TaxTMI 
TaxTMI 
2024 (1) TMI 589
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....ng sections: A. Executive Summary B. Introduction & Background C. Lapses in the Audit D. Articles of Charges of Professional Misconduct by the Auditor E. Penalty & Sanctions A. Executive Summary 3. National Financial Reporting Authority (NFRA) is India's independent regulator, in respect of matters relating to accounting and auditing, of prescribed classes [Rule 3 of NFRA Rules, 2018] of entities broadly described as 'Public Interest Entities' (PIEs). 4. NFRA initiated action under section 132 (4) of Companies Act 2013 ('CA-2013' or 'Act' hereafter) against the Auditors of SRS Real Infrastructure Limited for professional or other misconduct in relation to statutory audit for FY 2017-18, pursuant to information received from Serious Fraud Investigation Office ('SFIO hereafter') indicating suspicious transactions in the Company and the group. 5. Mis SVP & Associates (ICAI Firm registration no. 003838N) was the statutory auditor of SRSRIL and CA Pankaj Kumar was the Engagement Partner (EP) for this statutory audit for the FY 2017-18. Accordingly, NFRA initiated proceedings under Section 132 of....
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....ession of a Disclaimer of Opinion instead of a Qualified Opinion (Para C.5). f. The EP failed to demonstrate compliance with the requirement of the Standards on Auditing concerning the EQC Reviewer (Para C.6). Similarly, the EP failed to: determine materiality (Para C.7); plan the audit of Financial Statements (Para C.8); communicate with Those Charged with Governance (TCWG) (Para C.9 and C.10); and failed to identify and assess the risks of material misstatement through understanding the entity and its environment (Para C.11). 7. The submissions made by the EP in his reply dated 07.09.2023 to the SCN that the Financial Statements including the Audit Report for the FY 2017-18 were not adopted in the Annual General Meeting and therefore no public interest was harmed, does not absolve the EP of his professional duties as a statutory auditor of a listed entity. 8. Based on the proceedings under Section 132 (4) of the Companies Act and after giving the EP adequate opportunity to present his case, we find the EP guilty of professional misconduct. Accordingly, this Order imposes upon CA Pankaj Kumar a monetary penalty of Rs.3,00,000 (Rupees Three Lakhs) and CA Pankaj Kumar....
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....es had presented falsified Financial Statements containing falsified statement of debtors, adopted the malpractice of round tripping and layering of transactions that resulted in inflated purchases and sales. The investigation revealed inter alia siphoning of funds of Rs.671.48 crore and diversion of funds of 645.86 crore in the Company and its group companies. SFIO accused the auditors of the Company and its group companies under Section 143 [Section 143: Powers and duties of auditors and auditing standards], 147 [Section 147: Punishment for contravention of section 139 to 146], and 448 [Section 448: Punishment for false statement] of the Companies Act, 2013 14. MCA vide its letter dated 10.06.2021, directed SFIO to share the investigation report with the NFRA. SFIO vide its letter SFIO/ INV/SRS/999/2018-19/1/22807(7) dated 31.08.2021 shared the investigation report with NFRA for necessary action against the statutory auditors of the Company and the group. 15. Pursuant to the same, NFRA considered the case under Section 132(4) of the Companies Act, 2013 to assess whether any professional misconduct was committed by CA Pankaj Kumar, in his role as the Engagement Partner (EP) ....
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....uding the Audit Report for the FY 2017-18 were neither adopted in the Annual General Meeting (AGM) nor filed with the Registrar of Companies (RoC) under the Act or with any other authority nr body established under law and had no impact on the public or any stakeholder; and therefore, the proceedings under Section 132(4) against him were not in accordance with the law. In the personal hearing held on 08.12.2023, the counsel of the EP, Advocate Gautam Jain reiterated the same. 20. We find the submission made by the EP as erroneous. CA Pankaj Kumar, duly appointed us the statutory auditor by the shareholders in the AGM, conducted the statutory audit of the company for the FY 2017-18 and signed the audit report along with the Financial Statements on 30.03.2019 expressing an audit opinion on the Financial Statements of the company. The Financial Statements were also signed by two directors on behalf of the board of the company along with the company secretary and the chief financial officer of the company. lbc EP also received a professional fee of Rupees.............for the statutory audit of the company for the FY 2017-18. We, therefore, hold that his accountability in terms of re....
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....r a personal hearing that was rescheduled for 08.12.2023. The EP, assisted by his legal counsels' Advocate Gautam Jain and Advocate Piyush Kumar Kamal appeared for the personal hearing held at NFRA on 08.12.2023. 23. We have perused all the material on record including the written responses of the EP. The major lapses include non-assessment of going concern basis, non-evaluation / verification of inventory and the revenue recognized, insufficient audit documentation, inappropriate audit opinion, non-determination of materiality, non-appointment of EQC Reviewer, improper planning of audit, lack of proper communication with TCWG and non-assessment of the risks of material misstatement. These have been discussed in Part 'C' of this Order. C. Lapses in the Audit C.1 Failure to evaluate the management's assessment of the entity's ability to continue as a Going Concern 24. The EP was charged with noncompliance with SA 570 [SA 570: Going Concern] which deals with auditor's responsibilities in the audit of Financial Statements relating to 'Going Concern'. 25. During the FY 2017-18, there were many indicators in the operational and financial ar....
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....ed that the going concern assessment was not required because: a. As per SA 570, the auditor is required to assess the going concern for a period of next 12 months. In other words, for the audit of FY 2017-18, the applicable period shall be FY 2018-19; and on the date the audit report was signed i.e. 30.03.2019 "there were real estate projects running in the impugned Company, including the one with Republic of Congo". b. The Enforcement Directorate (ED) had attached on 08.01.2020 assets worth Rs.460 crore of the company which were more than the outstanding bank liabilities of Rs.260.57 crore as stated in the SCN. Further, the ED had also attached assets worth Rs.1570.53 crore and Rs.60.76 crore of two subsidiaries of the company, viz. SRS Real Estate Limited and SRS Retreat Services Limited respectively, the cumulative amount of which exceeds the total of alleged siphoning of funds of t 671.48 crore and diversion of funds oft 645.86 crore by the SRS group as stated in the impugned SCN. c. Corporate Insolvency Resolution Process (CIRP) initiated against the Company was quashed by NCLAT vide order dated 12.02.2019 which meant that the company management'....
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....h the terms of loan agreements etc. It is pertinent to note that all such indicators were present right at the beginning of the audit process for the FY 2017-18 and therefore the EP was duty bound to obtain evidence in support of the use of going concern basis and had to evaluate the same to conclude if any material uncertainty existed regarding the Going Concern. However, the Audit File contained no evidence of any such evaluation/testing of appropriateness of the Going Concern basis by the EP. 30. We find the reply and explanation of the EP clearly as an attempt to rationalize non­ performance of his professional duties and as an afterthought to mislead NFRA. We, therefore, find the EP to have been grossly negligent in performing his duty in accordance with SA 570. 31. Such lapses have been viewed seriously by international regulators as well. For example, the Public Company Accounting Oversight Board [PCAOB release No. 105-2015-028 dated 23.07.2015] ('PCAOB' hereafter), the US Regulator, charged Bravos & Associates CPA's ("Firm") and Thomas W. Bravos, CPA ("Bravos") in connection with audit of UAHC for FYE June 30, 2013, where Bravos authorized issuance of ....
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....the substantive and analytical procedures to verify the revenue of 29.16 crores recognized from the real estate segment and evaluated the risk of fraud in revenue recognition. There is no evidence in the Audit File to show that the EP performed audit procedures like re-computation of the revenue from the real estate segment, evaluation of audit evidences such as party wise and project wise details of revenue, details of parties with whom agreement to sale / transfer of deed was done and its reconciliation to verify the recognition of revenue in accordance with the policy of the company, invoices generated by the company, allotment letters issued to the clients, occupancy certificates issued by government etc. ii. The sealing by the Economic Offences Wing and the Income Tax Department was done in March 2018 and in June 2018 respectively. The audit report was signed on 30th March 2019. Therefore, there was sufficient time for the EP to perform the due audit procedures related to verification of revenue recognized in the Financial Statements. There is no documentation in the Audit File to show that the EP verified the fundamental assertions of occurrence, completeness and acc....
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....impact either on the audit report or on the Financial Statements of the company". 40. Our analysis of the EP's reply and other related material shows that: i. The Audit File lacked many significant and critical working papers such as: a. Working papers for setting materiality and performance materiality; b. Auditor's evaluation the appropriateness of management's use of the going concern assumption; c. The composition of the audit team and the reviewing team; d. The details of who performed the audit work, and the date of such audit work; e. Details of the EQC Reviewer, its team and the review work performed by the EQC Reviewer; f. Minutes of the meetings amongst the members of engagement team, with management and TCWG; ii. The Audit Work Papers did not have the caption of work paper, date, signature of preparer, and reviewer. iii. Most of the Audit Work Papers submitted do not meet any of the basic requirements of Para 8 and 9 of SA 230 41. Further, the averment made by the EP attributing insufficient audit documentation to inadvertent technical breach which docs not have any impact ....
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....performed, evidence obtained, and conclusions reached, and (b) determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review the documentation for each of those audits was insufficient to demonstrate the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, including in those areas of the audits involving significant risks. For the FY 2016 and 2017 Issuer A audits, the documentation also failed to demonstrate who performed the work and the date such work was completed. Additionally, in each of the Issuer A and Issuer B audits, the audit documentation was insufficient to demonstrate which aspects of the audit and which audit documentation Bharat Parikh reviewed. " 45. The Executive Counsel to the Financial Reporting Council (FRC), the UK Audit Regulator, in the matter pertaining to Deloitte LLP and John Charlton in the audit of Mitie Group plc. for the year ended 31 March 2016, imposed a financial sanction of Two Million Pounds, a published statement in the form of severe reprimand against Deloitte and a financial sanction of 65,000 Pounds a....
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....t i.e. CARO. 50. Our analysis of the EP's reply and other related material shows that: i. As on 31.03.2018, the inventory amounting to Rs.102.69 crores was reflected in the Financial Statements. This inventory was significantly material as it accounted for 13.56 % of total assets of the company. There is no evidence in the Audit File that the EP performed procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory or performed any alternative audit procedures in case he was unable to attend the physical inventory counting due to the scaling of the premises by the Economic Offences Wing and the Income Tax Department. ii. The contention of the EP that he qualified the matter related to inventory in the Annexure 'A' part of the Audit Report i.e., the CARO is misleading. The EP is required to clearly state the discrepancies in the inventory (if any) in the "basis of opinion" section of his audit report as required under Para 28 of SA 700. The compliance with the requirements of CARO does not absolve the EP of his professional duty of reporting the matter in his audit report. iii. The submission ....
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....it report) iii. Investment Properties includes a commercial building at SRS Tower, Faridabad having office space valuing 146.41 crores which the company had developed under a development agreement with SRS Automotive Components Private Limited, a subsidiary of SRSRIL. As management failed to provide any agreement, the EP stated that he was unable to comment upon the amount capitalised as building. (Para 4(e)of audit report) 55. Responding to the charge, the EP replied that NFRA had taken a strict and technical approach, that there was adequate and sufficient warning and intimation in the auditor's report, and that the breach may at best be construed as technical breach and the same can neither be attributed to him acting in malafide manner nor was of a serious character involving moral turpitude as to constitute professional misconduct. 56. The contention of the EP that the approach of NFRA is technical is wrong and misleading. Para 7, Para 8 and Para 9 of SA 705, establish a clear distinction between the three types of modified opinions i.e., Qualified Opinion, Adverse Opinion and the Disclaimer of Opinion and also explain the different circumstances that warran....
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....no evidence in the Audit File that the EP had discussed/consulted the significant matters, judgements and conclusions with the EQC Reviewer or even with any other person in the firm. There is no evidence in the Audit File of any final clearance or approval from the EQC Reviewer before signing of the audit report by the EP. 62. In the audit of Financial Statements of a listed entity, the role of an EQC Reviewer is important for ensuring quality, as the EQC Reviewer evaluates the significant judgments made by the engagement team, reviews the engagement team's evaluation of firm's independence, checks whether the appropriate consultation has taken place on difficult or contentious matters and reviews the related conclusions reached in forming the overall audit opinion. Such a critical role requires formal appointment of EQC Reviewer having sufficient and appropriate experience and authority to objectively perform his/ her duty. 63. We therefore conclude that in not determining that an EQC Reviewer had been appointed, the EP was grossly negligent in performing his duty in violation of Para 19 (a), (b) and (c) of SA 220. 64. Non-appointment of EQC Reviewer has been view....
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.... concepts in the audit of Financial Statements. Where material information is omitted or misstated, the Financial Statements will not be in compliance with the requirements of the SAs and therefore of the Law, as Section 143(9) of the Companies Act, 2013 requires the auditors to comply with the SAs. 70. As there is no working paper in the Audit File evidencing determination of materiality by the EP, we conclude that the EP has failed to adhere to the mandatory requirements of determining Materiality in accordance with SA 320 and falsely stated in his report that he had conducted the audit in accordance with the SAs specified under Section 143(10) of the Act. C.8 Failure to plan the audit of Financial Statements 71. The EP was charged with failure to establish and document the audit plan and overall audit strategy that sets the scope, timing, and direction of the audit; and to plan the nature, timing and extent of directions and supervision of engagement team members and review their work as required by Para 6, Para 10 and Para 11 of SA 300 [SA 300: Planning an Audit of Financial Statements]. 72. Responding to the charge, the EP replied that a checklist was prepared for ....
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.... that the EP has failed to exercise due diligence and was grossly negligent in not identifying and communicating with TCWG and consequently, failed to comply with the requirements of SA 260. 79. Failure to appropriately communicate with Audit Committee (which is a part of the TCWG) has been viewed seriously by international regulators too. For example, PCAOB, the US Regulator, charged the public accounting firm L.L. Bradford & Company, LLC (Audit Firm) for its failure to communicate with the audit committee during the audit of WebXU lnc.'s ("WebXU"). It stated that the "Firm also violated a PCAOB rule that requires a registered public accounting firm to communicate, in writing, to the audit committee ............. " The PCAOB, for this misconduct among others, censured the Firm, revoked its registration, and imposed a civil money penalty of $12500. C.10 Failures relating to communicating deficiencies in internal control to TCWG and Management 80. The EP was charged with failure to communicate in writing significant deficiencies in internal control identified during the audit with TCWG and with the management on timely basis in accordance with the requirements of Para 9....
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....vidence in the Audit File regarding performing any risk assessment procedures to provide a basis for the identification and assessment of risks of material misstatements at Financial Statement and Assertion levels and his audit responses to such risks, gaining understanding of the entity, etc. 88. In the light of the above facts and circumstances, we conclude that the EP has been grossly negligent in the conduct of his professional duties and made false declaration in the audit report regarding the true and fair view of the Financial Statements as he failed to comply with the requirements of SA 315. 89. Such lapses have been viewed seriously by international regulators as well. For example, PCAOB [PCAOB release No. 105-2015-41 dated 03.12.2015], the US Audit Regulator, charged L.L. Bradford & Company, LLC (the "Firm") in connection with audit of WebXU Inc.'s ("WebXU") for the year ended December 31, 2011, for failure to among others properly assess the risks of material misstatement and censured the Firm, revoked its registration permanently and imposed a civil money penalty of $12,500 upon the Firm. C.12 Failure to report non-compliances with provisions of the Compani....
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.... failure to report the material misstatements and non-compliances of the Company in its Financial Statements, as explained in the paras 24 to 93 above. ii. The EP committed professional misconduct m terms of Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states that an auditor is guilty of professional misconduct when he ''fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion". This charge is proved as the EP failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his failure to report the material misstatements and non-compliances of the Company in the Financial Statements, as explained in the paras 24 to 93 above. iii. The EP committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (as amended from time to time), which states....