TaxTMI 
TaxTMI 
2024 (5) TMI 75
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....g to the liability of the Firm D. Lapses in the Audit E. Article of Charges of Professional Misconduct F. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. The National Financial Reporting Authority ('NFRA' hereafter) initiated action under section 132 (4) of Companies Act 2013 ('Act' hereafter) against Mis S. Prakash Aggarwal & Co, the Audit Firm, for professional or other misconduct in the statutory audit of Vikas WSP Limited for the FY 2019-20. This was following the information received from Securities Exchange Board of India ('SEBI' hereafter), that the company did not recognize in its financial statements for FY 2019-20, the interest expense on its borrowings from banks, which resulted in overstatement of profits by the company. During FY 2019-20, VWL was a listed company at Bombay Stock Exchange ('BSE' hereafter) and therefore falls under NFRA domain [Vide Rule 3(l)(a) of National Financial Reporting Authority Rules, 2018.] 4. As is set out in this Order, the Audit Firm failed to meet relevant requirements of the Companies Act, Standards on Quality Control (SQC 1[Quality Control for Firms that Perform Audit and Reviews of ....
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....ibed under section 132 (4) (c) of the Act. 10. NFRA took up investigation under section 132(4) of the Act after receipt of a letter dated 25.08.2021 from SEBI about overstatement of profits by VWL due to non-recognition of interest cost on borrowings classified as Non-Performing Assets by the lending banks. 11. Vide NFRA letter 11.11.2021, the Audit File and SQC 1 policy of the Firm were called from the EP. In response, on 08.12.2021, the EP furnished a part of the audit file along with main points of SQC 1 Practice and Procedure followed by the Firm. On 21.12.2021, a reminder was sent to the EP asking him to submit the complete audit file and SQC1 Policy of the Firm. The EP sought extension of time of 30 days and was granted time till 20.01.2022. On 20.01.2022, the EP submitted the SQC 1 Policy of the Firm and some part of the audit file stating that "some audit documents available in hard form are of poor quality and their copies were blurred, would be filed after getting digitalized with the help of specialist". As submission of balance part of the audit file was still pending, the EP was again asked on 29.03.2022 to submit the complete audit file along with the Affidavit ....
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....requested for extension of time to submit the Firm's replies to the SCN, which was granted till 23.01.2023. Vide letter dated 23.01.2024, the Firm conveyed its inability to submit the replies to the SCN and requested to keep the proceedings against the Firm in abeyance till disposal of the Interlocutory Application. Following the principles of natural justice, nether opportunity was provided om 09.02.2024 to submit the Firm's replies to the SCN by 14.02.2024, The Firm submitted its replies to the SCN on 14.02.2024. The Firm has not availed of the opportunity of personal hearing. 16. We have perused all the material om record including the written responses of the Firm. Our findings on the charges levelled against the Firm are discussed in Part C and D of this Order respectively. C. Matters relating to the liability of the Fires 17. The Firm, while submitting its replies to the SCN has stated that for all the now-compliances related to the statutory audit of the VWL for the FY 2019-20, the EP was held responsible and was also penalized under section 132(4)(c) of the Companies Act, 2013. Hence, any action against the Firm for the same alleged offences, would be a cas....
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....which is a case of double jeopardy. 18. We have carefully gone through the replies submitted by the firm and observe as follows: i) The contentions of the firm that only the EP is accountable for non-compliance with auditing standards is misconstrued. It is the firm that was appointed as the auditor under section 139 of the Act and it is the auditor (in this case the firm) that has to be held accountable for auditor's duties and responsibilities under section 143 of the Act, including compliance with the SAs. The audit firm is responsible for establishing and maintaining a system of quality control to provide reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, as required by Para 2 of SA 220 and Para 3 of SQC 1. The SAs, such as SA 200, SA 220, SA 230, SA 260 (Revised), SA 620 and SA 700(Revised) refer to SQC-1 when it comes to specific aspects of audit such as documentation, communication with those charged with governance, engagement of Auditor's expert, evaluating the adequacy of internal audit function of the Company, and general quality aspects. Footnote 2 to para 3 of SQC 1 referred....
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....ime, and hence is a case of double jeopardy, is flawed and unacceptable. The relationship between a firm on one hand and the EP and EQCR om the other hand is that of a principal and agent. They remain jointly and severally responsible for professional misconduct observed during an audit. The appointment of a new partner does not absolve the firm of its accountability for any professional misconduct or breaches of auditing standards that occurred during any period. The firm, as a legal entity, has a continuous obligation to establish and maintain quality control systems, as mandated by auditing standards and regulatory requirements, These quality control systems are designed to ensure that the firm and its personnel comply with professional standards and regulatory obligations, regardless of changes in personnel. Therefore, the firm cannot evade responsibility for any deficiencies in its quality control systems or failure to enforce compliance with auditing standards, irrespective of the timing of appointment of other partner, D. Lapses in the Audit 19. The firm was charged [Para 7 to 12 of the SCN] for the following Lapses in the statutory audit of VWL. for the FY 2019-20: ....
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....-19, ending on 31.03.2020, it was referring to the date beyond 31.03.2020. * The MRL was not on the letterhead of the company and the name and designation of the issuing authority was also not traceable. All the above, point to the poor quality of the audit for which the audit firm should remain accountable. d. The audit firm was also charged for not meeting the requirements of Para 8 of SA 230, because on perusal of the audit file, one cannot clearly understand: * The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable Ind AS. * The results of the audit procedures performed, if any, and the audit evidence obtained, and * The professional judgements made by the EP in forming the audit opinion on the financial statements of VWL for the FY 2019-20. e. There was a huge difference between debit balance in the interest ledger [Debit balance in the interest ledger is Rs.2.68 cr whereas the interest on financial liabilities as disclosed in Note 22 of the FS of FY 2019-20 was reflecting Rs 4.16 cr] (part of the audit file) and interest on financial liabilities disclosed in the financial sta....
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....ma facie failed to do. (v) There was no documentation of how the EP had concluded that the ET was in compliance with independence requirements as stipulated in Para 11 of SA 220. The audit firm also failed to ensure the same through its overall audit quality monitoring mechanism. (vi) The EP did not document the following, as required by Para 24 of SA 220: * Issues identified with respect to compliance with relevant ethical requirements and how they were resolved. * Conclusions on compliance with independence requirements that apply to the audit engagement, and any relevant discussions with the firm that support these conclusions. * Conclusions reached regarding the acceptance and continuance of client relationships and audit engagements. * The nature and scope of, and conclusions resulting from, consultations undertaken during the course of the audit engagement. The Audit Firm also failed to ensure this. 20. The firm denied all the charges and reiterated that the BP was responsible for overall audit engagement including its quality and the firm was only responsible for formulation of SQC 1 policy, which it did in the extant ....
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....nduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he "fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity". This charge is proved as the audit firm, who was appointed as the statutory auditor, failed to disclose in its report the material non-compliances by the company as explained in Para 12-17 above. III. The audit firm committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties". This charge is proved as the audit firm, who was appointed as the statutory auditor, failed to exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations, as explained in Para 12-17 above. IV. The audit firm committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of profes....
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....e professional misconduct is proved. The seriousness, with which proved cases of professional misconduct are viewed, is evident from the fact that a minimum penalty is laid down by the law. 27. The audit firm in the present case was required to ensure compliance with SAs to ensure the audit quality and tend credibility to Financial Statements. As we have explained in this Order, substantial deficiencies m the audit work of the EP, abdication of responsibility and omissions and commissions on the part of M/s S, Prakash Aggarwal & Co., establish professional misconduct. As per the statutes, the audit firm is required to ensure the adequacy of the quality control systems by adoption of proper policies and procedures, and the very objective of audit quality review is defeated if the audit firm dues not perform its duties as stipulated by the standards. 28. Section 132(4) (c) of the Companies Act 2013 provides that the National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for. A) imposing penalty of (I) not less chart one lakh rupees, bat which may extend to Ave times of the fees received. in case of i....