TaxTMI 
TaxTMI 
2023 (5) TMI 1321
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..... Introduction & Background C. Major lapses in the Audit D. Other non-compliances with Laws and Standards E. Points of Law raised by the Auditors. F. Findings on Articles of Charges of Professional Misconduct by the Auditors, G. Findings on Additional Articles of Charges of Professional Misconduct by the Audit Firm only. H. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. Pursuant to Securities and Exchange Board of India ('SEBI' hereafter) sharing in April 2022, its investigation regarding diversion of funds worth Rs. 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited ('CDEL' hereafter), a listed company, to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL, NFRA initiated investigations under Section 132(4) of the Act GVIL is one of the subsidiaries of the Coffee Day Enterprises Limited. 4. Post suicide by the group Chairman, CDEL appointed Mr. Ashok Kumar Malhotra, retired Deputy Inspector General of Central Bureau of Investigation and Agastya Legal LLP to investigate inter alia the books of account of C....
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....ces, thus failing to detect & report understatement of related party loans by Rs. 350 crores. They failed to report the misstatement of Rs. 325 crores in Statement of Cash Flow. The total misstatements in the Financial Statements of GVIL were of Rs. 1776.16 crores. The Auditors failed to report absence of Internal Financial Controls in respect of fraudulent diversion of funds, pre-signing of blank cheques and ever greening of loans. They also violated a number of Standards on Auditing and provisions of the Companies Act 2013. 6. Based on investigation and proceedings under section 132(4) of the Companies Act 2013 and after giving them opportunity to present their case, NFRA found the Audit Firm and its Engagement Partners, guilty of professional misconduct and imposes through this Order the following monetary penalties and sanctions that win take effect after 30 days from the date of this Order: a) Imposition of a monetary penalty of Rs. One crore only upon M/s. Sundaresha & Associates, In addition, M/s. Sundaresha & Associates is debarred for a period of Two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financi....
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....ation from SEBI vide letters dated 01.04.2022 & 29.04.2022 sharing its investigation regarding diversion of funds worth Rs. 3,535 crores (as on 31-07-2019) from seven subsidiary companies of Coffee Day Enterprises Limited, a listed company, to Mysore Amalgamated Coffee Estate Limited, an entity owned and controlled by the promoters of CDEL, NFRA started investigation into the role of the statutory auditor under its powers in terms of section 132(4) of the Companies Act 2013. 10. Late V.G. Siddhartha ('VGS' hereafter) was Chairman & Managing Director of CDEL till 29.07.2019. VGS and his family reportedly owned around 10,000 acres of coffee estates through various entities owned by VGS and operated and managed by MACEL, whose 91.75% shares were held by Late S.V. Gangaiah Hegde, father of VGS. 11. As per the investigations made by the SEBI, the outstanding balance payable by MACEL to subsidiary companies of CDEL was as Rs. 842 crores as on 31 March 2019, which had increased to Rs. 3,535 crores on 31 July 2019, detailed in Table 1 as under- Table No. 1 Sr. No. Names of the Subsidiary Companies of CDEL from which funds diverted to MACEL Outstanding balance as o....
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....ets, no work in progress, no revalue from operations, no employee costs, no significant other expenses, except writing off of Rs. 45 crores land advance. There was no business relationship between GVIL & MACEL and almost the entire balance sheet of GVIL consisted of the loans and advances to and from the related panics. The loans and advances made to the related parties (depicted as Assets) of Rs. 475 crores constituted 98,76% of the total assets of Rs. 480.96 crores; and the Loans and advances taken from related parties (depicted as liabilities) were to the tune of Rs. 581-16 crores, which constituted 99.99% of total liabilities of Rs. 581.17 crores, GVIL had a negative net worth of Rs. 100.21 crore as on 31.03.2020. 16. Rule 3 of NFRA Rules 2018 lists out the classes of Companies and body corporates governed by NFRA, This includes unlisted Public Companies having outstanding loans of not less than Rs. 500 crores on 31st March of the preceding year. Since GVIL is an unlisted Public Company having borrowings of Rs. 577 crores as on 31-03-2019, it falls under the jurisdiction of NFRA. 17. M/s. Sundaresha & Associates (Firm) was the Statutory Auditor of GVIL for Financial Year ....
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....ed his inability to attend the personal hearing and requested NFRA to decide the case based on his written submissions. Accordingly, this Order is based on examination of the facts of the matter, charges in the SCN, written replies of the Auditors and other materials available on record. General submissions by the Auditors 19. Referring to Rule 4 of NFRA Rules 2018, the Auditors stated that creditors of GVIL are largely group companies, hence no public interest is involved in GVIL. We note that Rule4 defines functions and duties of NFRA. Rule 4(1) of NFRA Rules 2018 provides, "Tire Authority shall protect the public interest and the interests of investors, creditors and others associated with the companies or bodies corporate governed under rule 3 by establishing high quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions perforated by auditors", As mentioned in para 16 of this Order, GVIL is within the scope of Rule 3 of the NFRA Rules 2018, therefore, it is NFRA's duty to protect the public interest and the interests of investors, creditors and others ....
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....f financial statements are not under the misleading impression that the financial statements carry only the reported misstatements. Vide the SCN dated 03.11.2022, the Auditors were charged for matters which were not reported by them in the Independent Auditor's Report. Therefore, their reliance on the Disclaimer for one matter, to evade responsibility for all other unreported issues has no merit. 22. The Auditors have also submitted that they have inadvertently missed certain evidences which were not available in the Audit File submitted to NFRA and submitted some additional documents (total 64 pages) for consideration. We now examine whether these additional documents can be accepted as audit evidence. In this context, we refer to the following paragraphs of SA 230^[2] which emphasizes the importance of timely preparation of audit documentation and its archival within a reasonable time after the issuance of the audit report: a) Paragraph 7 of SA 230: The auditor shall prepare audit documentation on a timely basis. The explanatory material to the Standard at Para Al, inter alia, Mates that Documentation prepared after the audit work has been performed is likely to b....
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....t File^[4] to NFRA, through a duly notarized affidavit dated 21.07.2022 signed by CA Pradeepa Chandra C., partner of the Firm, it was averred that "The Audit File for the financial year 2019-20 as defined in Para 6(b) of SA 230 has been submitted" .... "It is certified that the above information is true and complete in all respects, and nothing has been concealed". The Auditors are expected to know what constitutes "Audit File" as per SA 230 and accordingly, all audit work papers were expected to be available in the Audit File submitted to NFRA. The submission by the Auditors of additional documents now, subsequent to the submission of Audit file, to defend the charges in the SCN, points to the incorrect averments made in the affidavit submitted by the Firm. 24. Therefore, considering the provisions of the auditing standards and the affidavit filed by the Firm, we do not find any merit in the submission of the Auditors regarding the additional documents and we treat the same as an afterthought to cover up the deficiencies in the Audit. 25. Further, the Auditors have submitted that Standards of Auditing are not reference material to decide on charges of professional misconduct....
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....ll objectives of the independent auditor, requires the auditor to comply with relevant ethical requirements, including those pertaining to independence, relating to financial statements audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAL The Code describes independence as comprising both independence of mind and independence in appearance. The Auditor's independence from the entity safeguards the auditor's ability to form an audit opinion without being affected by influences that might compromise that opinion. Independence enhances the auditor's ability to act with integrity, to be objective and to maintain an attitude of Professional Skepticism. 29. SA 220 requires the partners to form a conclusion on compliance with independence requirements that apply to the audit engagement. In doing so, the auditors are required to: a) Obtain relevant information from the firm and, where applicable, network firms, to identity and evaluate circumstances and relationships that create threats to independence; b) Evaluate information on identified breaches, if any, of the firm's independence policies and pr....
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....; Rs. In Lacs Particulars M/s Sundaresha & Associates M/s ASRMP & Co Mis Sundaresh & Co Grand Total 2018-19 2019-20 2018-19 2019-20 2038-19 2019....
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....nitor and implement quality control of assurance engagements; and b) Involving an additional professional accountant who was not a member of the assurance team to review the work done or otherwise advise as necessary,' 36. As per para 7.6 "Ceiling on the Fees" of Chapter 7 "Self-Regulatory Measures Recommended By The Council", "To ensure that the professional independence of a member in fulltime or part-time practice does not appear to be jeopardized he should, as far as possible, take care to see that the professional fees for audit and other services received by the firm in which he is a partner, by him and his partners individually and by firm or firms in which he or his partner are partners from one or more clients or Companies under the same management does not exceed 40% of the gross annual fees of the firm, firms and partners referred to above. Companies under the same management here would refer to the definition of this expression as provided in section 370(1-B) of the Companies Act, 1956." 37. The SCN stated that as per audit manual of the Firm, "Total fees generated by an auditee should not represent a large proportion of the firm's total fees. The....
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....are in the profit of M/s. ASRMP & Co., which had four partners. His share in profit was increased to 87% after retirement of one partner. All these firms operate from the same office address. 41. From the information obtained from CDGL, we note that CA Pradeepa Chandra C. (Partner of M/s. Sundaresha & Associates) worked at M/s. ASRMP & Co, Statutory Auditor of CDGL, and gave presentation on behalf of M/s. ASRMP & Co. in the Audit Committee Meeting ('ACM' hereafter) of CDGL held on 07.02.2019 and 24.05.2019. These presentations related to review of quarterly results of CDGL by the Auditor, scope of engagement, audit approach, observations of the Auditor on the Statutory Audit of the annual financial statements for FY 2018-19 and applicability of Ind AS 116 for FY 2019-20, A perusal of the Audit File shows that the presentation given by CA Pradeepa Chandra C. before the Audit Committee of CDGL, on 24.05.2019 was authored by CA Megha Sundaresha Andani (Partner of M/s. Sundaresha & Associates). This clearly shows the sharing of resources between these two audit firms and their interrelationship. 42. The inter-relationship among the three firms is corroborated by another f....
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....ity threat and mentioned that their firm & partners do not have any financial interest in any of the CCD group companies; that they did not quote tower fees to obtain new engagements; that they did not have close business relationship with CCD group; and that no confidential information stored in their server was used for any personal gain. They further stated that, no partner or their family members were director or officer in CCD group companies; that CCD group directors and officers did not have significant influence over their engagement; that the audit team will be regularly rotated: that they ensured that total fees from auditee did not exceed prescribed limits; and that where the amount forms large portions of total fees, they have taken following safeguards to mitigate the risk: a) The Firm has exposure to various clients, adding new clients and providing additional services to existing clients without compromising on non-allowed services over the years. b) The remuneration of partners is not linked to earning of any single client and c) They have sufficient resources and the cost can be covered even on loss of any client which forms significant p....
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....ependence mentioned in the Standards of Auditing and the Code of Ethics. In view of this, the charge that the Auditors have violated SQC 1, SA 200, SA 220 and the Code of Ethics stands proved. 49. In case of Marcum Bernstein & Pinchuk LLP, relating to independence of auditors, PCAOB^[7] has observed, "an accountant is not independent of an audit client if, at any point during the audit and professional engagement period, the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement."..... "Marcum BP failed to implement, effectively apply, and appropriately monitor quality control policies and procedures sufficient to provide reasonable assurance concerning the Firm's independence". In this case, PCAOB censured the audit firm, imposed monetary penalty and required the audit firm to undertake a review of its policies, procedures, staffing, and training with respect to auditor independence. 50. Similarly, in AWC (CPA) Limited, WONG Chi Wai, CPA, and WONG Fei Cheung, CPA, PCA....
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.... company of Tanglin Development Limited which, in turn, is a subsidiary company of Coffee Day Enterprises Limited, the listed entity of the Group, GVIL was incorporated in 2001 for carrying on the business of power generation but was yet to commence its operations. As per the Financial Statements for the FY 2019-20 and 2018-19, GVIL is not engaged in the business of power generation nor has it any revenue or expenditure related to power generation or business activities. It has no physical assets, no work in progress, no revenue from operations, no employee costs, no significant other expenses, except writing off of Rs. 45 crores land advance. There was no business relationship between GVIL & MACEL. The loans and advances made to the related parties (depicted as Assets) were worth Rs. 475 crores, which constituted 98.76% of the total assets of Rs. 480.96 crores. The Loans and advances taken from related parties (depicted as liabilities) were to the tune of Rs. 581.16 crores, which constituted 99.99% of total liabilities of Rs. 581.17 crores. GVIL had a negative net worth of Rs. 100.21 crores. These details from the Financial Statements show that GVIL was like a shell company being ....
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.... to MACVL. and the recoverability thereof was the basis of their Disclaimer of Opinion. They attached copies of MoA & AoA along with reply to SCN. 58. Having considered the reply, it is noted that additional documents submitted along with reply to SCN cannot be accepted as audit evidence as already discussed in para 22 to 24 of this Order. The Audit File does not evidence their claim that additional documents were obtained & verified during first year of audit. Further, prudent Auditors are required to refresh their understanding about the entity during audit of second year and subsequent years. There is no record in the Audit File about their understanding of the nature of business of GVIL, its ownership, governance structures etc. 59 The Auditors further submitted that as GVIL did not commence operations, it had no physical assets, Work-in-Progress, revenue, employee cost etc. and invested in an Infrastructure Company to further its objective. They submitted that in the earlier years GVIL had borrowed Rs. 511.16 crores from TDL, its holding company. They further stated that section 186 of the Act allows the holding company (TDL) to advance loans to its subsidiary company wi....
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.... to any other body corporate and stated that they had verified the MOA. 62. We note that approvals required under section 179 and 186 of the Act were not obtained while giving loans of Rs. 370 crores to MACEL, Rs. 105 crores to S1CAL and Rs. 45 owes to Razia Sultana. Despite that the Auditors had noted in the audit work paper 'CARO review' that "Loan advanced does not exceed the limit, hence it is concluded that sec 186 is complied with". This shows that appropriate audit procedures were not performed to verify whether the transactions of borrowing and lending were approved by the Board of Directors of GVIL. Further, we perused clause iii(B)(2) of MOA of GVIL and found that clause B pertains to Objects incidental or ancillary to the attainment of Main Objects. GVIL's Main Objects relate to business of power projects. Whereas Loans given to MACEL and SICAL did not relate to or were not ancillary to the business of power projects which had not yet taken off. It shows that loans given by GVIL to MACEL and SICAL were beyond its powers mentioned in the MOA, which the Auditors failed to observe. This shows that the Auditors did not even attempt to understand or had a total....
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....fact that the same was given without any business rationale. Due diligence and professional skepticism on their part could have easily revealed and established that MACEL was owned by the Promoter family and that the funds were diverted to an entity controlled by the owner. The Auditors were also required to be prudent and evaluate the terms and conditions of this loan. There is no evidence in the Audit File that such evaluations were performed by the Auditors. 67. It was pointed out that GVIL disbursed interest free loans/advances of Rs. 150 crores to SICAL during 2018-19, of which Rs. 105 crores was outstanding as on 31-03-2020. Considering the nature and size of GVIL. this loan too was unusual and given without any business rationale. The Auditors were required to evaluate the terms and conditions of this interest free loan and its recoverability. The Auditors had recorded in the Audit File that the counter party had a running business with regular turnover but they did not report about recoverability of this loan whereas they had reported about the recoverability of other loans in the Independent Auditor's Report. 68. The SCN points out that an advance of Rs. 45 crore....
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....raise the obvious question to the TCWG and management as to how GVIL could claim exemption u/s 186(11) when it was not engaged in the infrastructure business. 71. The SCN detailed the misstatements in Related Party Disclosures and also pointed to evergreening of loans through structured circulation of funds. Examination of the Financial Statements of GVIL and MACEL for FY 2019-20 revealed contradictions in the figures of intercompany loan transactions as detailed below: Table No. 4 Particulars As per Financial Statements of GVIL As per Financial Statements of MACE Difference Loans piven by GVIL to MACEL 410 754 340, Loans repaid by MACEL to GVIL 40 380 -340 Balamwe on 31.03.2020 370 370 0 72. The Table 4 above depicts the loan transactions between GVIL and MACEL in their respective Financial Statements. This created serious doubt about the completeness of the Financial Statements of GVIL and MACEL. On examination of the respective bank statements of GVIL and MACEL, both with Karnataka Bank, we find that on 10.04.2019. GVIL received Rs. 90 crores from TDL, which triggered a chain of apparently sham payments such as: GVIL paid ....
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....statement due to fraudulent diversion of funds. Resultantly they did not identify and respond to the RoMM which is non-compliance with SA 315 & 330- 77. SA 240 provides^[13] that the objectives of auditor are to identify and assess the risk of material misstatement in the Financial Statements due to fraud, obtain audit evidence and respond to identified or suspected risk, It also requires the auditor to maintain professional skepticism recognizing the possibility of existence of material misstatement due to fraud, It further requires the auditor to evaluate the business rationale (or lack thereof) of the significant transactions that are outside the normal course of business or otherwise appear unusual and evaluate whether such transactions may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of funds. There is no evidence in the Audit File of performing any audit procedure to comply with SA 240. 78. The SCN points out that the Auditors had the statutory duty to report the offence of fraud to the Central Government under Section 143(12) of the Act. Disbursal of loans and advances without any business rationale, complete absence....
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....ternal control is less structured. The Auditors did not perform any lest of controls to obtain an understanding of the control environment in GVIL. 81. The Auditors denied all these charges and stated that in respect of Rs. 511 crores borrowed from TDL (Holding Company), the transaction was covered by the exemption under section 186 available to holding company (TDL), to lend to its subsidiary company (GVIL) without any restriction. The Auditors admitted that the procedural aspect of passing a special resolution was not done in respect of loan taken from TDL, In respect of Rs. 70 crores borrowed from TRRDPL. they submitted that it was within the limit of Rs. 200 crores approved by the shareholders on 22.03.2015. The Auditors further replied that there is no reporting obligation on the Statutory Auditor regarding compliance with section 179 of the Act. This reply of the Auditors is not acceptable because neither was the Board approval under section 179(3) of the Act taken for both the loans nor was a special resolution passed for the borrowings from TDL. 82. Regarding the loan given to MACEL, the Auditors submitted that there is no need to have a written agreement for loan tra....
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....of Board of Directors and Shareholders was not taken, a fact admitted by the Auditors. The implied approval relied upon in their reply is not legally tenable and indicates the casual approach of the Auditor while dealing with statutory approvals. Further, GVIL had no business relations with MACEL, nor was there any agreement with MACEL regarding this loan taken without any security. This is ample proof of fraudulent diversion of funds and fraud on the company. The Auditors were duty bound to exercise professional skepticism during the course of audit, which they failed to do. Though the Auditors have given disclaimer about recoverability of this loan but surprisingly kept mum about fraudulent diversion of Rs. 370 crores to the promoter owned company, MACEL. 86. In respect of the loan of Rs. 105 crores given to SICAL, the Auditors believe that it is covered in the limit of Rs. 200 crores approved by shareholders in 2015. We notice that in FY 2018-19, loan of Rs. 150 crores was given to SICAL in addition to Rs. 550 crores loan given to MACEL, which indicates that this limit was breached in FY 2018-19 also. Further, shareholders had given a general approval, authorizing the Board o....
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....unt with Karnataka Bank, which is depicted below: Table No. 5 89. The above bank statement depicts that funds were circulated between MACEL and GVIL on 10-04-2019 & 10.05.2019 to clear cheques issued in FY 2018-19 for evergreening of loons of Rs. 780 crores. It is surprising that the Auditors while looking at one column (Withdrawal or Deposit) in this bank statement, did not look at another column (Deposit or Withdrawal) in the same page of the bank statement. As GVIL had no operations, there are no other entries in the bank statement besides these circular entries. It is humanly impossible that a reasonable, prudent person scrutinizing these statements could not observe these circular transactions. The Auditor is required to perform audit with professional skepticism (SA 200). Evergreening of loans through structured circulation of funds was clearly visible from the above bank statement. While the fraud was apparent earlier, it got established after the financial mess was unveiled post the death of VGS in the first half of the financial year. The Auditors were required to evaluate this evident evergreening of loans while verifying clearance of cheques issued in 2018-19, it i....
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....d Party Transactions in previous year column of the Financial Statements for FY 2019-20. This is non-compliance with Ind AS 24, which was not pointed out by the Auditors. 92. The Auditors replied that they had enquired into Related Party Transactions (RPT) with due diligence and there is no violation of Ind AS 24 & SA 550. They obtained balance confirmations from related parties and nothing was concealed and have further relied on their disclaimer of opinion in the audit report. They denied that they were in knowledge of any fraud. According to them, the question of reporting fraud u/s 143(12) of the Act does not arise. 93. As is dear from the above analysis, sums of Rs. 370 crores, Rs. 105 crores & Rs. 45 crores were fraudulently diverted to MACEL. SICAL and Razia Sultana respectively. Evergreening of loans through structured circulation of funds has also been proved Therefore, we find that the Auditors failed to report this fraud to the Central Government and in the Independent Auditor's Report resulting in violation of the section 143(12) of the Act and applicable Auditing Standards. 94. While denying the charge relating to PMLA, the Auditors have quoted section 420....
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.... to conclude on internal control. The Auditors have replied that they have complied with section 143(3)(i) of the Act. They stated that they have not provided any opinion on the adequacy of IFC and provided disclaimer of opinion for the entire financial statement and that disclaimer does not restrict to a specific element which is part of the "Basis for Disclaimer of Opinion", They have further stated that even if they had considered alleged control lapses, their opinion would have been the same i.e., "Disclaimer of Opinion", therefore, their audit conclusion cannot be regarded as inappropriate. Regarding non reporting internal control failure in disbursal of loans, they stated that disbursal is just one limb of balance reflected in the balance sheet as opposed to second limb being recoverability, and they disclaimed entire transaction. 96. It is undisputed fact that the Auditors were the Statutory Auditors and not the forensic auditors, However, laws and regulations lay down certain responsibilities on Statutory Auditors with respect to internal financial control and internal controls, internal financial control over financial reporting is designed and implemented to prevent, a....
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....he loans were obtained from Chinese lenders for the purpose of making these purchases. White the Agent returned a portion of the prepayments--some in unusual same-day, round-trip transfers--it did not return most of them..... By failing to adequately respond to the known fraud risks, Marcum's engagement team breached its duty to perform the Audits with the due professional care and professional skepticism requited by PCAOB standards. The team also failed to adequately understand the business rationale (or the lack thereof) for the significant unusual transactions and failed to obtain sufficient appropriate audit evidence to support Marcum's opinion on the Issuer's financial statements", For this misconduct, PCAOB censured Audit firm Marcum LLP ("Marcum"); imposed a civil money penalty of $250,000 on Marcum; prohibiting Marcum from audit works for a period of three years. PCAOB also imposed a penalty of $25,000 on the Engagement partner John E. Klenner besides barring him from being an associated person of a registered public accounting firm. 99. Similarly, failures to perform audit procedures and exercise professional skepticism in related party transactions and inte....
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....ognized an impairment loss of Rs. 16.97 crores in FY 2018-19 on this investment and recognized an impairment loss of Rs. 38.09 crores in FY 2019-20 on this investment. As of 31.03.2020, the carrying amount of this investment was Rs. 1.85 crores. An auditor with professional skepticism would not give credence to the management's assertion that the market price of SICAL's shares would increase in the long run, when they had actually been falling for two consecutive years. As a prudent Auditor they should have asked the management as to how SICAL's performance was likely to improve in the long run. From the Audit File, it is observed that the Auditors did not carry out any audit procedure to evaluate the management assertion. The future business plan of SICAL and its evaluation are also not available in the Audit File. 103. The Auditors have denied the charge stating that material uncertainty existed that might cast significant doubt on the GVIL's ability to continue as a going concern and accordingly they have provided material uncertainty para in the Independent Auditor's Report and also in para 2(f) of "Report on other legal and regulatory requirements", Whil....
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....ting firm and limited the activities of EQCR for two years. C.5 Lapses In audit relating to Statement of Cash Flows 106. The Auditors were charged with failure to report material misstatement of Rs. 325 crores in the Statement of Cash Flows This misstatement has resulted in non-compliance with Ind AS 7^[19] in respect of understatement of Cash flows from Operating Activity and overstatement of Cash flows from Investing Activity by Rs. 325 crores. As per Ind AS 7, cash advances and loans made to other parties are to be classified under the heading Cash flows from Investing Activities (other than advances and loans made by financial institutions). GVIL is not a financial institution. However, GVIL had mis-classified loans made to other parties worth Rs. 325 crores (net) under the heading "Cash flows from Operating Activities" (as negative balances). This has resulted in noncompliance with Ind AS 7. 107. The Auditors have denied the charge on the basis that terms and conditions of loans/advances were not finalized, therefore, these transactions cannot be termed as investing activity or financing activity and has to be classified as operating cash flow under elimination method....
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....in "Cash Equivalent". Therefore, Cash Flow from these transactions have to be considered as "Cash Flow from Investing Activities" and cannot be considered as "Cash Flow from Operating Activities". 111. Further, in the Independent Auditor's Report, the Auditors have reported as "We are unable to comment whether the financial statements comply with the Accounting Standards specified under section 133 of the Act, became of the matters described in the Basis for Disclaimer of opinion section above". We note from the "Basis for Disclaimer of Opinion" section of Independent Auditor's Report, that misstatement in Statement of Cash Flows by Rs. 325 crores is not reported by the Auditors. In view of the above, we find that reply of the Auditors is not satisfactory and the charge that the Auditors failed to report non-compliance of Ind AS 7 by GVIL is proved. 112. In the Matter of Armando C. Ibarra, P.C., Annan do C. Ibarra, Sr., and Armando C. Ibarra, Jr. relating to inter alia inappropriate classification in the Statement of Cash Flows, PCAOB^[20] observed, "In 2003. when it returned artwork to the original artist, Boys Toys wrote off its investment in fine art as a charge to....
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....Board are prerequisites before an Auditor makes a report on such approved & signed Financial Statements, It was the primary responsibility of the Auditors to ensure that these requirements were adhered to, which the Auditors failed to perform. The reliance on the "Doctrine of Indoor Management" is misplaced as this Doctrine is applicable to third parties, not having access to the internal records of a company. The Auditors should have obtained certified copy of the Board resolution approving the Financial Statements and authorizing the Directors for signing the Financial Statements and should have kept the same in the Audit File before its assembly. The Auditors did not do the same. Thus, this charge is proved. 115. The Auditors were charged that they did not consider material misstatements of Rs. 1776.16 crores^[21], while making audit conclusions and forming audit opinion, and thus violated SA 700-Forming an Opinion and Reporting on Financial Statements, which requires the auditor to conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error. 116. ....
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....t the FS and the Audit Report This indicates that the Audit File was not assembled even after 18 months of signing the audit report. 119. The Auditors have denied the charge stating that the record of audit procedures performed and who has performed/reviewed the work is available in 'Audit Programme' in the Audit File and details of date of conducting audit by article clerics are available in time sheets maintained separately. Regarding the extent of review, they replied that they had checked all the transactions. With respect to charge relating to non-assembly of the Audit File within stipulated period, they replied that they were not aware of the modalities of representation before NFRA and certain documents would have been inadvertently missed during the submission, as FS was in hard copy, They further replied that during the course of audit, observations, discussion with TCWG/management and clarifications received were noted in 'Audit Conclusion' section of the Audit File submitted to NFRA, While drawing attention to para 19 of SA 260. they argued that written communication with TCWG is not compulsory. 120. Having considered the reply, we observe that date....
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....ive audit plan, which Auditors have failed to do. Quality of performance of an audit largely depends upon the quality of audit plan. We find that the Auditors were deficient in developing an effective audit plan, thus this charge is proved. 124. The Auditors were charged with noncompliance of SA 720 which requires them to read the other information in the Annual Report of GVIL. There is no evidence in Audit File that the Auditors had read the Annual Report of GVIL. The Auditors denied this charge stating that they had verified the draft Annual Report prepared by the company and did not find inconsistency, accordingly no queries were noted in the Audit File. 125. We note from SA 720 that the purpose of reading annual report by the Auditors is to ensure that there is no material inconsistency between other information in annual report and financial statements. We further note from para A5 of SA 230 that oral explanation by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions auditor reached, but may be used to explain or clarify information contained in the audit documentation. There is no record in Audit File that the Audit....
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....f Chartered Accountants of India and is in full time practice and is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm and who, where required, has the appropriate authority from a professional legal or regulatory body". As per this definition, the EP has to take complete responsibility for the engagement, its performance, and for the audit report. Further, it is noticed from the Audit File that Chaitanya was doing only day to day work whereas responsibility of engagement was on Ramesh, who signed the audit report. Though as per SQC 1, one engagement can have only one EP, in this case the audit firm appointed one signing partner and one EP. CA C. Ramesh was appointed as signing partner and CA Chaitanya G. Deshpande was shown as EP in the audit plan. Chaitanya has not disputed this position in his reply. Therefore, we hold that CA C. Ramesh, as well as CA Chaitanya G. Deshpande were members of engagement team and are jointly and severally responsible for all lapses. The audit firm is also responsible for lack of due diligence in this regard for constituting their Engagement Team with multiple EPs in violation of SQC 1. 130....
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....ting Standards specified u/s 133 of the Act, because of the matters described in the Basis for Disclaimer of Opinion section of their audit report. e) The Balance Sheet, the Statement of Profit and Loss (Including Other Comprehensive Income), the Statement of Changes in Equity and Statement of Cash Flows dealt with by their Audit Report are in agreement with the books of account. f) In compliance with section 143(12) of the Act, the Audit Firm replied that there is no fraud identified by them, hence there is no reporting requirement to the Central Government. g) The Firm has a Quality Control Manual in place and the same has been adhered to while conducting the audit of CDGL. 133. We have considered the reply. Statutory Audits are performed by Engagement Team on behalf of the Audit Firm appointed as Statutory Auditor under section 139 of the Act. The audit reports are signed on behalf of the Audit Firm and, therefore, the Audit Firm remains responsible for all the acts of omissions and commissions by the Engagement Team as well as for violation of duties and responsibilities specifically required of the Audit Firm. M/s. Sundaresha & Associates was the ....
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....RA is not dependent on actions of other authorities. G. ARTICLES OF CHARGES OF PROFESSIONAL MISCONDUCT BY THE AUDITORS 137. Based on the foregoing discussion and analysis, we conclude that the Auditors have committed Professional Misconduct as defined under Section 132(4) of the Companies Act 2013 in terms of section 22 of the Chartered Accountants Act 1949 (CA Act) as amended from time to time, and as detailed below: a) The Auditors committed professional misconduct as defined by clause 5 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he "fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity", This charge is proved as explained in Section-C-3 to C-5 and D (b) above. b) The Auditors committed professional misconduct as defined by clause 6 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he "fails to report a material misstatement....
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....misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum punishment is laid down by the law. 141. Existence of "Shell Companies*1 for effecting sham or unlawful transactions is injurious to the economic health of India, Auditors of shell companies have greater responsibilities of exposing promoters* nefarious actions to use such shell companies for illegal and/or unethical activities 142. This Order has detailed all the lapses in Audit and the non-compliances with the Standards on Auditing made by the Auditors. The constant refrain of the Auditors throughout their reply has been that they had given the Disclaimer of Opinion indicating non recoverability of advances made to MACEL and Razia Sultana, The death of VGS happened in July 2019 and the Auditors had sufficient time to evaluate all the areas spelt out in this Order where the Standards have not been adhered to. The Auditors had access to the investigation report of Mr. Ashok Kumar Malhotra, which contained complete details of diversion of hinds and its modus operandi, including signing of blank cheques. Despite this, they did not report f....
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....nternal audit of the functions and activities of any company or body corporate. This debarment period will start after completion of two years debarment period imposed in case of Tanglin Development Limited for FY 2018-19 vide NFRA order dated 26.04.2023. b) Imposition of a monetary penalty of Rs. Five Lakhs upon CA C. Ramesh-In addition, CA C. Ramesh is debarred for a period of Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. c) Imposition of a monetary penalty of Rs. Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande is debarred for a period of Five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. 146. This order will become effective after 30 days from the date of issue of this order. [1] As defined in Rule 3 of the NFRA Rules 2018. [2] Standard on Auditing 230, Audit Documentation. [3] Refer para ....
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.... in an Audit of Financial Statements [14] Section 420 of IPC states, 'Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any pan of a valuable security, or anything which is signed or scaled, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall afro be liable to fine. [15] As per section 3 of PMLA act 2002. 'Who so ever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering', 'Proceeds of Crime', as defined at section 2(u) of PMLA Act, means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence. List of schedule offences in Part A of the schedule under PMLA Act 2002, cover....