Facts of the Case

  1. Ushdev International Limited was a listed company engaged in business operations involving substantial banking facilities.
  2. The company entered insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 pursuant to an order of the National Company Law Tribunal (NCLT), Mumbai Bench dated 14.05.2018.
  3. The auditor issued a Disclaimer of Opinion on:
    • Financial Statements; and
    • Internal Financial Controls over Financial Reporting (ICFR).
  4. Information received by NFRA revealed allegations relating to:
    • Bank fraud;
    • Manipulation of books of accounts;
    • Submission of forged and fabricated financial statements before banks;
    • Large outstanding trade receivables;
    • Significant Expected Credit Loss (ECL) provisions;
    • Overseas entities allegedly floated during the period of financial distress.
  5. NFRA examined the audit file and observed several deficiencies in the conduct of the audit engagement.

 

Issues Involved

  1. Whether the auditor failed to comply with duties relating to fraud reporting under Section 143(12) of the Companies Act, 2013 and SA 240.
  2. Whether sufficient appropriate audit evidence was obtained regarding valuation and impairment assessment of investments.
  3. Whether audit documentation complied with SA 230.
  4. Whether the auditor failed to report non-compliance with Ind AS 16 relating to disclosure of pledged assets.
  5. Whether the Disclaimer of Opinion on Internal Financial Controls over Financial Reporting was properly supported.
  6. Whether the auditor exercised due diligence and professional skepticism as required under auditing standards.

 

Petitioner’s Arguments (NFRA)

NFRA contended that:

1. Failure to Report Fraud Indicators

The auditor failed to investigate and report several indicators of possible fraud, including:

  • Extraordinary increase in Expected Credit Loss provisions.
  • Significant trade receivables remaining unpaid for prolonged periods.
  • Fresh credit sales to defaulting customers.
  • Defaults in repayment of bank borrowings.
  • Ongoing insolvency proceedings against the company.

2. Failure to Verify Major Debtors

NFRA observed that there was insufficient evidence demonstrating verification of the existence of major foreign debtors accounting for a substantial portion of trade receivables.

3. Deficiencies in Valuation of Investments

The auditor relied upon a valuation report prepared by management’s expert without adequately challenging assumptions, methodology, or impairment indicators.

4. Deficient Audit Documentation

Audit working papers lacked:

  • Proper authentication;
  • Dates of review;
  • Identification of preparers;
  • Evidence of review by the Engagement Partner.

Certain work papers were prepared by an individual not formally included in the engagement team.

5. Failure to Report Accounting Standard Violations

The auditor failed to report non-disclosures relating to pledged Property, Plant and Equipment as required under Ind AS 16.

6. Improper Basis for Disclaimer on Internal Financial Controls

The disclaimer regarding internal financial controls was primarily based upon commencement of insolvency proceedings without sufficient supporting audit documentation.

 

Respondent’s Arguments (CA Chirag Doshi)

The auditor submitted that:

1. No Fraud Was Identified

The Expected Credit Loss provisions were made because receivables and advances had become doubtful of recovery and therefore did not necessarily indicate fraud.

2. Transactions Related to Earlier Years

The receivables and advances pertained to prior periods that had already been audited by predecessor auditors without any fraud observations.

3. Procedures Were Performed

The auditor claimed to have undertaken:

  • Balance confirmations;
  • Background checks of parties;
  • Review of follow-up actions by management;
  • Examination of legal recovery efforts.

4. Reliance on Registered Valuer

The valuation expert engaged by management was a registered valuer possessing expertise relevant to the assignment.

5. Documentation Lapses Were Inadvertent

Missing signatures, dates, and certain procedural omissions were unintentional and did not affect overall audit quality.

6. Disclaimer Covered Certain Matters

The auditor argued that where disclaimer of opinion had been issued, further conclusions on those matters were not warranted.

 

Court Order / Findings

NFRA rejected the explanations offered by the auditor and recorded the following findings:

1. Failure to Exercise Professional Skepticism

NFRA held that significant red flags existed, including:

  • Massive increase in Expected Credit Loss provisions;
  • Default on bank borrowings;
  • Continued credit sales to defaulting parties;
  • Insolvency proceedings against the company.

The auditor failed to adequately examine these matters from a fraud perspective.

2. Violation of Fraud Reporting Obligations

The auditor failed to discharge responsibilities under:

  • Section 143(12) of the Companies Act, 2013;
  • SA 240;
  • CARO requirements.

3. Inadequate Audit Evidence

The auditor relied upon management’s valuation expert despite the expert expressly stating that:

  • No due diligence was performed;
  • Information was not independently verified;
  • Conclusions were based solely upon management representations.

NFRA held that the auditor failed to independently assess impairment indicators and valuation assumptions.

4. Non-Compliance with SA 230

Audit documentation contained serious deficiencies including:

  • Missing preparer authentication;
  • Missing review dates;
  • Insufficient evidence of Engagement Partner review;
  • Participation of a person not properly documented as engagement team member.

5. Failure to Report Ind AS 16 Violations

The auditor did not report non-disclosure regarding assets pledged as security despite being aware of such restrictions.

6. Deficient Internal Financial Controls Reporting

NFRA concluded that the basis for disclaimer on Internal Financial Controls over Financial Reporting was inadequate and unsupported by sufficient documentation.

 

Important Clarification

NFRA clarified that:

Issuing a Disclaimer of Opinion does not absolve an auditor from statutory responsibilities under the Companies Act, 2013.

Even where a disclaimer is issued, the auditor remains obligated to:

  • Report frauds where required;
  • Comply with auditing standards;
  • Maintain proper audit documentation;
  • Fulfill statutory reporting obligations.

NFRA emphasized that a disclaimer cannot be used as a defence against failures relating to audit diligence and professional responsibilities.

 

 

Final Order

NFRA held CA Chirag Doshi guilty of professional misconduct and imposed:

Monetary Penalty

₹5,00,000 (Rupees Five Lakhs Only)

The penalty was imposed under Section 132(4)(c) of the Companies Act, 2013 after considering the nature and gravity of the violations.

 

Sections Involved

Companies Act, 2013

  • Section 132(4)
  • Section 143(1)
  • Section 143(3)
  • Section 143(3)(e)
  • Section 143(3)(i)
  • Section 143(10)
  • Section 143(11)
  • Section 143(12)
  • Section 139
  • Section 133

Chartered Accountants Act, 1949

  • Section 22
  • Clause 7 of Part I of Second Schedule
  • Clause 9 of Part I of Second Schedule

Auditing Standards

  • SA 200
  • SA 220
  • SA 230
  • SA 240
  • SA 250
  • SA 260
  • SA 315
  • SA 500
  • SA 530
  • SA 540
  • SA 550
  • SA 705

Accounting Standards

  • Ind AS 7
  • Ind AS 16
  • Ind AS 107

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/10/20241021682027687.pd 

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