TaxTMI 
TaxTMI 
2024 (12) TMI 168
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.... sections: A. Executive Summary B. Introduction and Background C. Lapses in the of Audit D. Articles of Charges E. Penalty and Sanctions 3. EXECUTIVE SUMMARY 3. National Financial Reporting Authority (NFRA) is India's independent regulator in respect of matters relating to accounting and auditing of Public Interest Entities (PIEs). 4. NFRA suo motu examined the professional conduct of the EP, CA Chirag Doshi, for the statutory audit of UIL for the FY 2017-18, under Section 132(4) of the Companies Act, 2013 (the Act). 5. This Order finds that while the EP issued a Disclaimer of Opinion both on the Financial Statements and on the Internal Financial Controls over Financial Reporting for the FY 2017-18, the EP failed to- i. Perform his duties with due diligence and displayed gross negligence in relation to his obligations to report fraud under Section 143(12) of the Companies Act, 2013 and SA 240 (SA 240), The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements despite existence of several indicators of fraud. ii. Obtain sufficient appropriate audit evidence (SAAE) in the aud....
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.... of NFRA, 2018 of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants. 8. The Statutory Auditors, both individual and firm of chartered accountants, are appointed under Section 139 of the Act. The Statutory Auditors, including the Engagement Partners and the Engagement Team that conducts the audit are bound by the duties and responsibilities prescribed in the Act, the rules made thereunder, the Standards on Auditing (SA hereafter), including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalties prescribed under Section 132(4) (c) of the Act, 2013. 9. On receipt of information from CEIB Central Economic Intelligence Bureau vide letter dated 09.09.2022, NFRA started its investigation under Section 132(4) of the Act of possible violations of the SAs by the EP in the statutory audit of UIL, a company located at Mumbai and listed The securities of UIL were suspended from trading from the BSE w.e.f. November 20, 2023 on the Bombay Stock Exchange (BSE). The EP took up the audit assignment vide Engagement Le....
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....ancial Statements had been prepared in accordance with accounting principles generally accepted in India including Indian Accounting Standards (Ind AS) prescribed under Section 133 of the Companies Act, 2013 read with Rule 3 of the Companies (Indian Accounting Standard) Rules, 2015 and the Companies (Accounting Standards) Amendment Rules, 2016. 12. On examination of the Audit Files and on being satisfied that there were prima facie violations of the SAs and the relevant requirements of the Companies Act, 2013 such that sufficient cause existed to act under sub section (4) of Section 132 of the Act, a SCN was issued to the EP on 13.10.2023 under Section 132 (4) of the Act read with Rule 11 of the NFRA Rules 2018. The SCN asked the EP to show cause why action should not be taken against him for professional misconduct in respect of his audit of UIL for FY 2017-18. 13. The reply to the SCN was received vide email and letter dated 29.01.2024. The EP also availed personal hearing, which was held on 01.08.2024 at the office of NFRA, New Delhi. This Order is based on the review of the Financial Statements, the Audit Files, written responses of the EP and submissions made during the ....
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....ware that would have required a modification to the opinion, and the effects thereof [Para 27 of SA 705 (Revised)]. Therefore, it is evident that a Disclaimer of Opinion in itself cannot be a basis for absolving an auditor of his other statutory responsibility under the Companies Act, 2013. We now proceed to discuss the individual charges in the SCN. C. LAPSES IN THE AUDIT C.1. Responsibilities relating to Fraud 17. The EP was charged with failure to discharge his responsibilities relating to fraud as laid down in SA 240, reporting obligations under Section 143(12) of the Act and CARO Companies (Auditor's Report) Order, (2016), 2016. It was alleged that the EP failed to examine the sudden and significant increase in the provisions for Expected Credit Loss (ECL) provision on Trade Receivables and on Advances to Vendors. The ECL had increased by 2,583.39% from Rs. 106.57 Crores in FY 2016-17 to Rs. 2,859.69 Crore in FY 2017-18 Crores; and the provision for doubtful advances to vendors for purchase of steel amounted to Rs. 215.36 Crores. There was however no evidence in the Audit File that the EP had carried out existence checking for around 17 major foreign part....
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....ons should have aroused suspicion in a professionally skeptic auditor to identify whether there was any potential fraud being committed by the company through its borrowings from banks and/or credit sales, especially when the EP knew that the company was already under the CIRP when the audit was in progress. 20. The argument of the EP that the amounts of Trade Receivables were only provided for and not written off and therefore there was no trigger for having suspicion of fraud being committed is not acceptable as the amounts were pending for 1-3 years, and the company was already under CIRP Corporate Insolvency Resolution Process, raising doubts about chances of their recovery. The EP, without exercising necessary professional skepticism, chose the easy option of giving a disclaimer on the Trade Receivables and the related ECL without examining the same from fraud angle. The argument of the EP that the transactions for the Trade Receivables and Advances pertain to prior years and had been subjected to statutory audit wherein no fraud was reported by the predecessor auditors is not acceptable as the EP's responsibilities on reporting of fraud under Section 143(12) covers the....
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....tial fraud angle. We, therefore, find the EP to be grossly negligent in his duties relating to SA 240 and having failed to discharge his statutory obligations under Section 143(12) of the Act and CARO, 2016. 24. In similar case, the US regulator, PCAOB, in the matter of Wander Rodrigues Teles PCAOB Release No. 105-2017-007 dated March 20,2017, censured Teles, barred him from being an associated person of a registered public accounting firm and imposed a civil money penalty of $10,000. The Board imposed these sanctions on the basis of its findings that Teles violated PCAOB rules and standards inter alia in testing net accounts receivable which was identified as areas having increased risks of material misstatement, including a risk of fraud. C.2 Audit Evidence - SA 500 C.2(a) Management Expert's work pertaining to Non-Current Investments 25. The SCN charged the EP with failure to comply with Para 6 of SA 500 SA 500, Audit Evidence which requires the auditor to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence in respect of evaluation of UIL's investments in two fellow s....
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....rms of our engagement were such that we were entitled to rely upon the information provided by the Company without detailed inquiry. Also, we have been given to understand by the Management that they have not omitted any relevant material factors and, that they have checked out relevance or materiality of any specific information to the present exercise with us. Our conclusions are based on these assumptions, forecasts and other information given by/on behalf of the Company. Accordingly. We do not express any opinion or offer any form of assurance regarding its accuracy and completeness. We do not accept any liability to any third party in relation to the issue of this report. Neither the report nor its contents may be referred to or quoted in any other agreement or documents given to third parties without our prior written consent. We retain the right to deny permission for the same. 28. The declaration by the valuation expert that he relied completely on the information provided by the management and did not carry out a due diligence or audit of the company for the purpose of this engagement was not questioned by the EP, pointing to gross negligence and absence of due diligenc....
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....at the EP failed to comply with the requirements of SA 500 stated above. 31. Internationally too, such matters have attracted penal action. For example, PCAOB, in the Matter of L.L. Bradford & Company, LLC PCAOB Release No. 105-2015-041 dated December 3,2015 in connection with the audit of WebXU Inc., censured L.L. Bradford & Company, LLC, revoked the firm's registration and imposed a civil money penalty of $12,500. The Board imposed these sanctions on the basis of its findings that L.L Bradford violated PCAOB rules and standards inter alia in evaluation of the reasonableness of the significant assumptions used by the issuer and its specialist to determine the fair value of purchase consideration for the acquisition and test data WebXU (the Issuer) provided to the specialist and properly evaluate whether the specialist's findings supported the related financial statement assertions. C.2(b) Management Expert's work pertaining to Expected Credit Loss (ECL) for Trade Receivables 32. The EP was charged with non-compliance of Para 8 of SA 500 read with Para A44, A45, A46 and A48 of SA 500 which requires the auditor to evaluate the competence, capabilities and object....
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....d by SA 220, the EP had reviewed the working papers related to critical areas of judgement and significant risk. The EP submitted that he had inadvertently missed mentioning the review date while signing off a few of the AWPs, and accordingly, submitted that he was in compliance with the requirements of Para 9 of SA 230. The EP also submitted that FY 2017-18 was the first year of their engagement and he was involved right from the beginning i.e., acceptance of client to the conclusion phase of the audit engagement; that though Hitesh Sevada was not the initial member ofET, he was temporarily engaged and since his involvement was very limited, his name was not listed in the list of ET members; that the audit files submitted to NFRA were not tampered with and integrity of the same is not questionable. 37. We find that the absence of authentication by the preparers of the audit documentation and not affixing the date with the signature of the EP is a lapse as it fails to establish who prepared the audit document and when it was reviewed by the EP. As stated above, Para 9 of SA 230 requires the auditor to record who performed the audit work and the date such work was completed; and ....
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.... 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. C.4 Non-Compliance with Companies Act, 2013 40. The EP was charged with non-compliance with Section 143(3)(e) of the Companies Act, 2013, which requires the auditor to state in his report whether, in his opinion, the Financial Statements comply with the accounting standards. The EP was charged for not reporting the non-compliances by the company with Ind AS 16 and Ind AS 107 Indian Accounting Standard (Ind AS) I 07 Financial Instruments: Disclosures. 41. The EP was charged for failure to report that the company did not comply with Para 74(a) of Ind AS 16 which requires that the Financial Statements shall disclose the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities. The EP replied that the Disclaimer of Opinion in the Financial Statements includes borrowings as well. We have reviewed the EP's workpapers related to the borrowings, the work paper '1822M001 Curre....
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....t documented in the Audit File. 44. As the basis for Disclaimer of Opinion was only based on NCLT, Mumbai bench Order dated 14.05.2018 and the EP failed to record in the Audit File the facts mentioned above, we find that the basis of Disclaimer of Opinion on Internal Financial Control over Financial Reporting was deficient, and the EP showed gross negligence and lack of due diligence in performing this work. C.6. Inadequate Disclosures in Statement of Cash Flows 45. The EP was charged with non-compliance with Para 10 and Para 25(a) of SA 315 SA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment which required the auditor to discuss the susceptibility of the entity's Financial Statements to material misstatement. In the Statement of Cash Flows for FY 2017-18 under the head Cash flows from Investing Activities, the Company had disclosed an amount of Rs. 86.16 Crores as cash outflow on account of 'Payments for Fixed Assets/Reversal of Fixed Assets'. It was pointed out that this transaction was a non-cash transaction, the disclosure of which in the Cash Flow Statement was erroneous and is not in co....
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....nts and deficiencies in audit documentation and make appropriate reports under Section 143(12). 51. Based on the foregoing discussion and analysis, we conclude that the EP has committed professional misconduct as defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below: a. The EP committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct of his professional duties. (refer to Clause 7 of Part I of the Second Schedule of the CA Act). This charge is proved as explained in Section C.l, C.2(a), C.3, C.4 and C.5 above. b. The EP committed professional misconduct by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the audit engagement (refer to Clause 9 of Part I of the Second Schedule of the CA Act). This charge is proved as explained in Section CJ, C.2(a) and C.3 above. E. PENALTY AND SANCTIONS 52. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which....