TaxTMI 
TaxTMI 
2024 (1) TMI 589
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....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 the Companies Act for necessary action against the EP, CA Pankaj Kumar. 6. This Or....
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.... 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 is also debarred for 3 (Three) years from being appointed as an auditor or internal auditor or from undertaking any audit in respec....
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....g 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) in the Statutory Audit of SRS Real Infrastructure Ltd for the FY 2017-18 16. The Audit Files for FY 2017-18 were called from the Auditor vide lette....
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....r 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 requirements to comply with the professional standards and the law has no connection with AGM or filing with the ROC. 21. Further, in his reply dated 07.09.2023, the EP also stated....
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....aring 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 area of SRSRJL that required the EP to evaluate management's assessment of the entity's ability to continue as a going concern such as follows: i. Defaults in repayments of cash credit ....
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....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's objective was to keep the company running. 28. We have considered the reply of the EP and other relevant material on record and find that: a. The contention of the EP that the going concern assessment for audit of FY 2017-18 was not required as the Audit Report....
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.... 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 the Firm's unqualified audit report, which included going concern explanatory language regarding those Financial Statements. However, Respondents did not have a reasonable basis for making these statements and issuing their audit report". For misconduct including this and others, PCAOB censu....
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....tate 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 accuracy of such recognized revenue. Even if the contention of the EP is that supporting documents were not available in a conclusive manner is accepted for the arguments sake, the EP should have disclaimed his opinion in accordance with the requirements of SA 705 instead of merely giving a qualified opinion. 36. In ligh....
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....opriateness 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 either on the audit report or on the Financial Statements of the company is not tenable as it fails to meet the objectives of the audit documentation enumerated in Para 37 and 38 above. It is the audit documentation that acts as a basis of the auditor's report and as an evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. In the absence of prop....
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....volving 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 and a published statement in the form of a severe reprimand against Charlton besides other things, for breach of ISA 230 as they failed to adequately document the audit work papers. 46. In light of the foregoing, we find the explanation of the EP unacceptable and conclude that the EP was grossly negligent in performing his duty in accordance with SA 230. C.4 Failures relating to Audit Evidence for inventory 47. The EP was charged with f....
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....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 of the EP that the related supporting documents were not available in a conclusive manner clearly warranted a 'disclaimer of opinion' in accordance with the requirement of SA 705 instead of merely giving a qualified opinion as the impact of undetected potential misstatement in inventory was both material and pervasive. 51. We, therefore, find the reply and explanation of the EP unacceptable, and find him grossly negligent in performing his duty in accordance wit....
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....trict 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 warrant the expression of a specific type of modified opinion by the auditor. In the present case, the matters in respect of which the EP stated in his audit report that he was unable to comment, covers more than 50% of the total assets of the company making it both material and pervasive. Such a situation clearly warranted a Disclaimer of Opinion instead of a Qualified Opinion. The reply of the EP clearly shows his lack of understanding of the SA in this regard. 57. The Auditor's Opinion in the audit repo....
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....gement 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 viewed seriously by international regulators as well. For example, the PCAOB [PCAOB release No. 105-2015-040 dated 03.12.2015], the US Regulator, charged public accounting firm Stein & Company, LLP (Audit Firm) for its failure in audit of Health Talk Live, Inc. ("Health Talk") noting that "The Firm improperly issued the audit report without obtaining an engagement quality review and concurring approval of issuance and thus violated Auditing Standard No. 7, Engagement Quality Review ("AS 7")". For this misconduct, PCAOB censure....
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....ely 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 the audit items at page number 561-565 of the Audit File. The EP called any deviation from the requirements of SA 300 a technical breach. 73. The reply of the EP is misleading and not acceptable. The checklist referred to by the EP is a generic document and not a specific audit programme for an entity working in Real Estate sector and Trading and Manufacturing of construction material. Further, the said document does not bear any seal and signature of the EP thereby raising serious doubts about its genuineness and integrity. Also, there is n....
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....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 and Para 10 of SA 265. 81. Responding to the charge, the EP replied that the EP, ET and the management of the company shared a common premise and thus there was constant communication with those charged with governance which happened on a regular basis. 82 The reply of the EP indicates an unprofessional and nonchalant attitude in performance of the audit of a PIE. In his report on Internal Financial Controls Over Financial Reporting (ICFR) attached as Annexure B to the audit report, the EP has qualified his audit opinion on the basis of lack of appropriate in....
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....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 Companies Act 2013 90. The EP was charged with failure to comply with Section 143 (9) [Section 143 (9): Powers and duties of auditors and auditing standards] of the Companies Act, 2013 which requires that every auditor shall comply with the SAs. 91. Responding to the charge, the EP in his written reply stated that he and the ET had complied with the spirit of the auditing standards while conducting the audit of the company for FY 2017-18. Any lapses in not complying with the requirement of SAs are minor, based on technical breaches. 92. The reply of the EP is misleading and unprofessiona....
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....pression 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 that an auditor is guilty of professional misconduct when he ''fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the EP failed to conduct the audit in accordance with the SAs (as explained in paras 24 to 93 above), but falsely reported in his audit report that the audit was conducted as per SAs. Therefore, we conclude that the charges of professional misconduct enumerated in the SCN dated 16.06.2023 stands proved based on our analysis of the evidence in the Audit File, the Audit Report issued by auditor, the....