TaxTMI 
TaxTMI 
2023 (12) TMI 320
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....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 + Debarred for 1 year Allegations Acceptance of audit engagement without valid authorisation and....
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....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 2023 [Arising out of Order dated 13.04.2023 passed by the National Financial Reporting Authority, in Nf-21/1/2022/03.] 8. The ....
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....untants, 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 decisions of DHFL were centralised in Head Office of DHFL who followed computerised accounting system through Enterprise Resource Planning System (in short 'ERP'). As per the App....
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....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 continued to receive Appointment Letter for 17 Branches from DHFL for Audit for the FY 2016-17, 2017 - 18 and 2018-19. 19. It has been brought out that on 10.08.2022, M/s K. Varghe....
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....ran, 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 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 profes....
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....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 Constitution of India regarding non-Application of retrospectivity of penal statute and in defence of other charges. (a) Council of Institute of Chartered Accountants of India' Vs. C.H. Padiya', (1979) 49 Com Cas 478. (b) `Maya Rani Punj' Vs. CIT, Income Tax, Delhi', (....
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....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 years and therefore NFRA was incorrect in equating Section 225 of the Companies Act, 1956 to Sections 139 & 140 of the Companies Act, 2013, whereas these are not equivalent Sections. 34. It has been stated that it was wrong on the part of NFRA to rely on the provision of Section 139(1) of Companies Act, 2013 for annual ratif....
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.... 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 Branch of DHFL were approximately Rs. 5.45 crores, whereas, the branch had income of Rs. 4.05 crores. Similarly, revenue of Kottayam branch was Rs. 50 lakhs and its expenses were about Rs. 1.01 crores and Thrissur Branch had revenue of Rs. 99 lakhs and expenses of Rs. 2.40 crores. The Appellants submitted that Risk of management override of controls was assessed as....
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....me 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 SA 520. 47. The Appellants refuted violation of SA 700 and highlighted that their role was confined only to conduct Branch Audits and as such SA 700 was not applicable to them. The Appellant submitted that expressing opinion on financial statements of DHFL as per SA 700 was responsibilities of CAS and the Appellants cannot be held responsible for the same. 48. The Appellant M....
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....' 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 Auditors and the conduct of branch audits of DHFL which were relied upon by CAS 54. M/s K. Varghese & Co. ('the Firm') was the Auditors of 17 branches of DHFL. Accordingly, to examine the case, the Firm was requested on 10.08.2022, to submit the Audit Files along with some other information/documents. On 25.08.2022, the Audit Firm submitted the Audit Files along with other information in respect....
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....g 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 conferred on an authority by a statute does not depend on the existence of rules or regulations and cited the judgment of the Hon'ble Supreme Court in the matter of Surinder Singh' Vs. Central Government & Ors. [(1986) 4 SCC 667]. 60. The Respondent strongly refuted the issue raised by the Appellants regarding alleged retrospective jurisdiction exercised by NFRA against the settled law and the Appe....
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....e 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 Respondent that the mischief sought to be remedied by the legislature, has to be kept in mind and cited case of Heydon's Case [76 ER 637]. 65. It is the case of the Respondent that NFRA carefully examined all documents including detailed replies along with audit files and documentations of the four Appellants herein, vis-à-vis SCNs issued to them and came to the conclusion that the replies of the Appellants were evasive and misleading, resulting establishing the fa....
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....re 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) SCC OnLine Del 4012]. (iii) ICAI' Vs. Vivek Kapoor [(2016) SCC OnLine P7H 7501]. 70. The Respondent castigated the conduct of the Appellants for taking the stand that the appointment of the Branch Auditors was not required to be made under Section 139 of the Companies Act, 1956. As per Respondent, it seems that the Appellants did not even check the requirement of the Companies Act, 1956 since they believed that their appointments were not required to be made under Section 139 of the Companies Act....
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....bject-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 into account provisions of the Companies Act, 2013, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made there under. We conducted our audit in accordance with the Standards on auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance". It is the case of the Respondent that SAs are applicable for the bra....
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....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 matters of Election Commission of India' Vs. 'Subramaniam (1996) 4 SCC 104, Om Pal Singh' Vs. 'Union of India', ILR (2006) II Delhi I and Clariant International Ltd. & Anr. Vs. Securities and Exchange Board of India [(2004) 8 SCC 524]. 78. The Respondent refused the allegations of the Appellants that the Appellants were not given suitable opportunity to defend their cases and thereby, the Respondent violated the principles of natural justice. In this regard, the Respondent clarified that under Rule 11(5) of NFRA Rules, 2018, the Appellants were given clear opportunit....
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....pellants, 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 the Company V/s Statutory Auditors of the Branches of the company. Issue No. (V) Are Standards of Auditing (SA) mandatory or Advisory or to be treated as guidance notes to Auditors. Issue No. (VI) What is professional misconduct for member of ICAI and legal provisions. 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. Issue No. (VIII) Alleged violation of the Code of Ethics issued by ICAI and impact on Appeals before this Appellate Tribunal. Issue No. (IX) Excessive V/s adequate imposition of pen....
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....ay 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 be prescribed. *** [(3A) Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorized by the Chairperson. (3B) There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions under sub-section (2) [other than clause (a) and sub-section (4).] (4) Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall- (a) have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such ....
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.... 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 individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed : Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor: Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141: Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar wi....
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....e 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 manner: Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable opportunity of being heard. *** (4) (i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be reappointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139. *** (5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direc....
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....namely:- (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members; (b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company; (c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading: Provided that the auditor of a company which is a holding company shall also....
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....ith it in preparing his report; (d) whether the company's balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; (e) whether, in his opinion, the financial statements comply with the accounting standards; (f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; (g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; (h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; (i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls; (j) such other matters as may be prescribed. (4) Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor. *** (8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor ....
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....ified amount, the auditor shall report the matter to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board's report in such manner as may be prescribed. 145. Auditor to sign audit reports, etc.- The person appointed as an auditor of the company shall sign the auditor's report or sign or certify any other document of the company in accordance with the provisions of sub-section (2) of section 141, and the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor's report shall be read before the company in general meeting and shall be open to inspection by any member of the company. 146. Auditors to attend general meeting.- All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on a....
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....ctors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally: Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable." (Emphasis Supplied) NFRA Rules, 2018 "2.(g) "Division" means a division [including the one headed by the chairperson or a full-time member] established by the Authority for the purpose of organizing and carrying out its functions and duties. Rule 3: Classes of companies and bodies corporate governed by the Authority. - (1) The Authority shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under sub-section (2) of section 132 or undertake investigation under sub-section (4) of such section of the auditors of the following class of companies and bodies, namely: - (a) Companies whose securities are listed ....
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.... corporate: Provided that a body corporate governed under clause (e) of sub-rule (1) shall provide details of appointment of its auditor in Form NFRA-1. (4) A company or a body corporate other than a company governed under this rule shall continue to be governed by the Authority for a period of three years after it ceases to be listed or its paid-up capital or turnover or aggregate of loans, debentures deposits falls below the limit stated therein." (Emphasis Supplied) Chartered Accountants Act, 1949 "21. Disciplinary Directorate: (1) The Council shall, by notification2, establish a Disciplinary Directorate headed by an officer of the Institute designated as Director (Discipline) and such other employees for making investigations in respect of any information or complaint received by it. (2) On receipt of any information or complaint along with the prescribed fee, the Director (Discipline) shall arrive at a prima facie opinion on the occurrence of the alleged misconduct. (3) Where the Director (Discipline) is of the opinion that a member is guilty of any professional or other misconduct mentioned in the First Schedule, he shall place the matter before the Board of Di....
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....f a person who is not a member of the Institute: Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in item (2) of this Part; (4) enters into partnership, in or outside India, with any person other than a chartered accountant in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member under clause (v) of sub-section (1) of Section 4 or whose qualifications are recognised by the Central Government or the Council for the purpose of permitting such partnerships; (5) secures, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business: Provided that nothing herein contained shall be construed as prohibiting any arrange....
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....r or a whole time director) unless he or any of his partners is interested in such company as an auditor; (12) allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, profit and loss account, report or financial statements. PART II : Professional misconduct in relation to members of the Institute in service A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person−(1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments of the employment undertaken by him; (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification. PART III : Professional 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 misconduct, if he&minu....
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....ary in making such financial statement where he is concerned with that financial statement in a professional capacity; (6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity; (7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties; (8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion; (9) fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances; (10) fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time. PART II : Professional 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 misconduct, if he− (1) contravenes any of the provisions of this Act or the regulations made....
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....CAI is duty bound to follow the professional standards and code of ethics ICAI. It needs to be appreciated that any violation of professional standards and code of ethics, results in disciplinary issue and ICAI is required to take action against the member of ICAI. The disciplinary board of ICAI is entrusted to take action against its members who are found guilty of professional misconduct, under the Chartered Accountants Act, 1949. It is the duty of the Disciplinary Directorate of the ICAI to keep watch on alleged irregularities committed by its members. There are prescribed procedures to investigate the misconduct and it is notified by the Central Government under provisions of Section 21 of Chartered Accountants Act of 1949, which we have already noted earlier. ➢ We note that prior to 2006, decisions of ICAI disciplinary committees had to be approved by the High Court having jurisdiction. However, after the 2006 amendment to the Chartered Accountants Act, 1949, disciplinary committees were empowered to decide cases brought before them and impose a penalty on an auditor without the approval of the High Court. ➢ Under the Chartered Accountants Act, the monetary p....
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....l together different, of-course, having overriding powers over ICAI for the companies covered under Section 132 of the Companies Act, 2013. ➢ We note that the Hon'ble Supreme Court of India in its landmark judgment in the matter of S. Kumar Vs. Secretary ICAI & Ors. [(2018) 14 SCC 2018] dated 26.02.2018 issued direction to Government for considering suitable mechanism and law for oversight of auditors on the lines of Sarbanes Oxley Act, 2002 [which came after Enron episode and resulted into establishment of Public Company Accounting Oversight Board ("PCAOB")] in U.S.A. ➢ The relevant para in matter of S. Sukumar and Ors. (Supra) reads as under:- "49. It can hardly be disputed that profession of auditing is of great importance for the economy. Financial statements audited by qualified auditors are acted upon and failures of the auditors have resulted into scandals in the past. The auditing profession requires proper oversight. Such oversight mechanism needs to be revisited from time to time. It has been pointed out that post Enron Anderson Scandal, in the year 2000, Sarbanse Oxley Act was enacted in U.S. requiring corporate leaders to personally certify the accur....
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....oing of its members as stipulated in Section 132 of the Companies Act, 2013. Before the formation of NFRA, ICAI had the exclusive right to take any action against the professional misconduct of its auditors. ➢ There are many regulatory bodies which govern the audit governance of the listed and unlisted companies in India including NFRA, ICAI, MCA and SEBI. Out of these, NFRA and ICAI are established for the similar objective to protect the interest of creditors, investors, and other parties who are directly or indirectly associated with companies. ➢ The jurisdiction of SEBI over the conduct of auditors and audit firms is related to their involvement in defrauding investors and thus narrower than that of the ICAI. The NFRA has more flexibility when it comes to imposing penalty on auditors and audit firms and it has a broader mandate than SEBI. ➢ The notification of NFRA does not in any way alter the liability of the statutory auditors to fully comply with the law. NFRA's authority to monitor and enforce compliance with the accounting and auditing standards is with reference to such standards as were established by law even earlier and are binding on st....
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....ke for investigating and ICAI will cease to exercise such disciplinary jurisdiction. ➢ Hence, we may conclude NFRA has been consciously and deliberately given superior authority over ICAI on oversight of auditors and in disciplinary matters as stipulated in Section 132 of Companies Act, 2013. ➢ We clarify the Issue No. 1 accordingly. Issue No. (II) Retrospective or prospective applicability of provisions as contained in Section 132 of Companies Act, 2013 as well as NFRA Rules, 2018. ➢ 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 branches were given on different dates which were prior to notification bringing NFRA into force, therefore, the NFRA ....
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....ed himself to be visited with penalty. That was a time when the Act of 1922 was in force. Therefore, for levying penalty on the assessee resort should have been made to the provisions of Section 28 of the 1922 Act and not to Section 271(1)(a) of 1961 Act. If the 1922 Act applied, in the absence of a prescription of any particular rate or the minimum, it was open to the Tribunal to reduce the penalty***" (Emphasis Supplied) ➢ S.K. Ganesan' Vs. A.K. Joscelyne', 1956 SCC Online Cal 43. "18. In my opinion, the contention of Dr. Pal is not well-founded. It is true that in the case of statutes of a penal character which create certain offences and make certain acts punishable as such offences for the first time, no proceedings under them are generally maintainable in respect of acts done before the commencement of the statute, unless the statutes include such acts by express provision or necessary intendment. The reason is plain. The act which was not an offence at the time it was done under the law then prevailing, cannot become so by reason of the operation of some statute which itself came into existence at a subsequent date, speaking as from then and making acts ....
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....t him that he had been a willing party to or at least had connived at the concealment of the payment of the selling commission by the Directors. On that point again, there is the difficulty that the complainant withdrew the allegation that the respondent had acted with a desire to accommodate the Managing Agency and the Directors in regard to their concealing the payment of the commission. Speaking for myself, I am inclined to think that in a case of professional misconduct charged against an Accountant or a lawyer, the fact that the complainant withdraws a particular allegation cannot always be decisive or a reason for not pursuing an enquiry, for the object of such proceedings is to test the fitness of the person concerned, in the public interest, to exercise his profession. The fact, however, remains in the present case that not only was the allegation withdrawn but there has also been no further enquiry and, therefore, we have no right to assume that what was alleged against the respondent actually happened. It is in view of the nature of the charges framed that we find it difficult to take any action in the matter. Mr. Meyer himself frankly conceded that since the allegation o....
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....t that :- "26. The Designated Court has held that the amendment would operate retrospectively and would apply to the pending cases in which investigation was not complete on the date on which the Amendment Act came into force and the challan had not till then been filed in the court. From the law settled by this Court in various cases, the illustrative though not exhaustive, principles which emerge with regard to the ambit and scope of an Amending Act and its retrospective operation may be culled out as follows: (i) A statute which affects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a Statute which merely affects procedure, unless such a construction is texturally impossible, is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature. (iii) Every litigant has a vested right in substantive law, but no such righ....
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....re suggested as relevant: (i) 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) The rule against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right. (p. 392)" ( Emphasis Supplied ) ➢ From above judgments, it seems that if new law is made to take care of known wrongs for the benefits of society as a whole, then the express provision of retrospective application in new law may not be required and necessary implication need to be made out from the language employed. The said judgement list of factors to construe the provisions of the statute retrospectively i.e., (a) General scope and purview of the statute; (b) The remedy sought to be applied. (c) The former state of the law, (d) What it was the legislature contemplated. ➢ In this connection we may safely rely on ratio laid down by Hon'ble Supreme Court of India in Securities and Exchange Board of India Vs. Classic Credit Ltd. [Civil Appeal No. 67 of 2011], where it was held as under :- "34. We will now deal....
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....swer in a simple way. But the provision of limitation of 60 days contained in Sub-section (3) created an obstacle in the straight application of the well-established principle of law. If the accident had occurred within 60 days prior to the Constitution of the Tribunal then the bar of limitation provided in Sub-section (3) was not an impediment. An application to the Tribunal could be said to be the only remedy. If such an application, due to one reason or the other, could not be made within 60 days then the Tribunal had the power to condone the delay under the proviso. But if the accident occurred more than 60 days before the Constitution of the Tribunal then the bar of limitation provided in Sub-section (3) of Section 110A on its face was attracted. This difficulty of limitation led most of the High Courts to fall back upon the proviso and say that such a case will be a fit one where the Tribunal would be able to condone the delay under the proviso to Sub- section (3), and led others to say that the Tribunal will have no jurisdiction to entertain such an application and the remedy of going to the Civil Court in such a situation was not barred under Section 110F of the Act. While ....
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....y the Hon'ble Supreme Court in the matter of Bijender Singh vs. State of Haryana and Ors. [(2005) 3 SCC 685], wherein it was held that "14. The embargo of giving a retrospective effect to a statute arises only when it takes away vested right of a person. By reasons of Section 20 of 2000 Act no vested right in a person has been taken away, but thereby only an additional protection had been provided to a juvenile". (Emphasis Supplied) ➢ At this stage, we will attempt to deep dive into penalty aspects as contained in Chartered Accountants Act, 1949 and also as stipulated in Companies Act, 2013. This read as under :- a) Chartered Accountant Act, 1949 "[21B. Disciplinary Committee.-(1) The Council shall constitute a Disciplinary Committee consisting of the President or the Vice-President of the Council as the Presiding Officer and two members to be elected from amongst the members of the Council and two members to be nominated by the Central Government from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy: Provided that the Council may constitute more Disciplinary Committees as and when it considers nece....
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....6; From above judgements, following clear ratios are noted for deciding on the issue of retrospectivity. These are as follows :- (i) Change in forum due to change in law has no bar on being implemented with retrospective effect. (ii) The litigant has vested right in action but does not have any vested right on forum. (iii) Retrospective application in such procedural law and change in forum is barred only if express provision is made in new law. From this, we are of prima-facie view that Section 132 (4) of the Companies Act, 2013 can be applied retrospectively. ➢ We also take into consideration the fact that neither any new misconduct has been created in law, which NFRA can investigate and levy penalty, if required nor NFRA can levy penalty greater than the quantum of penalty envisaged under the Chartered Accountants Act, 1949. ➢ Thus, plea of the Appellants about protection under Article 20 of the Constitution 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 sca....
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....lthough legally complied but still could not be considered as in compliance with principal of natural justice in so far as there has not been a proper separation of powers in investigation, prosecution and adjudication by the NFRA. ➢ On the other hand, the Respondent denied the averments of the Appellants that NFRA violated principles of natural justice on ground that no divisions were notified/ stipulated as required in the Companies Act, 2013 and NFRA Rules 2018. The Respondent submitted that as per Section 132(1A) of the Companies Act, 2013, "NFRA shall perform its functions through divisions, as may be prescribed", and the word "as may be prescribed" means if any prescribed, and since the legislature has not prescribed any divisions, at initial stages NFRA has been functioning keeping in mind the principles of natural justice. In any case, by way of an amendment dated 13.11.2018 to 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 ....
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....rounds for all these years. We therefore direct that the appeals be remitted back to the High Court so that they are heard and disposed of on merits as expeditiously as possible." (Emphasis Supplied) ➢ From above, it becomes clear that matters cannot be allowed to be avoided only on pure technicalities and there may not be any prejudice or failure of justice on this account alone. ➢ We may note the observation made by the Hon'ble Apex Court in the mater of Clariant International Ltd. and Ors. vs. Securities and Exchange Board of India [(2004) 8 SCC 524], which held as under :- "69. Reasons for creating special tribunals, according to the learned author, are: (i) Expert knowledge (ii) Cheapness (iii) Speed (iv) Flexibility (v) Informality 80. The Board exercises its legislative 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....
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....and scope of Statutory Audit : ➢ Statutory Audit is a legally required review of the accuracy of financial statement of the entity as per relevant statutes applicable to such entities. Such entities as Auditee may include public limited Company, Private Limited Company, Limited Liability Partnerships, Banks, Insurance Company, Electricity Company, Co-operative Banks, Government Companies listed or unlisted companies, NBFC and so on. Occasionally such Auditee entities may be governed by different laws, as applicable. For instance, the companies are governed by the Companies Act, 2013, their Statutory Audit has been prescribed in Section 139 to 147, which we have already noted earlier. ➢ Generally speaking, 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" i....
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....uitably. * Therefore, complete freedom has been given to Statutory Auditor to decide the reliance and the impact of Branch Audit Report on the overall audit of company accounts. While doing so, he may incorporate the observations regarding outcome of Branch Audit as deemed fit to give true and fair picture about financial statements of the company, keeping in view, the concept of materiality along with accounting and auditing principles and standards as applicable, in given context. * However, in case Branch Audit Report contains qualifications on matters which are required to be disclosed in company account, the Statutory 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 C....
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....nd scope of every audit assignment and risk of material misstatement, perceived by the auditor". This is not in sync with appellant's contention that he "had a properly documented audit plan available in the audit file for previous years. Therefore, documentation displaying an overall audit strategy and development of an audit plan for FY 2017-18 was felt not necessary, in view of the fact that it was not an audit of financial statements". The Appellant as EPs failed to assess the need to update the existing Overall audit strategy and audit plan in light of changed risk environment as SA 300 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 profe....
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....t the Statutory Auditor can conduct the auditor of all branches or some of the branches himself else other qualified to be auditors and so appointed can conduct Branch Audit. * As regards qualification required for appointment of Statutory Auditor and/ or Branch Auditors, we observe that the qualification remains exactly the same for appointment of Statutory Auditor as well as Branch Auditors. In continuation, it may also be observing that the Statutory Auditor is appointed by the members of the company i.e., the shareholders 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 t....
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....; NFRA has been empowered to investigate either suo-moto or on a reference made to it by Central Government to investigate into the matters of professional or other misconduct committee by any member or firm of CA's registered under the Chartered Accountants Act, 1949. ➢ Proviso to this sub Section 132(4) provide that no other institute or body shall initiate or continue any proceeding in such matters of misconduct where NFRA has initiated 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) u....
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.... to place the matter before the "Board of Discipline" and where Director Discipline is of opinion that member is guilty of professional or other misconduct mentioned in II Schedule or both Schedules, Director Disciplinary is required to place matter before the "Disciplinary Committee". ➢ Board of Discipline in terms 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 Chartere....
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....ng examination of financial statement failure to disclose material facts which have could impact on true and fair picture of financial statement, failure to report material mis-statements, non-exercised due diligence or grossly negligence 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 dependen....
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....ing unacceptable or discreditable conduct, thus making a member liable to disciplinary action. After all, Code of Ethics draws community ethics and moral principles into the professional institutions. There is a need to arrive 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 a....
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.... 200-299: General Principles & Responsibilities (9 Standards) * 300-499: Risk Assessment and Response to Assessed Risks (6 Standards) * 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 rea....
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....ficient 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 by the Respondent, we note that NFRA held....
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....agement 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 acknowledged to the Annexures attached to the appointment letters contained the scope of the Branch Audit. And therefore, Firm's Letter dated 12.09.2017 had fulfilled the auditor responsibility in agreeing the terms of....
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....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 the contention of the appellant that the Firm consented to similar appointment letters from DHFL as received from 2015-16 to 2018-19 pursuant to the resolution at the 30th AGM authorizing Board of Directors of the Company to appoint branch auditor(s) of ....
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....mentation 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 not find any error in the assessment of NFRA on this ground. Violation of SA 230 ➢ SA 230 requires the auditor to assemble all the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis af....
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....o 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 information" other than the Company's Financial Statements, therefore, the Appellant made appropriate adaptation as reasonable in the circumstances, to the requirements of maintenance of audit documentation, with reference to the provisions in SA 230. ➢ It is also the case of the Appellants that they presumed....
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....inst 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", therefore, the contentions of the Appellants should not be accepted in the absence of written audit documentation. Further, appellant's contention that "Since the Appellant was not required to audit the financial statements of the branch office of the Company, there was no straight jacket application of the provisions of SA 230" is untrue. ....
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....nvironment, 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 misstatements at the financial statement level and assertion level and response to such risks etc. The Appellant stated that thus, did not express any opinion on the financial statements, because the scope of audit undertaken by the Appellant did not cover expression of any opinion on financial statements of the Company. ➢ The Appellants reiterated that the defined scope of audit was to provide an ....
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....dit 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 case did not contain any of these details and hence the replies of the EPs are prima-facie not acceptable. ➢ It appears to us that the Appellants assumed their limited role w.r.t. Branch Audit which prima-facie is contrast to legal requirements as stipulated in the relevant SAs. The Impugned Orders brought out the shortcomings on the part of the Appellants in this regard and we tend to hold that the Respondent came to right conclus....
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....edures 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 evaluating the reliability of information produced by the company. The Respondent refuted plea of the Appellants that "it is a matter of judgment for the auditor to design the audit procedure to obtain audit evidences". The Respondent stated that there is no evidence in the Audit File of designing and performing audit procedures, such as an audit plan, the substantive procedures performed and the conclusions drawn. ➢ We are aware that it is discretion of Auditors to design audit procedure to obtain audit ev....
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....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 audit procedures performed on it, the contentions of the EP are not accepted. ➢ We have already examined and came to conclusion that all rules and procedure are equally applicable for the Audit of Company as a whole as well as for the Branches. Similarly, the SAs are applicable for entire company audit including Branch Audit, albeit, as applicable. Although, it is a fact that the Appellants had limited role as Branch Auditors than the main Statutory Auditors, however, we can't ignore the fact that the firm were auditing 17 of branches of DHFL. This def....
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.... 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/NFRA that there was no evidence of such sampling being complied by the Appellant. We find force of logic that mere selection of sample even though it might have been advised by the company gives any right to the Appellants not to comply with the relevant SAs. In view of these details, we do not find any error in the Impugned Order on this ground. Violation of SA 700, "Forming an Opinion and Reporting on Financial Statements" ➢ SA 700 deals with a company's auditor obligation to form an opinion and report on the "financial statements" of a company. ➢ As per SA 700, in order to form a....
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....ey 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 brought out some instances of failure on the part of the Appellants. The Respondent cited few specific instances of that from the audit file that in respect of loan files with loan code 1107 the EP noted in the "CERTIFICATE' for Kottayam Branch, that "Market Value Funding but amenities agreement not obtained'. For loan file with loan code 1275 the EP noted that "Market Value Funding, Broken Period Search Report not obtained". For loan file with loan code 1187 the EP noted that "Original plan not obtained. Similar "Remarks" were noted for other branches as well. All of these indicate the deficiencies identified by the EP during the audit. Despite such defi....
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....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 down norms before Auditors accept the assignment. ➢ It has been argued before us that the term "ascertain" means " to find out for certain". It is the case of the Respondent that the auditor should have found out for certain as to whether the Company has complied with the provisions of Sections 224, 224A and 225 of the Companies Act. It is the case of the Respondent that it would not be sufficient for the auditor to accept a certificate from the management of the Company that the provisions of the above sections have been complied with. It is necessary for the incoming auditor to verify the relevant records of the Company and ascertain as to whether the Company has, in fact, complied with....
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....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 Accountant, who is expected to maintain high standard of professional conduct. The punishment proposed by the Institute in these circumstances is quite lighter. Such a professional deserves to be debarred from practice for life time. Hence, in exercise of powers conferred under Section 21(6) of the Act, we deem it appropriate to direct that name of respondent No. 1 be removed from the register of members of the Institute for life. Ordered accordingly." ( Emphasis Supplied ) ➢ Thus, violation of Code of Ethic will hold the Auditor to be liable for the penalty as stipulated in Section 132 of the Companies Act, 2013. ➢ It is clear from ICAI Code of Ethics, 2009 that it is responsibility of the auditors to ascertain and en....
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....m 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 cannot be considered excessive. ➢ We find that NFRA applied the principle of proportionality and imposed minimal permissible penalty i.e., a monetary fine of Rs. 100,000 and the Appellants have been barred from practicing for a period of one year which is 10% of max. penalty permissible. ➢ The need to deter fraud or collusive behaviour and reckless behaviour of the Auditors and repercussions of negligent audits are quite evident. ➢ Hence, we consider the penalty as imposed by NFRA on all four Appellants were imposed as deterrent, perhaps keeping in mind all facts, including limited role as branch auditors. This cannot be considered excessive after all; it is fact that there has been fraud in DHFL of Rs. 31,000 Crores and Auditors can't pretend to be ignorant of what was happening. Issue No. (X) Can au....