TaxTMI 
TaxTMI 
2026 (7) TMI 847
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....F-23/46/2021 in Company Appeal (AT) No. 200 of 2022 dated 12.09.2022 and Impugned Order no. 009/2024 in Company Appeal (AT) No. 177 of 2024 dated 23.04.2024, passed by the National Financial Reporting Authority, New Delhi (NFRA). 2. National Financial Reporting Authority ("NFRA") is the Respondent herein. Appeal in Company Appeal (AT) No. 200 of 2022 3. The Appellant, CA Som Prakash, submitted that by way of the impugned order, the Respondent has proceeded to hold the Appellant guilty of professional misconduct and has imposed severe civil and professional consequences upon him, namely, (i) imposition of a monetary penalty of Rs. 3,00,000/-, (ii) debarment for a period of three years from being appointed as an auditor or internal auditor or undertaking audit assignments in relation to financial statements or internal audit of any company or body corporate, and (iii) direction to undergo training on Standards on Auditing and Indian Accounting Standards and submit proof thereof within 180 days from the order becoming effective. 4. The Appellant submitted that he is a practicing Chartered Accountant of long standing and is a partner in the firm M/s S. Prakash Aggarwal & Co....
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....was withheld. 8. The Appellant submitted that nonrecognition of interest was not a matter of non-compliance of Ind AS 109 to fall with section 129(1) of the Companies Act, 2013 nor noncompliance to be treated as aberration under Section 129(5) of the Companies Act, 2013. This being a very technical matter, was within the decision-making ability of the company management, and hence was not a significant matter that required any discussion with the management and recording as per Para 10 of SA 230, particularly because the company had duly disclosed the facts of non-recognition of interest Note 33(i)(a) of the Annual Financial Statement of 2019-20. 9. The Appellant submitted that the Annual Financial Statements of VWL were thereafter examined by SEBI, and clarification was sought from the Appellant regarding non-provisioning of interest. The Appellant, by communication dated 13.07.2021, furnished detailed explanations clarifying that the Company had not removed or extinguished the underlying borrowing obligations and that the accounting treatment adopted did not violate Para 3.3.1 of Ind AS 109. 10. The Appellant submitted that the explanation furnished before SEBI was found....
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....y specific material fact which was required to be disclosed but remained omitted. The Appellant submitted that if the allegation concerns non-provisioning of interest on borrowings classified as NPAs, the same already stood disclosed in Notes to Accounts. In fact, the Show Cause Notice itself drew information and figures from the audited financial statements and cross-referenced disclosures already available therein. Therefore, the allegation of non-disclosure becomes self-contradictory and unsupported. 14. The Appellant submits that the second charge under Clause (6) of Part I alleging failure to report material misstatements proceeds entirely upon NFRA's disagreement with the accounting interpretation adopted by the Appellant and not upon identification of any false entry, fabricated disclosure or concealed financial fact. The Appellant submitted that his understanding of Ind AS 109 was that where borrowers are unlikely to settle liabilities strictly in accordance with original contractual terms due to financial distress, expected future cash flows may require evaluation in accordance with actual settlement expectations and measurement principles. Whether such interpretation i....
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....during the year, was continuing in the books of accounts of the company and in the financial statements. The Appellant also stated that a proposed One- Time Settlement (OTS) was relevant for determination of interest is not the provisions regarding extinguishment of liability as wrongly perceived by NFRA and on the contrary the interest is to be recognized based on the estimated future cashflows towards interest in the circumstances of the case of OTS in the anvil, for which the company had remitted Rs 2.15 Crores to the Banks. 18. The Appellant submitted that reliance upon alleged deficiency in audit documentation cannot substitute proof of deficient audit performance. Audit working papers are evidentiary instruments supporting audit conclusions and are not themselves the sole measure of audit quality. The Appellant submitted that the Standards on Auditing do not require every professional discussion, judgment, clarification, reconciliation or evaluation to be separately documented in exhaustive detail. Matters resolved through professional engagement and reflected in final audit outputs cannot be treated as absent merely because every deliberative step was not independently pr....
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....appropriate audit evidence" and SA 500-Para A2 state that "Audit procedures to obtain audit evidence can include inspection, observation, confirmation, recalculation, re-performance and analytical procedures, often in some combination, in addition to inquiry". The Appellant also explained that SA 500- Para A 6 mention "Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, and thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion, is a matter of professional judgment". In view of these, the Appellant emphasized that despite the mandatory applicability of SAs, application of all SAs and all provisions cannot be mandatory in every audit, and the judgment of an auditor plays a vital role. 22. The Appellant submitted that the only issue relevant here is whether not recognizing interest in the circumstances of the case was compliance of Ind AS 109 or not, which was a technical matter that was not to be addressed or to be discussed with the management, or not to be recorded as in a "minute" because it was a technical interpretation of the EIM in terms of Ind AS 109. The Appellant e....
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....t guilty of professional misconduct without sufficient reason or proof of the listed offences and without testing whether these were grave enough to be treated as professional misconduct, and hence the punishments were travesty of justice. 25. The Appellant further submitted that the impugned order contains observations which appear to interpret candid professional defence as resistance to regulatory authority. Such approach has resulted in conclusions unsupported by objective assessment of audit work undertaken. The Appellant submitted that the sanctions imposed are manifestly excessive and disproportionate. The combined effect of Rs. 3,00,000/- monetary penalty, three-year debarment, and mandatory retraining substantially affects the Appellant's professional standing, livelihood and right to continue practice. 26. The Appellant submitted that findings carrying such severe professional and reputational consequences shall have been supported by clear evidence, reasoned analysis and strict demonstration of statutory misconduct by the NFRA. In the absence of such findings, the impugned order fails to satisfy settled standards of fairness, proportionality and regulatory adjudica....
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....nces of opinion where "firm using a suitably qualified external person(s) to conduct an engagement quality control review" is about establishing policy and procedure by the firm in this respect, as apparent from the other relevant paragraphs No 57-58 of SQC 1 and it does not cast any responsibility on the firm to appoint EQCR. Similarly, Para 71 of SQC 1 also is for addressing a policy matter that a "firm's policies provide for the replacement of the engagement quality control reviewer where the ability to perform an objective review may be impaired to address situations where maintaining objectivity by EQCR gets affected. Provisions in Para 92 of SQC 1 that small firms and sole practitioners may wish to use a suitably qualified external person to carry out Engagement Quality Control Review, is also a matter of policy. 33. The Appellant further contended that the NFRA misread the reference to SQC 1 and auditing standards such as SA 200, SA 220, SA 230, SA 260, SA 620, and SA 700 as though those references created direct substantive liability on the firm for audit performance. The Appellant submitted that, under SA 200, responsibility for the engagement and its performance li....
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....ttributable to the engagement partner, and repeats charges already raised in earlier proceedings against the EP. The Appellant contended that, for these reasons, the impugned order deserves to be quashed. 39. Concluding arguments, the Appellant requested this Appellate Tribunal to allow the appeal and set aside the impugned order dated 23.04.2024 against the firm. 40. On the other hand, the Respondent, NFRA, denied the averments of the Appellants, in both appeals as misleading and baseless. Company Appeal (AT) No. 200 of 2022 41. The Respondent submitted that M/s S. Prakash Aggarwal & Co. acted as the statutory auditor of VWL, a listed company having and the Appellant CA Som Prakash Aggarwal acted as the EP for the audit assignment. Since VWL was listed on both BSE and NSE, preparation and presentation of its annual financial statements were mandatorily governed by Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 requiring compliance with notified Indian Accounting Standards including Ind AS 109 relating to Financial Instruments. Consequently, the Appellant was under heightened statutory and professional obligations while conducting the audit and expres....
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....ry auditing requirements. 45. The Respondent submitted that after detailed scrutiny of the audit file, correspondence, explanations and underlying financial statements, an apparent case of professional misconduct emerged against the Appellant CA Som Prakash and accordingly Show cause Notice dated 29.06.2022 was issued under Rule 11(1) of the NFRA Rules, 2018. Sufficient opportunities were granted to the Appellant to respond and participate in proceedings. The Appellant submitted written responses dated 27.07.2022 and sought personal hearing. Such request was accepted and hearing was initially scheduled through Video Conferencing and thereafter rescheduled upon the Appellant's own request. The hearing was ultimately conducted on 25.08.2022 wherein the Appellant reiterated his written submissions. Thus, principles of natural justice were fully complied with and no procedural prejudice whatsoever was caused. 46. The Respondent NFRA submitted that upon comprehensive consideration of all records including audit files, written explanations, oral submissions and applicable legal framework, serious violations were established against the Appellant. The Respondent found that the Appel....
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....9. The Respondent further submitted that the Appellant's interpretation of the principles governing measurement of financial liabilities under Ind AS 109 was fundamentally erroneous and contrary to the statutory accounting framework applicable to listed entities. It is submitted that Ind AS 109 requires financial liabilities to continue to be recognised and measured until extinguishment in accordance with the prescribed standards and does not permit assumptions of reduced future cash outflows merely because negotiations for waiver or settlement may have commenced. The Respondent contended that the Effective Interest Method ("EIM") under Appendix A of Ind AS 109 expressly requires estimation of expected cash flows by considering contractual terms of the financial instrument while excluding assumptions based upon expected credit losses or speculative waivers. Therefore, unless and until the liability stood legally modified, discharged or extinguished, interest obligations continued to subsist and were required to be recognised in the financial statements. 50. The Respondent submitted that the accounting treatment accepted by the Appellant resulted in a material misstatement in the....
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....ral formality but constitutes the foundational evidence of work performed, conclusions reached and professional judgments exercised during the audit process. Paragraph 7 of SA 230 mandates timely preparation of audit documentation and Paragraph 8 specifically requires documentation of significant matters, conclusions reached and significant professional judgments made during audit. The Respondent submitted that these requirements acquire greater importance in matters involving listed entities and material accounting assumptions. 54. The Respondent submitted that the Appellant's position that oral explanations or internal discussions could substitute formal audit documentation stands expressly contradicted by the Standards on Auditing. SA 230 recognises that oral explanations may only supplement documentation already existing in audit records and cannot independently establish performance of audit procedures. Audit files must speak for themselves and permit an experienced auditor, without prior involvement in the engagement, to understand the procedures performed, evidence obtained and basis of conclusions. In the present case, such standard was not satisfied and the audit record....
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.... and supported by findings derived from audit files, financial records, responses furnished by the Appellant and applicable statutory standards. The conclusions reached by NFRA were neither presumptive nor punitive in nature but flowed from objective evaluation of evidence and legal obligations cast upon auditors of public interest entities. The Respondent contended that the Appellant's attempt to portray the proceedings as mere disagreement over professional interpretation is misconceived since the findings arose from demonstrable failures in accounting evaluation, audit execution, documentation, quality control and regulatory compliance, all of which directly impacted the truthfulness and fairness of audited financial statements. 59. The Respondent further submitted that the Appellant's challenge to the findings under Clause (5) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 is wholly unsustainable. The Respondent contended that the Appellant was under a clear professional obligation to disclose all material facts necessary for proper understanding of the financial statements where he was associated in a professional capacity. In the present case, the ....
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....ismissed as administrative imperfections but constitute substantive violations affecting the audit process itself. 63. The Respondent submitted that the challenge to the findings under Clause (7) Schedule to of ICAI Act, 1949, namely lack of due diligence and gross negligence, deserves rejection. The Appellant relied substantially upon management assertions and alleged settlement expectations without independent verification from lending institutions and without preserving documentary evidence supporting such reliance. The Respondent contended that professional diligence requires active verification, corroboration and challenge, particularly where financial liabilities materially affect profitability and solvency indicators. The Appellant's conduct revealed absence of professional scepticism expected of an independent statutory auditor. 64. The Respondent further submitted that findings under Clause (8) Schedule to of ICAI Act, 1949, namely failure to obtain sufficient information necessary for expression of audit opinion, are fully supported by the record. It is submitted that the Appellant did not obtain adequate evidence regarding borrowings, interest obligations, correspo....
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....04.12.2023 was issued to the Firm under Rule 11(1) of the NFRA Rules, 2018, granting it reasonable opportunity to respond. The Firm sought multiple extensions of time and was granted sufficient opportunities, and the Appellant eventually submitted on 14.02.2024. 68. The Respondent contended that after careful perusal of the entire record, including the audit file, the Firm's reply to the SCN, and all supporting documents, it was established that the Appellant Firm failed to discharge its statutory responsibilities. The Firm, being primarily responsible for establishing and maintaining a robust system of quality control, failed to ensure that the firm and its personnel complied with professional standards, regulatory and legal requirements, and that the audit reports issued were not appropriate in the circumstances. This failure constitutes professional misconduct on the part of the Firm. 69. The Respondent submitted that the scheme of the Companies Act, 2013, the Standards on Auditing (SAs), and the NFRA Rules, 2018 explicitly impose independent obligations upon the audit firm itself, apart from the individual auditor/Engagement Partner. The Act also provides for specific pen....
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....mine the integrity of the auditing profession and financial reporting in the country. The Respondent submitted that the Firm, having been appointed under Section 139, is fully accountable for compliance with Section 143 of Companies Act, 2013. The argument that the Firm's role is confined only to "establishing" a system is misconceived. SA 220 read with SQC-1 requires the Firm to "reasonably assure" compliance and quality of reports, which was not done in this case. The Respondent stated that non-compliance with mandatory auditing standards amounts to professional misconduct under the Chartered Accountants Act, 1949, particularly Clauses 5, 7, and 9 of Part I of the Second Schedule. The Firm, as the appointed auditor, remains vicariously and directly responsible for misconduct committed by its partners/employees in the course of the audit and cited judgement of Hon'ble Delhi High Court in case of Deloitte Haskins & Sells LLP Versus Union of India and Another [2025 SCC OnLine Del 641] establishing these principles. 75. The Respondent contended that the Firm, the EP and the EQCR are jointly and severally liable. The Firm has a continuing duty to maintain and enforce quality con....
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....mpugned orders, the grounds of appeal, the pleadings and the written submissions filed by the parties. We now proceed to pass this common judgment in following part. Company Appeal (AT) No.200 of 2022 82. Looking to the background of the case, we are of the opinion that issues are required to be framed the issues framed for determination focus on critical accounting and auditing standards in case of CA Som Prakash in Company Appeal (AT) No. 200 of 2022 are as under: - Issue No. I: RBI IRACP Norms vs. Borrower's obligations: Whether RBI's prudential norms (IRACP Norms) that stop banks from recognizing income on NPA accounts also extinguish the borrower's legal obligation to recognize and accrue interest expense in its own financial statements. Issue No. II: Ind AS 109 & Interest recognition: Whether the Effective Interest Rate (EIR) method under Ind AS 109 allows a borrower to substitute expected One-Time Settlement (OTS) cash flows for contractual cash flows when computing interest expense on NPA-classified borrowings. Issue No. III: Violation of SAs, Companies Act, 2013 and Chartered Accountant Act, 1949. Issue No. IV : Modifie....
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....that as at the balance sheet date of 31 March 2020, all three consortium lenders had already classified the Company's accounts as Non- Performing Assets (NPA). The Company continued to hold total borrowings of approximately Rs. 135.65 crores as on 31.03.2020. 86. We further note that on 25.08.2021, the Respondent NFRA received information from the SEBI in the case of VWL, alleging that the Company had not recognised interest expense on its borrowings from banks in its Statement of Profit and Loss for FY 2019-20, resulting in overstatement of profits. This information set off the chain of disciplinary proceedings that culminated in the impugned orders against EP & the Firm in Company Appeal (AT) No. 200 of 2022 & Company Appeal (AT) No. 177 of 2024 respectively. 87. We have already noticed that the firm i.e., M/s S. Prakash Aggarwal & Co. was the statutory auditor of VWL for FY 2019-20. CA Som Prakash Aggarwal was the sole proprietor of M/s S. Prakash Aggarwal & Co. and was the Engagement Partner for this audit of VWL. Issue Wise Discussion 88. Now, we will discuss various issues framed by us in para 82 89. Issue No. I: RBI IRACP Norms vs. Borrower's obligatio....
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....2022, and the Resolution Professional admitted total interest claims of Rs. 124.28 Crores including prior period interest of Rs. 87.07 Crores from the consortium banks. Prima facie it indicates that the obligation on part of VWL was never waived by Bank and always existed for VWL. 93. We would now examine this aspect from Appellant's view point who pointed out that the Company's accounting treatment rested on few assumptions. Assumption I - Since RBI's prudential norms (IRACP Norms) required the banks to stop recognising interest as income in their books once the account was classified as NPA, the Company was similarly not required to recognise or provide for interest in its books. 94. At the outset, we will put to test validity of the arguments of the Appellant vis-à-vis finding of the NFRA in order to determine Issue No. I. The Assumption I by the Appellant (as stated above) is built on a fundamental confusion between lender- side income recognition rules and borrower-side liability recognition obligations. It is the case of Appellant that both operate in conjoint manner and in fact are two sides of the same coin. However, we observe that the two operate unde....
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.... the loan/facility agreement executed between the parties, the applicable Accounting Standards and the Companies Act, 2013. We hold that none of these are affected by the RBI's IRACP norms. 99. During pleading, it was brought to our notice that the Respondent NFRA issued Circular dated 20.10.2022, in the wake of this very case, for bringing clarity to others. This reads as under :- "It has come to the attention of the NFRA during a disciplinary action under Section 132(4) of the Act for professional misconduct of the statutory auditor of a listed company (Vikas WSP Limited), that the company in the Financial Statements of 2019-20, had discontinued accrual/recognition of interest expense on its bank borrowings, which had been reportedly classified as Non-Performing Asset (NPA) by the lender banks and for which the company was negotiating One Time Settlement with the banks. This accounting treatment was in contravention of the provisions of applicable accounting standard, as these borrowings as well the interest payable thereon continued to be the financial liabilities of the company and were required to be accounted for as amortised cost in accordance with the requir....
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....nd AS 10 (Events after the Reporting Period), only events occurring after the balance sheet date that provide evidence of conditions existing at the balance sheet date may be reflected in the financial statements. An alleged OTS concluded after 31.03.2020 cannot be used to extinguish a liability that undeniably existed on 31.03.2020. (v) The Respondent NFRA found, and we also noticed that the EP himself admitted during the personal hearing that while he had seen the OTS proposal, he had never documented it. We are of the firm view that OTS proposal that was never documented, never sanctioned by the bank's and never legally executed cannot serve as the basis for de-recognising a financial liability of interest. (vi) The CIRP proceedings proved this argument wrong in the most conclusive manner possible. The banks filed claims for the interest in CIRP before the IRP. If the interest had been waived even indirectly, the banks would not have filed claims. The admission of claims of Rs. 124.28 Crores by the Resolution Professional is the final and definitive rebuttal of the OTS expectation argument. Thus, assumption of the Appellant's also stands rejected by us i....
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....ise in FY 2019-20 and was overlooked or ignored by the Appellants during audit. 107. Similarly, the Effective Interest Rate ('EIR') is defined in Appendix A of Ind AS 109 as: "The rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability. When calculating the effective interest rate, an entity shall estimate the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) but shall not consider the expected credit losses...." (Emphasis Supplied) 108. The above definition r/w other points of Ind AS 109 clarify that the EIR is calculated considering the contractual terms of the financial instrument and not the expectations of the borrower about future settlements. The definition explicitly states that 'expected credit losses' shall NOT be considered when calculating the EIR. This is critical as the risk that a borrower may not repay is irrelevant to the EIR calculation. The EIR i....
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....he Company were classified as Non-Performing Assets (NPA) in June 2016. However, during the current year, The Company has repaid loan Rs. 19.76 lacs to Punjab National Bank. In accordance with the prudential norms for banks by the Reserve Bank of India, the lender banks have not charged interest on aforementioned export credit facilities extended to the Company upon the classification of the export credit facilities of the Company as NPA. Accordingly, the Company is not making provision for interest on bank borrowings." (Emphasis Supplied) 112. Based on our earlier discussion, we find above Note No. 33(a)(i) does not allow the company to avoid reporting accrued interest. Similarly, the Appellants were also required to emphasise same in Audit report rather than only depending on Note No. 33(a)(i). Thus, we reject the arguments of the Appellant on these aspects. 113. It has been case of the Appellant that when a borrower like VWL is unlikely to settle his loan obligations at contractual terms, because of financial problems, expected future cash flows associated with the loan will not be according to contractual terms, but should be based on the amount at which it wi....
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....nguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability." (Emphasis Supplied) 115. We will also refer to Appendix B, Para 3.3.1of Ind AS 109 which further clarifies that a financial liability is extinguished when the debtor either discharges the liability by paying the creditor, normally with cash, other financial assets, goods or services; or is legally released from primary responsibility for the liability either by process of law or by the creditor. 116. Thus, it is crystal clear that only when legal liability of company is extinguished then only financial liability can be decognised, which is not the case. hence, we do not accept the logic of the Appellant on this issue also. 117. The Respondent's response to the argument was unequivocal and correct, and the NFRA correctly held that the Assumption of no future cash outflow o....
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....recisely the kind of anomaly that should have triggered the highest level of professional scepticism on the part of the Appellant's. Any auditor using basic scepticism in financial analysis during audit would have identified this variance as a major red flag and demanded satisfactory explanation supported by documentation. The EP CA Som Prakash did not do so in case of audit of VWL. 124. Another bone of contentions between parties is regarding Audit Documentations. We observe that SA 230 (Audit Documentation) governs the auditor's responsibility to prepare audit documentation that provides a sufficient and appropriate record of the basis for the auditor's report. Paragraph 8 of SA 230 requires the auditor to prepare documentation that enables 'an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed; (b) The results of the audit procedures performed, and the audit evidence obtained; (c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.' Similarly, Paragraph 10 of SA....
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.... should have been recognised have been recognised; and Accuracy i.e., finance costs have been correctly calculated and further that Occurrence recording finance costs actually occurred. The 80% year-on-year collapse in Finance Cost directly implicated all three assertions. An auditor having Scepticism (discussed earlier while discussing SA 200) while assessing risks under SA 315 would have identified Finance Cost as a 'significant risk' defined in SA 315, as a risk of material misstatement that, in the auditor's judgment, requires special audit consideration. The EP CA Som Prakash either, did not assess this risk at all, or assessed it and then failed to respond to it. We find both of which constitute professional misconduct. 129. We also examine SA 500 (Audit Evidence) which requires the auditor to design and perform audit procedures to obtain sufficient appropriate audit evidence on which to base the auditor's opinion. 'Sufficiency' is the measure of the quantity of audit evidence. 'Appropriateness' is the measure of quality. For the specific assertion of completeness of finance costs in a situation where the auditor knows the borrower has outst....
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....n Accounting Standards (Ind AS) are prescribed under this section via the Companies (Indian Accounting Standards) Rules, 2015. Compliance with Ind AS is accordingly statutory compliance not mere professional best practice. Similarly, Section 143(3)(e) stipulate that the auditor's report shall state whether the financial statements comply with accounting standards under Section 133. The EP's report stated compliance when there was none. Section 143(9) stipulated that every auditor shall comply with the auditing standards. This statutory obligation was violated across multiple standards as detailed above. Section 132(4)(c) mention that where professional or other misconduct is proved, NFRA shall have the power to make an order imposing monetary penalty and/or debarring the member from being appointed as an auditor or internal auditor. This is the provision under which both impugned orders were passed. Chartered Accountant Act,1949 134. We will take into consideration the Schedule II of Chartered Accountants Act, 1949 which describe Professional Misconduct of the Chartered Accountant with respect to present appeal. The relevant clause reads as under: - 135. Clause (5)....
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....a modified opinion under SA 705 (Revised) - specifically, whether the instant facts required at minimum a Qualified Opinion or an Adverse Opinion? 138. As per SAs, Audit Report can be issued by Auditors in various classification. TYPE 1-UNQUALIFIED (CLEAN) OPINION SA 700 (Revised) (Forming an Opinion and Reporting on Financial Statements) requires the auditor to form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework, and to express an unmodified opinion only when so satisfied. It means the auditor found the financial statements to be true and fair in all material respects, with no significant issues, are financial statement clean with no concerns. Everything is properly stated. TYPE 2-QUALIFIED OPINION As per para 7(a) of SA 705 (Revised), the auditor shall express a qualified opinion when: (a) the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (b) the auditor is unable to obtain sufficient appropriate audit evidence on w....
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.... (Revised) gives flexibility to the auditor to add supplementary paragraphs within an otherwise unmodified (clean) report, used to draw the reader's attention to something already disclosed in the financial statements that fundamental to understanding them. The inclusion of an Emphasis of Matter paragraph in the auditor's report does not affect the auditor's opinion. An Emphasis of Matter paragraph is not a substitute for: (a) a modified opinion in accordance with SA 705 (Revised) when required by the circumstances; (b) disclosures in the financial statements that the applicable financial reporting framework requires management to make; or (c) reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity's ability to continue as a going concern. 139. It is the case of the NFRA that EP should have given modified opinion. We have noted the Appellant's reliance on Management Representation Letter dated 24.06.2020. We note that SA 580 (Written Representations) requires written representations from management as part of the audit evidence. Paragraph 6 requires such represe....
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.... 142. We have already examined and noted earlier that the NPA interest misstatement affected: (a) Finance Costs in the P&L - understated by at least Rs. 16.91 crores; (b) Current Liabilities in the Balance Sheet - understated by the same amount; (c) Profit Before Tax - overstated by 88%; (d) Profit After Tax - correspondingly overstated; (e) Retained Earnings - overstated; (f) Net Worth - overstated. The misstatement was not confined to a single line item. It permeated the profit and loss account, the balance sheet, and the statement of changes in equity simultaneously. Conclusion on Issue No. IV 143. Thus, in given circumstances, the EP could have considered modified opinion like an Adverse Opinion or a Qualified Opinion but the EP issued neither and rather issued unmodified opinion which was not correct on the part of the Appellant. 144. Issue No. V: Appointment of EQCR; Whether appointing an Engagement Quality Control Reviewer (EQCR) is mandatory for the audit of a listed entity under SA 220. 145. Now we will review aspect of EQCR as Mandatory for listed entities. 146. We note that the Appellant has submitted that EP's failure to appoint an EQCR, though noncom....
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....ent for listed companies like VWL in terms of SA 220. 151. Issue No. VI: Authority of Standards on Auditing (SAs)Whether Sas issued by the ICAI are mandatory requirements binding on every statutory auditor or if they are merely "guiding principles" allowing unlimited professional discretion. 152. It is the case of the Respondent/ NFRA that Ind AS & SAs are binding on all companies and Auditor respectively and carry legal force in Companies Act, 2013. On the other hand, the Appellant's fairly conceded that, Ind AS & SAs are mandatory but submitted that these Ind AS & SAs also provide reasonable flexibilities for companies and Auditors to exercise their discretion in accordance with Ind AS and SA. The Appellant particularly argued that as Auditor, they have been given choice of adopt particular line in given circumstances. 153. The Appellants contend that Standards on Auditing represent a set of principles affording discretion to auditors, and that an auditor cannot be faulted for adopting alternative approaches consistent with the underlying principles. This seems to be non-convincing as Section 143(9) of the Companies Act, 2013 provides in unambiguous terms that 'Every....
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....tements. It is also a fact that this the systemic impact which made the NFRA Circular in consequence of this case has set a standard for all stakeholders and finally the need for deterrence that the auditors of listed companies must need to be more careful else professional misconduct may result in consequence of penalties. For all the foregoing reasons, this Appellate Tribunal finds no merit in either of the appeals filed by the Appellants on the issue of quantum of penalty. Conclusion on Issue No. VII 158. We find penalty imposed on the Appellant as reasonable and proportionate to professional misconduct. Company Appeal (AT) No. 177 of 2024 159. Now we will deal with the Firm's Obligations for which separate impugned order was issued on 23.04.2024. We frame following issues for determination focus on critical accounting and auditing standards in case of the firm in Company Appeal (AT) No. 177 of 2024. Issue No. I: Whether an audit firm is independently and primarily liable for quality control failures under SQC 1, separate and distinct from the EP's individual liability under Standards on Auditing? Issue No. II: Whether having an SQC 1 policy document in pla....
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....h and maintain a system of quality control that provides reasonable assurance that the firm and its personnel comply with professional standards and applicable legal and regulatory requirements and reports issued by the firm or engagement partners are appropriate in the circumstances. 164. We find from Impugned Order that the Respondent NFRA's order against the Firm found the systemic failures like failure to ensure EQCR was conducted for a listed entity audit, a failure at the 'Engagement Performance' quality control level, failure to ensure adequate audit documentation, failure at the 'Engagement Performance' level, Failure to ensure the EP had adequate competence in Ind AS and failure to observe SAs applicable to listed entities. Failure to maintain and implement firm-wide quality control policies that would have prevented an unmodified opinion by EP on materially misstated financial statements of a listed company, as already discussed in detail while discussion in Company Appeal (AT) No. 200 of 2022. 165. It needs to be appreciated that the audit Firm was primarily responsible for establishing and maintaining a system of quality control to ensure that ....
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.... independently and primarily liable for quality control failures under SQC 1, separate and distinct from the EP's individual liability under Standards on Auditing. Conclusion on Issue No. II 170. We hold that the firm having an SQC 1 policy document in place is not sufficient to discharge the Firm's quality control obligations, and the Firm must also ensure the policy is actually implemented. Conclusion on Issue No. III 171. We find that the Firm's contention that only the EP is accountable for audit non-compliance and that the Firm is only responsible for formulating the SQC 1 policy is legally not correct and impermissible. Conclusion on Issue No. IV 172. We are of view that non-compliance with SA 220 (EQCR), SA 230 (documentation), SA 260 (TCWG communication) and SA 315 (risk assessment) by the EP attracts liability on the Firm under SQC 1. Issue No. V: Whether proceeding against the Firm after already penalising the EP for the same underlying audit deficiencies constitutes double jeopardy prohibited under law? Whether NFRA could have issued SCN and impugned order to firm at later stage. 173. Now we will examine the contentions of the Appellant that there....
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....gement of Auditor's expert, evaluating the adequacy of internal audit function of the Company, and general quality aspects. Para 3 of SQC-1 reads as under: "3. The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances". (Emphasis supplied) 175. We find the issue whether the firms are vicariously liable for the misconduct by its partners or not and whether the NFRA can penalise both the firm and its partner, is no longer res integra. 176. We would like to refer to two supportive judgements in case of Deloitte i.e. one by Hon'ble Supreme Court and one by Delhi High Court, which are relevant to present appeals. These judgements reads as under: A.) 2025 SCC OnLine Del 641 - Deloitte Haskins & Sells LLP Versus Union of India and Another 132. We thus find ourselves unable to construe Section 132 of the Companies Act creating a vicarious liability which is otherwise not envisaged in cognate statu....
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....end to both the entity and the individuals involved. This structure not only ensures accountability but also upholds the integrity and trust essential to the auditing profession. 142. By virtue of the firm being appointed as an auditor, the firm and its members willingly undertake responsibilities that come with a clear expectation of compliance with accounting standards and the assurance of professional diligence. The alignment between the firm and its members, particularly in the discharge of auditing services, is integral and inseparable. Liability arising from statutory breaches, including those regulated by the NFRA, is both reasonable and necessary to ensure the firm's adherence to professional obligations. B.) Union of India v. Deloitte Haskins & Sells LLP, (2023) 8 SCC 56 113. Now so far as another submission that Section 140(5) is violative of Article 14 of the Constitution of India and discriminates against the auditors unfairly in comparison to similarly placed alleged perpetrators, such as Directors, management, etc. It is required to be noted that the role of auditors cannot be equated with Directors and/or management. Auditors play very ....
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....r the SAs. On the other hand, it is the case of the Respondent that the Firm is not merely vicariously liable for the EP's failures - it bears primary, independent liability for failing to establish and implement the institutional safeguards that would have prevented those failures. The Respondent explained that penalty of Rs. 5,00,000/- against the Firm - higher than the penalty of Rs. 3,00,000/- against the individual EP - correctly reflects this principle. We also find the Firm as an institution bears a heavier responsibility for systemic quality control than the individual engagement partner for engagement-level failures. 179. The Appellant firm alleged that the show cause notice to the firm was issued after 15 months as an afterthought, by NFRA. We note that the Respondent-NFRA issued a Show Cause Notice (SCN) under Rule 11(1) of the NFRA Rules, to the Engagement Partner on 29.06.2022. We also note that post giving opportunity of hearing to the EP, on 12.09.2022 NFRA passed an order under Section 132(4) of Companies Act, 2013 imposing a penalty of Rs. 3 Lakhs and 3-year debarment against the Engagement Partner. We also take into consideration the arguments of NFRA that,....
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....t quality control reviewer. For example, the engagement quality control reviewer: (a) Is not selected by the engagement partner; (b) Does not otherwise participate in the engagement during the period of review; (c) Does not make decisions for the engagement team; and (d) Is not subject to other considerations that would threaten the reviewer's objectivity" (Emphasis supplied) 182. We note contention of NFRA that the alleged delay in issuing the SCN to the Firm did not arise from the EP's response, nor was it a reactive measure. It was a result of the sequential and evolving evaluation of responsibilities arising during the course of the proceedings. NFRA further elaborated that at the time of issuance of the Penalty Order against the EP on 12.09.2022, the Executive Body of NFRA had not yet made a legal determination regarding the Firm's systemic role under SQC 1. It was further the case of NFRA that it was only upon further scrutiny of the same underlying facts, it became necessary to initiate proceedings against the Firm, albeit at a later stage. The NFRA further argued that the regulator's obligation is continuing and dynamic and submitte....
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....ties imposed are at the lower-to-middle range of what NFRA could have imposed. NFRA explicitly applied the principles of deterrence, proportionality, and signalling value. We find that the sanctions are proportionate to the gravity of the misconduct i.e. issuing an unmodified opinion on statements that overstated PBT by 88% and the public interest dimension as VWL is a listed company whose investors relied on the audited financial statements. It is also a fact that this the systemic impact which made the NFRA Circular in consequence of this case has set a standard for all stakeholders and finally the need for deterrence that the auditors of listed companies must need to be more careful else professional misconduct may result in consequence of penalties. Conclusion on Issue No. VI 187. We hold that the penalty of Rs. 5,00,000/- on the Firm is proportionate and higher penalty on the Appellant firm than the individual EP penalty is justified. Final Conclusions 188. For all the foregoing reasons, this Appellate Tribunal finds no merit in either of the appeals filed by the Appellants. 189. Before parting the case, we would like to emphasize that the statutory audit is not....