retrospective in nature, unless the amending statute expressly or impliedly provides otherwise. And also, that generally change of 'forum' of trial is procedural, and normally following the above proposition, it is presumed to be retrospective in nature, unless the amending statute provides otherwise. This determination emerges from the decision of this Court in Hitendra Vishnu Thakur v. State of Maharashtra (1994) 4 SCC 602; Ranbir Yadav v. State of Bihar (1995) 4 SCC 392, and Kamlesh Kumar v. State of 72 Jharkhand, (2013) 15 SCC 460, as well as, a number of further judgments noted above." (Emphasis Supplied) 86. We will also refer to yet another jud....
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....t barred under Section 110F of the Act. While taking the latter view the High Court failed to notice that primarily the law engrafted in Sections 110A and 110F was a law relating to the change of forum." (Emphasis Supplied) ➢ It is therefore, clear that for matters of misconduct committed prior to coming into force of Section 132 (4), NFRA can initiate an investigation. It also stated that the expression "such matters of misconduct" can be inferred to mean misconduct' which has been committed prior to 24.10.2018 i.e., the date of coming into force of Section 132 (4) and qua which proceedings already underway by the ICAI and w.e.f. 24.10.2018 the said proceeding would be in the exclusive domain of the NFRA. ➢ In the matter of Election Commission of India and Ors. vs. Subramanian Swamy and Ors. [(1996) 4 SCC 104], it was held in Hon'ble Supreme Court that :- "16. We must have a clear conception of the doctrine. It is well settled that the law permits certain things to be done as a matter of necessity which it would otherwise not countenance on the touchstone of judicial propriety. Stated differently, the doctrine of necessity make....
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.... or accountancy: Provided that the Council may constitute more Disciplinary Committees as and when it considers necessary. (2) The Disciplinary Committee, while considering the cases placed before it shall follow such procedure as may be specified. (3) Where the Disciplinary Committee is of the opinion that a member is guilty of a professional or other misconduct mentioned in the Second Schedule or both the First Schedule and the Second Schedule, it shall afford to the member an opportunity of being heard before making any order against him and may thereafter take any one or more of the following actions, namely:- (a) reprimand the member; (b) remove the name of the member from the Register permanently or for such period, as it thinks fit; (c) impose such fine as it may think fit, which may extend to rupees five lakhs." (Emphasis Supplied) b) Companies Act, 2013 "132. Constitution of National Financial Reporting Authority- (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall- (c) where professional or other mis....
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....onstitution and cited judgments will not give any reprieve to the Appellants in present cases in view of our detailed discussing earlier. ➢ Thus, after taking into consideration the background for forming NFRA, the judgment of the Apex Court, proven scams, need to restore shaken confidence of public and investors at large and prevent any adverse impact on Indian economy, we hold that NFRA has clear and required retrospective jurisdiction over the alleged offences by delinquent Chartered Accountants for period prior to formation of NFRA or prior to coming into effect relevant portion of Section 132 of Companies Act, 2013. Issue No. (III) Violation of Principle of natural justice V/s separate division of NFRA. ➢ Another preliminary ground of challenge by the Appellants, to the Impugned Orders of NFRA, in the Appeal Books as well as during several initial hearings, is that enquiry by NFRA was against the laid down procedures since NFRA did not constitute any division as required in Section 132(A) of the Companies Act, 2013. It is the case of the Appellant that as per Rule 2(g) of NFRA Rules, 2018, NFRA is obligated to establish divisions for the purp....
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....Clause 2(g) of NFRA Rules, 2018, it has been stipulated that divisions means division including one headed by the chairperson or fulltime member for purpose of carrying out its functions and duties. Since, at the time of issue of SCNs as well as the Impugned Orders to the Appellants, Clause 2(g) of NFRA Rules, 2018 clearly defined the division and as such as there was no illegality on the part of NFRA on this account. Moreover, the Appellants also were given opportunity for personal hearing which they denied and therefore, there have been no violation of natural justice. ➢ It is brought to the notice by NFRA that there has been no violation of principles of natural justice with regard to formation of separate divisions by NFRA. It is submitted that as per Section 132 (1A) pf Companies Act, 2013 NFRA is to function through such divisions as may be prescribed and Section 2(66) of the Companies Act, 2013 defines prescribed by law as rules under such act, which are to be framed by the Central Government and not NFRA as per Section 469 of the Companies Act, 2013. It has further been argued that there is distinct difference between "existence of powers" and "manner of exe....
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....tive power by making regulations, executive power by administering the regulations framed by it and taking action against any entity violating these regulations and judicial power by adjudicating disputes in the implementation thereof. The only check upon exercise of such wide ranging power is that it must comply with the Constitution and the Act. In that view of the matter, where an expert Tribunal has been constituted, the scrutiny at its end must be held to be of wide import. The Tribunal, another expert body, must, thus, be allowed to exercise its own jurisdiction conferred on it by the statute without any limitation." (Emphasis Supplied) ➢ The Rule for division are prescribed in Section 132 of the Companies Act, 2013 and NFRA Rules 2018 (Rune No. 2(g) which have already noted earlier. ➢ Therefore, it is clear that prior to amendment in Rule 2(g) of NFRA Rules 2018, the "division" was not defined but Ministry of Corporate Affairs vide amendment dated 13.11.2018 on NFRA Rule, 2018 specified as to what constitute "division" under Rule 2(g). We note that the Respondent used the division as stipulated in the Companies Act, 2013 and NFRA Rule....
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....eaking, Statutory Audit is conducted by independent auditors who are duly qualified and permitted by the examination and regulatory body i.e., ICAI. Statutory Audit involve detailed examination of financial and other relevant connected records of the entity to establish that financial statements of the entity depicts true and fair picture of the company. Definition and scope of Branch Audit. ➢ Section 2(14) of the Companies Act, 2013 describes "Branch office" in relation to company means any establishment described as such by the Company. ➢ As per Section 143 (8) of Companies Act, 2013, where a company has a branch or more than one branch, the accounts of such branch shall be audited by :- a) the Statutory Auditor, so appointed by the shareholder of the Company, itself. b) Any other person, qualified to be and appointed as an Auditor as prescribed under Section 139 of Companies Act, 2013. ➢ However, if branch of such company is situated outside India, the accounts of such branch shall be audited, either by Auditor appointed by the company or by an auditor duly qualified to act as an Auditor of accounts of branch o....
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....tory Auditor is duty bound to incorporate such observations in its comprehensive Audit Report of the company. * As regard the relationship between the Statutory Auditor and the Branch Auditor we may infer that both are responsible for their respective area, however, the Branch Auditor will squarely remain responsible in respect of branch audit conducted by him. ➢ We observe that SA 230 describes Auditor's responsibility where the audit to be conducted is of "Financial Statements" of the company and Financial Statements, as per Section 2(40) of the Companies Act, 2013 are the Balance Sheet, Profit and Loss Account, Cash Flow Statement and Statement of Changes in Equity along with Notes on Accounts, whereas the scope of Branch Audit is limited to audit of the Company's branches. ➢ The Appellants pointed out that Scope of auditing of the Financial Statements of the Company as a whole was upon the DHFL Statutory Auditor i.e., CAS only. Per contra, the Respondent empathetically denied and refuted the arguments of the Appellants that the branch audit was limited to expressing opinion on the accounting of the branches in question, as reflec....
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.... requires the auditor to include in the audit plan, the timing of the audit and to update and change the overall audit strategy and the audit plan as necessary during the course of the audit. ➢ We note the content of SA 300 as under :- "SA 300 PARA 7 and 9 7. In establishing the overall audit strategy, the auditor shall: (a) Identify the characteristics of the engagement that define its scope; (b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required; (c) Consider the factors that, in the auditor's professional judgment, are significant in directing the engagement team's efforts; (d) Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and (e) Ascertain the nature, timing and extent of resources necessary to perform the engagement. (Ref: Para. A9-A12) 9. The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit." (Emphasis Supplied) ➢ As per S....
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....areholders who in turn may appoint branch auditors also if required or the Branch Audit can be entrusted to the Statutory Auditors. * As regard, application of SAs to Branch Audit, we are of clear opinion that all SAs stand applicable to the branch audit, as required for the work of the branch audit. * As regard, the impact of the quality of branch audit on the overall audit of the company, it is quite obvious and natural that the quality of Branch Audit will definitely impact the overall audit. In few situation, it may happen depending upon the nature of business that main activities of work except for the centralised functions, may lies only in the branches and the importance of such branches becomes very significant. * Incidentally, in the present four appeals where M/s K. Varghese and company (firm) was appointed to conduct the audit 17 branches for of total 33 branches of DHFL, which can be considered very significant looking to the nature of the work of DFHL. ➢ We note from the Impugned Order dated 13.04.2023 of NFRA in case of CA Harish Kumar T.K. where it has been recorded that appointment of none of 33 branch auditors was approved....
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....ted an investigation under this Section. ➢ The explanation under Section 132(4) of Companies Act, 2013 have already been gone into earlier. ➢ From this it is clear that professional or other misconduct will have to derive the meaning and further details from Section 22 of Chartered Accountants Act, 1949. ➢ Section 22 of Chartered Accountants Act, 1949 reads as under:- "22. Professional or other misconduct defined For the purposes of this Act, the expression "professional or other mis conduct" shall be deemed to include any act or omission provided in any of the Schedules, but nothing in this Section shall be construed to limit or abridge in any way the power conferred or duty cast on the Director (Discipline) under sub-section (1) of Section 21 to inquire into the conduct of any member of the Institute under any other circumstances." (Emphasis Supplied) ➢ As per Section 22 of the Chartered Accountants Act, 1949 "professional or other misconduct" shall include any act or profession omission as in any of the schedule but nothing in this Section shall be construed to limit in any way powers conf....
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....rms of Section 21 A of the Chartered Accountants Act, 1949 have been given the following three powers:- a) Reprimand the member; b) Remove the name of the member from the Register up to a period of three months, c) Impose such fine as it may think fit, which may extend to rupees one lakh. ➢ The Disciplinary Committee of ICAI which is headed by President or Vice President of Council as presiding officer, generally deals in serious offence as stipulated in Schedule II or both schedules. The Disciplinary Committee has been empowered to take following action after following due process :- a) Reprimand the member; b) Remove the name of the member from the Register permanently or for such period, as it thinks fit; c) Impose such fine as it may think fit, which may extend to rupees five lakhs. ➢ It will be worthwhile to note that the Chartered Accountants Act, 1949 was amended in 2006 to change the procedure for determining whether an auditor is guilty of misconduct. Prior to 2006 amendment, disciplinary proceedings were governed by the Council of ICAI who had power to refer the matter to Disciplinary Co....
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....in conduct of professional duties or failure to obtain information or material departure from generally expected audit procedure as applicable in the circumstances and forum. ➢ Thus, it is observed that the professional misconduct continues to be defined under Section 22 of the Chartered Accountants Act, 1949 r/w Schedule I and Schedule II of Chartered Accountants Act, 1949. ➢ We will like to refer to the judgment of the Hon'ble Supreme Court in the matter of Council of Institute of Chartered Accountants of India Vs. Y.K. Gupta, F.C.A, [2010) SCC OnLine Del 4192]. The relevant portion clarifying the powers of ICAI, now in turn of NFRA reads as under :- "16. The Code of Conduct issued by the Institute of Chartered Accountants of India records that it is necessary for the Institute "to guide and compel the members to live up to these high standards. The prestige and confidence enjoyed by a profession, to a great extent, is dependent on strictness and scrupulosity with which such a Code is interpreted and not necessarily by legislation or regulations as much by self-discipline". It is also stated that the Council in addition to "professional misconduct"....
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....e at a balance between the interests of the member as a citizen in expressing views in the matters of public concern and the interest of the institution in preserving the status and dignity of the professionals rendering service as Chartered Accountants." (Emphasis Supplied) ➢ It is therefore clear that there is no bar on ICAI or NFRA to restrict investigation of professional misconduct covered only under Section 22 of the Chartered Accountants Act, 1949. The powers are far more and wider and any conduct which makes auditor of unbecoming of such profession will make him liable for suitable investigation and if found guilty may face punishment as per law. ➢ NFRA derives the power regarding disciplinary action on professional or other misconduct of the members of ICAI under Section 132 (4) (c) of the Companies Act, 2013. ➢ NFRA has far more powers and authority for professional misconduct of members of ICAI in comparison to powers and authority of ICAI itself. Issue No. (VII) True intent of Standard of Audits and other related standards relevant for audit and issue regarding alleged violation by the Appellants herein. (A) Legal st....
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.... * 500-599: Audit Evidence (11 Standards) * 600-699: Using Work of Others (3 Standards) * 700-799: Audit Conclusions & Reporting (6 Standards) * 800-899: Specialised Areas (3 Standards) ➢ There are two Standards on Review Engagements (SRES) are applied in the review of historical financial information. ➢ There are three Standards on Assurance Engagements (SAES) which are applied in assurance engagements, other than audits and reviews of historical financial information. ➢ There are two Standards on Related Services (SRSS) which are applied to engagements involving application of agreed-upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. ➢ Standards on Quality Control (SQC) are for ensuring quality by firms that performs audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. SQC requires that the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standa....
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.... sufficient and appropriate audit evidence. This includes external confirmations, sampling, specific areas such observation of physical verification of inventories, accounting estimates, related parties among others. (vi) Documentation : Audit Documentation is the record of audit procedures performed (including audit planning), relevant audit evidence obtained, and conclusions the auditor reached. Terms such as 'working papers' or 'workpapers' are sometimes used for audit documentation. While SA 230 "Audit Documentation" provides detailed and general guidance on the audit documentation, most standards on auditing require specific documentation to be done by the auditor. Given the increased scrutiny by various regulators, it is important for the auditor to have robust documentation of the work done. The cardinal principle is "Work not Documented is Work not Done"! C. Analysis of Issue of Violation of various SAs by the Appellants :- ➢ Having noted the legal basis of SA and other details, time has come to look into specific allegations of such violations by the Appellants. ➢ From the Impugned Orders passed ....
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....mstances that require the terms of the audit engagement to be revised and whether there is need to remind the entity of the existing terms of the audit engagement based on following factors: i. Any indication that the entity misunderstands the objective and scope of the audit. ii. Any revised or special terms of the audit engagement. iii. A recent change of senior management. iv. A significant change in ownership. v. A significant change in nature or size of the entity's business. vi. A change in legal or regulatory requirements. vii. A change in the financial reporting framework adopted in the preparation of the financial statements. viii. A change in other reporting requirements. ➢ It the case of the Appellants that the such engagement letters are to be sent by newly appointed auditor, which convey acceptance of the audit assignment and to spell out the auditor's understanding about the scope and limitations of the audit. The Appellants submitted that their letters consisted of the acceptance letter issued by the audit firm as also the copies of appointment letter duly signed, and ackn....
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....SAs since section 143(9) requires "every auditor" to comply with the SAs. Thus, even if the opinion was not expressed on the true and fair view of financial statements of the Company, opinion was expressed on the true and fair view of the branches based on the financial information related thereto and the Appellants were required to comply with the SA. ➢ The Respondent also denied the averments of the Appellants that the appointment and qualification process are different for statutory auditors and branch auditors and therefore, the Appellants, being Auditors of such branches, were not required to follow the appointment procedure. The Respondent stated that the, w.r.t Appointment of branch auditors the Companies Act, 1956, specifically provided that the decision as to whether the books of account of a branch should be audited by the company's auditor or by any other auditor has to be taken by the shareholders in a general meeting. It is the case of the Respondent that the Appellants failed to adhere to basic requirement before acceptance of appointment of auditors and therefore are guilty of professional misconduct. ➢ The Respondent stated that t....
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.... averments, we came to note that there were no documentation in the audit files or in the Supplementary Audit Files to support the Appellants claim that assessment of Internal Control System was actually performed for the subject matter audit. Further, mandatory documentation requirements in the present case did not contain any of these details. ➢ After noting the provisions of SAs and listening to the averments made before us, the facts emerges that SA 210 requires the Auditors to inter-alia, clearly understand the scope of the audit and comply the legal requirements. It is undisputed fact that there was a change of Statutory Auditors (CAS) who were given task of all audit including of branches. In such case, the Appellant should have ensured the compliance of SA 210. It is also observed that change in Statutory Auditors in certainly circumstances which requires the Auditors (herein the Appellants as Branch Auditor/ EPs) to reassess and revisit terms of Agreement and comply with stipulating of related SAs especially SA 210. The Appellants statement that their role was limited to Branch Audit, will not provide any immunity from non-compliance of SA 210. Hence, we do....
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.... submitted that nowhere in SA 230, it is mentioned that change of statutory auditor of the Company is a significant change that requires a branch auditor to revisit the terms of their audit engagements. ➢ It has been clarified that SA 230 describes Auditor's responsibility where the audit to be conducted is of "Financial Statements" and Financial Statements, as per Section 2(40) of the Companies Act, 2013 are the Balance Sheet, Profit and Loss Account, Cash Flow Statement and Statement of Changes in Equity along with Notes on Accounts, whereas the scope of Branch Audit only is limited audit of the Company's branches, and the EPs were not required to undertake auditing of the Company's Financial Statements. The Appellants pointed out that Scope of auditing of the Financial Statements of the Company as a whole was upon the DHFL Statutory Auditor CAS only. ➢ The Appellant admitted that although a Branch Auditor is accountable for the part of audit conducted by him, the Company's Statutory Auditor is required to use the works done by a branch auditor in accordance with the law and since the EP was only auditing "historical financial infor....
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....llants that low amount of fees is an indicator of lower professional risk associated with the audit. The Respondent stated that this reflect poor understanding of the Appellants. Moreover, the audit plan submitted by the Appellants to the NFRA were not forming part of the Audit File for 2017-18. Such contentions of the Appellants are against the fundamentals of SA 230 that require the maintenance of Audit Files that can enable experienced auditors having no connection with the audit to understand the nature, timing and extent of the audit procedures performed to comply with the SAs. ➢ The Respondent submitted that the Appellant's audit documentation, including the "Supplementary Audit File" are deficient in terms of the nature, timing and extent of the audit procedures performed, who prepared and reviewed the audit working papers and the timing of the audit procedures. The Respondent argued that as per 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", th....
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.... alongwith suitable documentation. ➢ This enable the Auditor to design detect risk of material misstatement and to reduce same to an acceptable low level. This also help the Auditor to detect fraud or error by the Company. ➢ SA 315, prescribes for Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment, including internal control of the Company. ➢ SA 320 also provides a definition of performance materiality, which means the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality . ➢ SA 330 deals with the auditor's responsibility to design and implement responses to the assessed risk of material misstatement identified in accordance with SA 315. ➢ The Appellants alleged that the Respondent falsely stated that the Appellant failed to comply with SA 315 and SA 330 for lack of documentation regarding the performance of risk assessment procedures for material missta....
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.... to support mandatory documentation requirements of SA 315, SA 320 and SA 330. ➢ The Respondent contested the Appellants arguments regarding not violation of various SAs and further submitted that without any working papers in the Audit Files by the Appellants to satisfy the mandatory documentation requirements of SA 315, 320 and 330 for which compliance is required to be demonstrated by documents included within the audit files. ➢ This Appellate Tribunal has noted that "the concept of materiality is applied by the auditor both in planning and performing the audit and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor's report. We also observe that mandatory documentation requirements of these SAs include the factors considered in the determination of materiality for the financial statements as a whole, the materiality levels for particular classes of transactions, account balances or disclosures, performance materiality and any revision of the materiality amounts as the audit progress. The audit documentation in the present ca....
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....ons by the Appellants, the defence taken by the Appellants are not convincing. We tend to agree with the Respondent. Violation of SA 500 ➢ The requirement of Para 6 of SA 500 is that the auditor shall design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. ➢ The Impugned Order finds that the Appellant has failed to comply with SA 500 in not designing and performing audit procedures to obtain sufficient appropriate audit evidence and not evaluating the reliability of information produced by the Company. The Appellant submitted that these findings are without merits. ➢ It is case of the Appellants that it is a matter of judgment for the auditors to design the audit procedure to obtain audit evidence. The Appellant's branch audit reports clearly indicate that the Appellant had obtained evidence on the loans during verification. ➢ Per-contra, the Respondent stated that the Appellants are guilty of non-compliance with SA 500 in not designing and performing audit procedures to obtain sufficient appropriate audit evidence and not eval....
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....20 has no application. Hence the allegation is misconceived. ➢ The Respondent stated the Appellants were responsible for non-compliance SA 530 which relates to the determination of sample design, sample size and required audit procedures. The Respondent assailed the EP who submitted that the "basis of selection of sample was defined in the appointment letter itself, and the skills of judgment and competence of the auditor were applied to draw the required sample data. ➢ The Respondent stated that the conditions in the appointment letter do not evidence basis for EP's work and conclusions. It is the case of the Respondent that the SAs casts a responsibility on the auditor to design and perform audit procedures to obtain sufficient appropriate audit evidence on which to base the audit opinion. The terms dictated by the company cannot substitute this responsibility. There is no evidence that any of the sampling and the related procedures as detailed in SA 530 have been complied with by the EP, while the audit opinion is based on sample testing. In the absence of any evidence to show compliance with the determination of sample design, sample size and....
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....ple testing. In the absence of any evidence to show compliance with the determination of sample design, sample size and audit procedures performed on it, the contentions of the Appellants are without any basis. The Respondent also castigated the pleas of the Appellants that the basis of selection of sample was defined in the appointment letters itself. The Respondent stated that in the appointment letters nowhere specified any criterion for selection of "random" loan accounts for verification. The Respondent refuted that the Appellants claim that "the audit files clearly established that 25 samples had been duly examined and there were no adverse remarks" stands no merit in view of the various adverse remarks related to loan files noted by the appellant in the "CERTIFICATE" issued by them and pointed out in the Impugned Orders. ➢ We have noted contention of both the Appellants and the Respondents on SA 530. This Appellate Tribunal notes the contention of the Appellants that sample size was contained in the appointment letters of the Appellants and therefore their liability was limited and the SA was not applicable. However, we also noted averments of the Respondent/....
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....rporation of such remarks in the certificate itself indicates that the proper process of examination of the loan documents had been carried out by the Appellants. Moreover, the findings that there was absence of materiality levels documented in the audit file and that there was no assessment of the risk of misstatements and test of controls were also unfounded. ➢ Per contra, the Respondent denied all averments of the Appellants regarding non-violation of SA 700. The Respondent also assailed assumptions of the Appellants that their role was confined to only Branch Audit and they were not responsible for Audit of Company and they applied SA as necessary in circumstances. The Respondent submitted that Section 143(8) of Companies Act, 2013 clearly stipulate and specifies only Company Auditors and does not differentiate with Branch Auditors. Hence, the Appellants were fully responsible. ➢ It is the case of the Respondent that SA 700 was applicable to the Appellants and they were duty bound to evaluate effect of mis-statement and decided to appropriately modify the opinion. ➢ The Respondent elaborated the pitfalls of the Appellants and brou....
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....lance certified by the EP that the loans were primarily appearing in the branch's Trial Balance and then transferred to the head office through entries in the branch books. The EP's claim in the "annexure" that rectification entry was recognized in books in the next financial year (i.e. on 02.04.2018) is also not supported by any evidence in the audit file. Hence, in the absence of materiality levels documented in the audit file, the pleadings of the Appellants are not convincing. ➢ We also note that NFRA did not find any documentation evidence from the Appellants to have complied with requirements of the SA 700 by the Appellants. ➢ In view of above discussions, we do not find any error in the Impugned Orders on this account. Issue No. (VIII) Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal. ➢ The ICAI Code of Ethics, 2009 stipulates few fundamental principles like integrity, objectivity, professional competence and due care, confidentiality, professional behaviour. It is the duty of incoming Auditors to ascertain and ensure that the company has full filled all laid....
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....is Appellate Tribunal finds the code of ethics to be very important to any profession to maintain high integrity and high standards, it expects its members to follow to keep public trust. In this regard, we find the judgment in the matter of Institute of Chartered Accountants of India Vs. Vivek Kapoor & Ors. [(2016) SCC OnLine P&H 7501]. The relevant portion reads as under :- "15. International Federation of Accountants in its Code of Ethics had given great importance to public interest. It was framed with objectives of credibility, professionalism, quality of service and confidence keeping in view fundamental principles of integrity etc. 16. From the facts, noticed above, it is clear that respondent No. 1 grossly violated the code of ethics for Chartered Accountants. He admitted his guilt before the Income-tax authorities, which resulted in defrauding the revenue. Thereafter, he left the country. He did not avail of the opportunity afforded to him at different stages to defend the case against him. A professional, who behaves in this manner, deserves to be dealt with sternly. In our opinion, the conduct of respondent No. 1 is wholly unworthy of a Chartered Accoun....
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....en lakh rupees, but which may extend to ten times of the fees received, in case of firms; (B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority. Explanation.-For the purposes of his sub-section, the expression "professional or other misconduct" shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949." (Emphasis Supplied) ➢ As against minimum penalty of Rs. 1 lakh in case of individual Charted Accountant and maximum penalty of five times of fee received; NFRA has imposed minimum penalty as stipulated in Companies Act, 2013 i.e., Rs. 1 Lakh on all four Appellants herein. ➢ As regards debarment of the Appellant for one year, NFRA has power to debar for a period of minimum six months and maximum ten years. The penalty of one year debarment on all four Appellant c....
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....an order is passed by the Appellate Tribunal." (emphasis supplied) ➢ We will also add that the above judgment of this Appellate Tribunal has already been challenged in the Appeal by the Appellants with a prayer to grant stay and the Hon'ble Supreme Court of India in Civil Appeal No. 4606/ 2023 has not granted the stay and the Appeal is under consideration by the Apex Court. Final Conclusions : 87. We feel that it is of utmost importance that Auditors realise their responsibilities which is necessary not only to the company but also to the public. In view thereof, giving effect to the Impugned Orders which highlights the professional misconduct and other misconduct on the part of the appellant vis-à-vis a public listed company become quintessential so as to make public aware and enable them to make informed and sound financial decisions and investments. Any deviation to this will only result is catastrophic effect on economy of the nation and cause immense prejudice and harm to the public, shareholders and various stakeholders such as banks, lenders, and creditors. NFRA, as an independent audit regulator has been entrusted by the Parliament afte....