TaxTMI 
TaxTMI 
2024 (12) TMI 167
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....#39; hereafter) for the Financial Year ('FY' hereafter) 2019-20. The Firm and the EP are collectively called as the Auditor/s or Principal Auditor/s). 2. This Order is divided into the following sections: A. Executive Summary B. Introduction & Background C. Major lapses in the Audit D. Omission and Commission by the Audit Firm E. Finding on the Articles of Charges of Professional Misconduct F. Penalty & Sanctions A. EXECUTIVE SUMMARY 3. NFRA suo moto examined the professional conduct of the statutory auditors of Coffee Day Enterprises Limited under Section 132(4) of the Companies Act 2013 ('the Act' hereafter), pursuant to the Securities and Exchange Board of India ('SEBI' hereafter) shared its investigation report regarding diversion of funds worth Rs 3,535 crores from seven subsidiary companies of Coffee Day Enterprises Limited to Mysore Amalgamated Coffee Estate Limited ('MACEL' hereafter), an entity owned and controlled by the promoters of CDEL. Coffee Day Enterprises Limited is listed on stock exchanges. A Show Cause Notice was issued to to Mis Venkatesh & Co., the auditor for the FY....
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....investigation report of DIG of CBI mentioned above; (Section C-1 of this order). 5.2 The Auditors also failed to perform any audit procedure to verify whether CDEL passed special resolution in the general meeting before giving loan of Rs 1,841.46 crores and guarantee of Rs 100 crores to subsidiaries. They also failed to verify whether loan taken by subsidiaries from CDEL and money raised by the subsidiary on the strength of CDEL's guarantee were used for the principal business activity ofthese subsidiaries (Section C-11 of this order). 5.3 The Auditors accepted this audit engagement as statutory auditor of CDEL from FY 2019- 20 without first performing mandatory procedures and started audit activities even before obtaining no objection certificate from the resigning auditor (Section C-111 of this order). 5.4 The Auditors failed to exercise due diligence and were grossly negligent in preparation of the Independent Auditor's Reports by giving contradicting opinions, wrongly including Key Audit Matter in the Audit Reports despite disclaiming audit opinions, and wrongly included Emphasis of Matter paragraph in respect of the matters not presented and disclosed in the f....
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....countants or firm of Chartered Accountants, are appointed by the members of companies as per the provision of section 139 of the Act. The Statutory Auditors, including the EP and the Engagement Team ('ET' hereafter) that conduct 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 ('SQC' hereafter) and the Code of Ethics, the violation of which constitutes professional or other misconduct, and is punishable with penalty prescribed under section 132 (4) (c) of the Act. 9. NFRA started its scrutiny, on receipt of information from SEBI in April 2022 about its investigation regarding the diversion of funds worth Rs 3,535 crores (as on 31-07-2019) from seven subsidiary companies of CDEL to MACEL, an entity owned and controlled by the promoters of CDEL. 10. Late V. G. Siddhartha ('VGS' hereafter) was Chairman & Managing Director of CDEL; and Late S.V. Gangaiah Hegde, father of VGS was holding 91.75% shares of MACEL during relevant period. 11. As per the investigation made by the SEBI and examination by NFRA, th....
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....cheques issued by MACEL in March 2019 without MACEL having requisite bank balance. These cheques were used by the lenders (CDEL's subsidiaries) to show recovery of related party loans in their books of accounts, even though MACEL did not have adequate bank balance or approved bank credit limit to support these cheques. These cheques were later shown as cleared in the next financial year, i.e., FY 2019-20 (year of audit in this case) by evergreening loans/advances by CDEL's subsidiaries through orchestrated circulation of funds among related parties). 12. The linkage of the entities described in Table-1 is depicted in the Chart -1 given below: 13. The examination of the Consolidated Financial Statements of CDEL and financial statements of MACEL, shows that except for CDGL, MACEL did not have any business transactions with 6 of the 7 subsidiary companies. MACEL was used as a conduit to transfer funds from CDEL's subsidiaries to the personal accounts of VGS, his relatives and entities controlled by him and/or his family members, as loans and advances that were never returned to CDEL/MACEL. 14. The modus operandi of the alleged diversion of funds discovered by the ....
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....d their audit report on 25.11.2020. 18. After detailed scrutiny of the information shared by SEBI, NFRA suo motu initiated proceedings under section 132(4) of the Act and the Audit File of CDEL for Financial Year 2019-20 was called for. Based on an examination of the Audit File and other materials on record, each of which was shared with the noticees, a Show Cause Notice ('SCN' hereafter) dated 17.01.2024 under section 132(4) of the Act, was issued and served upon the Auditors, charging them with the following professional misconducts a) Failure to disclose a material fact known to them which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where the Statutory Auditors are concerned with that financial statement in a professional capacity. b) Failure to report a material misstatement known to them to appear in a financial statement with which the Statutory Auditors are concerned in a professional capacity. c) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties. d) Failure to obtain sufficient information which is necessary ....
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.... of place for us to note that the Standalone Financial Statements of CDEL reveal investments totaling Rs 1,866 crores in its subsidiaries and loans amounting to Rs 1,751 crores to these subsidiaries. These subsidiaries extended loans to various related parties. Notably, CDEL's investments in subsidiaries and loans to them constituted 97% of the SFS balance sheet, which had a total size of Rs 3,711 crores. 21. We note that the Auditors gave a Disclaimer of Audit Opinion on CFS, on the basis of inter alia not obtaining audit evidence about appropriateness of transactions with MACEL and recoverability of Rs 3,512 crores from MACEL, a promoter entity. It is important to note that following the suicide of CDEL's Chairman (VGS), in July 2019, an investigation led by a former CBI official and Agastya Legal LLP uncovered significant financial irregularities like questionable loans to MACEL, understated balances, the use of pre-signed cheques, and diversion of funds for the private investments of promoters. The Auditors had access to this investigation report dated 24.07.2020 which clearly detailed the irregularities in CDEL's financial statements. Specifically, the substanti....
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....CARO. 23. The Firm and the EP denied this charge and replied as under:- a) The Firm was statutory auditor of CDEL only and not any of its subsidiaries. b) There was no reason to suspect fraud in financial reporting of CDEL. Further, findings of the investigation report of Agastya Legal LLP (investigation report) supplied by CDEL to the Firm did not give any reason to believe that any fraudulent transactions had occurred in CDEL. c) They had given disclaimer of opinion in their audit report demonstrating exercise of professional skepticism and judgement. d) There was no failure on their part to evaluate fraud risk in CDEL. There was no diversion of funds from CDEL and funds were allegedly diverted from subsidiaries of CDEL. Source of lending by subsidiaries of CDEL to MACEL was not CDEL. e) They had no obligation to evaluate fraud risk in any of the group companies other than CDEL. f) They had no access to the books of subsidiaries of CDEL audited by other auditors. g) They had communicated with TCWG (TCWG) - Those Charged With Governance, Audit Committee and management about these transactions. h) Disclaimer....
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....goods & rendering. of services 0.00 64.82 Balance of Loan received (Liability) 0.00 11.68 a) The Auditors took a stand that they were the Statutory Auditor of CDEL only and not of any of its subsidiaries. In this connection, we note that paragraph 10 of SA 600 provides that principal auditor would normally be entitled to rely upon the work of component auditors unless there are special circumstances to make it essential for him to visit the component and/or examine the books of accounts and other records of the said component. The large quantum of funds given to MACEL is given in Table 2 above. Further, the investigation report of Mr. Ashok Kumar Malhotra and Agastya Legal LLP available to the Auditors, clearly highlighted several red flags like unusual movement of funds from subsidiaries of CDEL to MACEL without any commercial sense, evergreening of loans, signing of blank cheques etc. Further, SFS of CDEL show investments of Rs 1,866 crores in its subsidiaries and Loans of Rs 1751 crore to its subsidiaries. These investments and loans were 97% of the SFS balance sheet size of Rs 3,711 crores which was under full scope of audit by the Auditors. Th....
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.... of these transactions and recoverability of Rs 3,512 crores dues from MACEL and it was evident from the material available with the Auditors that these transactions were outside the normal course of business of CDEL and its subsidiaries. The investigation report of retired DIG of CBI has mentioned about absence of commercial sense to lend huge funds to MACEL at para 8.3.7 of the report, which is quoted hereafter "However, the question that no one seems to have put forth is why a Company with a paid-up capital of less than Rs 10 lacs be advanced gargantuan sums of money aggregating to several Crores of rupees, while the legality of these transactions may well and truly be unquestionable, the fact of the matter remains that these transactions did not make any commercial sense to us. In retrospect, an analysis of the transaction between the Company and its subsidiaries on one hand and MACEL on the other, clearly brings about the fact that these transactions though couched in all legalities, disclosure norms and meeting the imperial standards of all regulations probably did not meet the simple test of commercial expediency". (Emphasis added). Despite such a clear report in hand, the A....
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.... 2015-16 to FY 2018-19. The substantial loans and advances made to a promoter group under the pretext of goods supply is unusual for a listed company like CDEL. The Auditors' reply that there was no reason to suspect fraud, is just not acceptable given the background and the circumstances when they took up this Audit. The absence of an inquiry into such a significantly high advance and the absence of evaluation of fraud risk reflect a complete absence of professional skepticism and due diligence on the part of the Auditors. e) Further, according to CDEL's Standalone Financial Statements, the company extended loans totaling Rs 1,832.02 crores to its subsidiary, Tanglin Developments Ltd. (TDL), with Rs 1,746.10 crores outstanding as of 31.03.2020. The financial statements of TDL indicate that: (a) Rs 609 crores was recoverable from MACEL; (b) Rs 511 crores were recoverable from GVIL (GVIL) - Giri Vidhyut (India) Limited, a subsidiary of TDL, which is a subsidiary of CDEL, which in tum was to recover Rs 370 crores from MACEL; (c) Rs 954.26 crores were recoverable from TRRDPL (TRRDPL) - Tanglin Retail Reality Developments Private Ltd, a subsidiary of a subsidiary of TD....
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....aintain professional skepticism recognizing the possibility of existence of material misstatement due to fraud. Para 32 (c) of SA 240 further requires an 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. g) The investigation report of retired DIG of CBI came on July 2020, thereafter the Auditors were appointed in Aug 2020. The Auditors had access to this investigation report which contained clear details about diversion of funds to promoter entity without commercial sense, evergreening of loans and signing of blank cheques. The Auditors performed audit for four months and issued audit report on 25.11.2020. Thus, they had four months to evaluate fraud and communicate with Those Charged With Governance (TCWG), the Audit Committee and Management regarding the suspicious fraudulent transactions. SA 260 (Communication with Those Charged with Governance) required the Auditors to communicate with TCWG at planning st....
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.... -72.38 Receipt from MACEL 23.90 -48.48 Payment to MACEL 24.01 -72.49 Receipt from MACEL 17.10 -55.39 Payment to MACEL 19. 59 -74.98 Total 65.50 65.50 b) Evidence of evergreening of loans through circular transactions is also apparent in the bank statements of CDGL with Induslnd Bank. Had the Auditors reviewed CDGL' s bank statements for April 2019, they would have uncovered this manipulation. Similar patterns of loan evergreening through structured fund circulation were observed in other subsidiaries, including TDL, GVIL, and TRRDPL. This issue was highlighted in the investigation report by Mr. Ashok Kumar Malhotra. Despite this, the Auditors failed to apply adequate professional skepticism and did not examine the bank statements of these subsidiaries, particularly those with significant transactions. The reply of the Auditors that evergreening happened in subsidiaries only and not in CDEL, is very concerning. By stating this the Auditors are absolving themselves of any action due on their part when there is a report of an inquiry done at the behest of the Auditee company,....
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....n of funds from CDEL and funds were allegedly diverted from subsidiaries of CDEL. Source of lending by subsidiaries of CDEL to MACEL was not CDEL. 27. The Auditors reliance on the claim that they were not required to evaluate fraud risk in subsidiaries as provision for significant amount was made by the subsidiaries in respect of land advance given to related parties is an oxymoron I reveals a flawed understanding of the work and responsibility of a principal Auditor. This was also a special circumstance envisaged in paragraph 10 of SA 600 discussed earlier in this Order. Therefore, the Auditors were required to evaluate fraud risk in these transactions also. Despite knowing that such unusual transactions had caused significant loss to the shareholders ofa listed company, the Auditors did not perform their statutory duty diligently and were then seeking refuge under SA 600. It is important to note that any loss to a holding company on account of any fraudulent transaction in a subsidiary, is ultimately borne by the stakeholders of the holding company who solely rely on the auditor of the holding company. In many cases financial statements of subsidiaries are not available in pub....
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....antage". The diversion of Rs 3,512 crores to MACEL without any business purpose resulted in the overstatement of receivables in the consolidated balance sheet of CDEL. Thus, the Auditors understanding of the issue as displayed in his reply is appalling. 30. The above analysis clearly shows absence of professional skepticism and due diligence; and absence of appropriate audit procedure to report in the Independent Auditor's Report, a diversion of funds which had already been detected. Granting of abnormal amount of loans and advance to MACEL and land advance to other related parties without any business rationale; and evergreening of loans through structured circulation of funds were clear indications of diversion of funds. It is also evident from above analysis that despite having adequate evidence that an offence of fraud had been committed in the company, the Auditors failed to evaluate and report the fraud to the Central Government under Section 143 (12) of the Act. On the contrary, they reported Para X of Annexure -A (CARO report) of Independent Auditor's Report dated 25.11.2020 on SFS that no material fraud by or on the company had been noticed or reported during th....
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.... a) Section 185 of the Act does not apply to these transactions as loans were given to subsidiaries in which none of the directors of CDEL had any interest. b) No part of the funds given by CDEL to TDL was diverted to MACEL. The source of the loan given to TDL was the sale price of Mindtree shares held by CDEL. A part of the sale proceeds was utilised to repay the loan of TRRDPL (TDL's subsidiary). These transactions were verified by the EP with supporting documents. c) They verified the guarantees, guarantee working and loan agreements. 34. We have considered the replies and proceed to evaluate the same as under: a) Clause (iv) of the CARO requires the auditor to report inter alia in respect of loans, investments, guarantees, security, whether provisions of sections 185 of the Companies Act have been complied with, giving details thereof in case of non-compliance. In this case, the Auditors reported that the Company has complied with the provisions of Section 185 of the Act with respect to loans advanced and investments made and securities and guarantees given. b) Section 185(2) of the Act provides that: "A company may ad....
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....as applicable to these transactions. d) With respect to utilization of funds, the details given in paragraph 24(e) of this Order show that TDL did not utilize the proceeds of loans given by CDEL for its principal business activities but diverted the funds to MACEL through its subsidiaries. This is also corroborated from the preceding para that funds were diverted by TRRDPL to MACEL by using pre-signed blank cheques. Thus, the Auditors' reply that funds of CDEL were not diverted to MACEL is not accepted. e) With respect to verification of guarantee of Rs 100 crores provided to the lender of CDH&RPL, perusal of the audit work papers AWP - current file standalone - 12.6.3-Financial Guarantee workings quoted by the Auditors in their replies shows that this work paper contains details of the guarantees and calculation of guarantee commission etc., but this work paper does not have evidence that the Auditors had verified whether CDEL passed special resolution before providing guarantee and whether CDH&RPL had utilised the proceeds of loans for its principal business activities. Thus, the Auditors' reply on this part of the charge is also not accepted. 35. In ....
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....at the client might be involved in money laundering activities Refer para 28(a) & 29 of SQC 1 and para 12 of SA 220. 39. They were further required to communicate with the predecessor auditor in compliance with relevant ethical requirements; major issues including the application of accounting principles or of auditing and reporting standards; and the audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances Refer para 12 & A21 of SA 300. 40. The sequence of events described below indicates that the Auditors accepted the audit of CDEL in haste without completing mandatory activities : * On 17.07.2020, i.e. after the close of FY under question, the outgoing auditor of CDEL resigned citing low level of audit fee. * On 01.08.2020, the Auditors prepared the client acceptance form and 'LRR Audit requirements_O1082020.pdf'. This is not a common template but the Auditors had recorded on 01.08.2020 in this AWP that they had obtained documents relating to 18 specific requirements like financial statements with detailed sub-schedules and trial balances for the year ended 31st March 2019 and three quarters of FY 2019-....
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..... 42. From the above, it is clear that the Auditors (a) did not perform. procedures to evaluate integrity of CDEL's promoters despite knowing about financial irregularities committed by CDEL's promoters; and (b) accepted the appointment as statutory auditor of CDEL and also started audit activities even before getting the no-objection letter from the outgoing auditor. Thus, it is proved that the Auditors did not exercise due diligence before accepting the audit engagement of CDEL, and violated paragraphs 28 & 29 of SQC J, paragraphs 12 of SA 220 & paragraphs 12 & A21 ofSA 300. IV. Lapses in forming audit opinion (This matter pertains to SFS as well as CFS) 43. The Auditors were charged with failure to exercise due diligence and for gross negligence in preparation ofthe Independent Auditor's Reports and violation of para 19 (c), 28 & para 29 of SA 705 (SA 705) - "Modifications to the Opinion in the Independent Auditor's Report". and para 8 (a) & 9 (c) of SA 706 (SA 706) - "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report". due to following- a) In the Disclaimer of opinion section, they reported that t....
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....t opinion on the financial statements; and (c) The statement about auditor independence and other ethical responsibilities required by paragraph 28(c) of SA 700 (Revised)". (emphasis added). In the instant case the audit reports on SFS and CFS show that SA705, quoted above which required them to specifically mention the fact that they were not able to obtain sufficient appropriate audit evidence, was not done. On the contrary they wrongly reported that they had obtained sufficient appropriate audit evidence. Relevant portion of the audit report on CFS is "We believe that the audit evidence obtained by us along with the consideration of audit reports of the other auditors referred to in sub-paragraph (a) of the Other Matters paragraph below, is sufficient and appropriate to provide a basis for our audit opinion on the console dated financial statements." despite giving a disclaimer of opinion both on the SFS and the CFS. This is an evidence of gross negligence. b) The Auditors admitted the charge relating to wrong reporting of KAM in respect of the matters included in the Disclaimer of Opinion section of the audit report but stated that the intention behind incl....
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.... they had disclaimed audit opinions. c) In respect of the charge relating to wrong inclusion of matter in EOM paragraph which were neither presented nor disclosed in the financial statements, the Auditors replied that those EOM paragraphs were included as matter of abundant caution to alert the shareholders about the issues of magnitude that had arisen for consideration and better information. This reply is not accepted in view of para 8 (a) of SA 706 which states that: "If the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor's report provided: (a) The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter. " (Emphasis added). Para 9 (c) of SA 706 states "When the auditor includes an Emphasis of Matter paragraph in the auditor's report, the auditor shall indicate that the auditor's opinion is not modified....
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....idence.....". It is important to understand that Audit cannot be performed without obtaining Sufficient Appropriate Audit Evidence. 45. From the above, it is proved that the Auditors did not exercise due diligence and were negligent in preparing the Independent Auditor's Reports and violated para 19 (c), 28 & 29 of SA 705, and para 8 (a) and 9 (c) of SA 706. V. Lapses in the Engagement Quality Control Review (This matter pertains to SFS as well as CFS) 46. The Firm, EP and EQCR were charged with violation of paras 60 to 73 of SQC l and paras 19 to 21 of SA 220 as there is no record in the Audit Files that the EQCR performed an engagement quality control review providing an objective evaluation of the significant judgments made by the engagement team and the conclusions reached in formulating the report in respect of charges mentioned at points I to IV above. 47. Para 60 to 73 of SQC 1 provides detailed prescription regarding establishing policies and procedures about Engagement Quality Control Review; Nature, Timing and Extent of the Engagement Quality Control Review; and Documentation of the Engagement Quality Control Review. Further, paras 19 to 21 of SA 220 provi....
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....is certificate was signed on 27.11.2020 after signing of the Audit Report on 25.11.2020. This is a clear violation of para 19(c) of SA 220 which provides that the auditor will not date the audit report until the completion of engagement quality control review. Para 61 of the SQC 1 states that the firm's policies and procedures should require the completion of the engagement quality control review before the report is issued. To this charge, the Auditors and EQCR replied that the audit report was signed after the EQCR had reviewed the working papers remotely, however, due to the prevalence of covid in his family, his signature was obtained on 27.11.2020. 53. NFRA asked the auditors to provide evidence of remote working, to which they responded on 4th June 2024 and provided a medical certificate according to which EQCR and his wife were COVID infected during this period. This part of the reply is also not accepted as there is no evidence that EQCR did the work or completed his review before issue of audit report i.e. even email confirmation from EQCR is not available. Thus, there is no evidence of any work done by the EQCR, the only document relied upon, is dated after the dat....
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....it was conducted properly which makes it clear that the quality control systems, policies and procedures were in proper order. 57. We do not agree with the contention of the Firm in this regard. Mis Venkatesh & Co. is the legal entity appointed under Section 139 of the Act as the auditor of CDEL. Hence the report issued by the legal entity, signed by EP, is the primary responsibility of the legal entity issuing the report under the Act. We have proved the shortcomings in the Audit Report in the previous sections of this Order. Hence, apart from the individuals delegated by the Firm to carry out this audit, the Firm (as the appointed statutory auditor has the primary responsibility) is also answerable for its report issued under the Act, as further explained in the following paragraphs. 58. Paragraph 2 of SA 220 stipulates that Quality control systems, policies and procedures are the responsibility of the audit firm. Under SQC 1, the firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and regulatory and legal requirements; and ....
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....ct emanates from this basic premise. However, there is not adequate evidence of effective supervision and oversight by Mis Venkatesh & Co. Providing the ET with a quality policy and tools are not good enough to establish effective supervision as envisaged in SQC-1. Had the Audit Firm discharged its supervisory responsibilities timely and effectively such major lapses in the audit could have been avoided. Therefore, Mis Venkatesh & Co. is responsible for the misconducts committed by the EP and EQCR. 63. Due to these fraudulent transactions the consolidated financial statements of CDEL were grossly misstated. The Auditors in audit reports issued by the Audit Firm had disclaimed the opinion. Their contention about disclaiming the audit opinion is not logical as an auditor is required to comply with Laws and auditing standards even if he disclaims his opinion. Further, the Auditors were required to comply with section 143(12) of the Act and CARO even in case of Disclaimer of Opinion. Had the Auditors properly discussed the audit procedures with the component auditors in relation to the significant fraud risks, advised them accordingly, and exercised due professional skepticism throu....
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....eport lists key Audit Quality Indicators reported by 9 leading audit firms (refer to page 14 of the report). This Audit Quality Indicators make it clear that in, actual practice across the world, the Audit Firm has an equally important role as that of EP to ensure overall quality in any audit undertaken by the Firm. Other points raised by the Firm, the EP and EQCR 66. By referring to Rule 8(1) of NFRA rules 2018, it was contended that in the instant case there was no failure of accounting standards, assuming but not admitting any failure of auditing standards simpliciter would not lead to a charge of professional misconduct. This contention is not satisfactory in view of Rule 11(1) of NFRA rules 2018 which provides that a show cause notice under section 132(4) of the Act can be issued based on inter alia the material available on record. In this case, the Show Cause Notice was issued based on the material available on record. Further, violation of accounting standards is not a prerequisite for making a charge for violation of auditing standards. 67. It was further contended that the Auditor had disclaimed his opinion therefore the adherence or non-adherence of auditing sta....
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....sides barring him from being an associated person of a registered public accounting firm. b) Similarly, failures to perform audit procedures and exercise professional skepticism in related party transactions have invited serious action by audit regulators in other jurisdictions too. For example, in case of Cheryl L. Gore, CPA and Stanley R. Langston, CPA, PCAOB (PCAOB) Release No. 105 2021-020 dated 14.12.2021 had observed that "Gore failed to obtain sufficient appropriate audit evidence and to perform sufficient procedures concerning whether Issuer A 's .financial statements accurately disclosed its related party transactions" "Gore failed to exercise due professional care, including professional skepticism, and failed to obtain sufficient appropriate audit evidence in connection with Issuer A 's identification, accounting, and disclosure of related party relationships and transactions Gore failed to perform any of these procedures during the 2016 Audit" (Emphasis supplied). This case resulted in debarment and imposition of monitory penalty on the auditors. c) In a disciplinary case As per the decision cited in the Code of Ethics 2009, issued by ICAI (S.N....
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....he EP committed professional misconduct as defined by clause 5 of Part I 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 the Firm and the EP failed to disclose in the Audit Reports the fraudulent diversion of funds to promoter entity as explained in Section - C-I above. b) The Firm and the EP committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that a chartered accountant in practice 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 Firm and the EP failed to disclose in the Audit reports the fraudulent diversion of funds to promoter entity, which resulted in the material miss....
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....e First Schedule of the CA Act, which states that a chartered accountant in practice is guilty of professional misconduct when he "accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the restricted certificate rules 1932 without first communicating with him in writing". This charge is proved since the Firm and the EP failed to communicate with the outgoing auditor as explained in Section C-III above. F. PENALTY & SANCTIONS 70. Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional 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. 71. This Order has detailed out all the lapses in Audit and the non-compliances with the SAS, Quality Control Standards and Laws by the Auditors and EQCR. The death of VGS (the then Chairman of CDEL), the key player of the entire financial fraud, happened in July 2019 and the Auditors, who were appointed in Aug 2020, had sufficient time to evaluate all the parameters/areas spelt out in this ....