Facts of the Case  


The National Financial Reporting Authority (NFRA) conducted an investigation into the professional conduct of CA Krishna Bihari Chaturvedi in relation to the audit of five branches of Dewan Housing Finance Corporation Limited (DHFL) for the Financial Year 2017-18.

DHFL was a housing finance company listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). NFRA initiated an Audit Quality Review (AQR) of the statutory audit of DHFL after reports concerning alleged large-scale financial irregularities and fraud involving the company.

During the review, NFRA observed that 33 engagement partners/branch auditors had signed Independent Branch Auditors’ Reports for nearly 250 branches of DHFL. CA Krishna Bihari Chaturvedi had signed audit reports relating to five branches.

NFRA found that the appointment of the branch auditors had not been approved in the Annual General Meeting (AGM) of DHFL as required under the Companies Act, 2013. Despite the absence of a legally valid appointment, the audit firm accepted the engagement and issued branch audit reports portraying itself as the statutory branch auditor.

NFRA further examined the branch audit work and found significant non-compliance with applicable Standards on Auditing and deficiencies in audit documentation.

Issues Involved

  1. Whether the branch audit appointment accepted by the auditor was legally valid under the Companies Act, 2013.
  2. Whether the auditor complied with the applicable Standards on Auditing while conducting the branch audit.
  3. Whether sufficient audit evidence and audit documentation were maintained.
  4. Whether the conduct of the auditor amounted to professional misconduct under the Chartered Accountants Act, 1949.
  5. Whether penalties and debarment were warranted under Section 132(4) of the Companies Act, 2013.

 Petitioner’s / NFRA’s Arguments

NFRA contended that:

  • The appointment of the branch auditors was not approved by the AGM of DHFL and therefore lacked legal validity.
  • The audit firm accepted an invalid appointment and issued audit reports as if it were the statutory branch auditor.
  • The auditor failed to comply with the requirements prescribed under the Standards on Auditing.
  • Proper audit documentation was not maintained.
  • Sufficient and appropriate audit evidence was not obtained before expressing an audit opinion.
  • The audit opinion issued lacked an adequate audit basis.
  • The conduct demonstrated lack of due diligence and gross negligence in the discharge of professional duties.
  • Such actions constituted professional misconduct under the Chartered Accountants Act, 1949 and attracted action under Section 132(4) of the Companies Act, 2013.

 

Respondent’s Arguments

The order records that disciplinary proceedings were initiated through Show Cause Notices dated 07.12.2022 and 17.01.2024.

NFRA noted non-cooperation during the proceedings, including failure to reply to the Show Cause Notice within time and non-acceptance of communications sent through post.

 

Court Order / Findings

NFRA held that:

  • The appointment accepted for conducting the branch audit was legally defective.
  • The auditor issued audit reports representing himself as a statutory branch auditor despite the invalid appointment.
  • The audit work did not comply with the applicable Standards on Auditing.
  • Proper audit documentation was not maintained.
  • The auditor failed to obtain sufficient information necessary for expressing an audit opinion.
  • The deficiencies resulted in a baseless audit opinion that was ultimately relied upon by the statutory auditors of DHFL.
  • The conduct amounted to failure to exercise due diligence and gross negligence in professional duties.
  • Professional misconduct stood established under the relevant provisions of the Chartered Accountants Act, 1949.

NFRA concluded that CA Krishna Bihari Chaturvedi committed professional misconduct within the meaning of Section 132(4) of the Companies Act, 2013.

 

Important Clarification

NFRA clarified that:

  • The appointment of the branch auditors itself did not satisfy the legal requirements prescribed under the Companies Act, 2013.
  • Even though the appointment was defective, NFRA independently examined the audit work from the perspective of compliance with the Standards on Auditing.
  • The findings of professional misconduct were based not only on the defective appointment but also on substantive audit failures and deficiencies in audit execution.
  • Branch auditors have an important responsibility in ensuring the reliability and integrity of information that ultimately forms part of the company’s financial statements.

Sections Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 139

Chartered Accountants Act, 1949

  • Section 22
  • Clause 5 of Part I of the Second Schedule
  • Clause 7 of Part I of the Second Schedule
  • Clause 8 of Part I of the Second Schedule

Other Relevant Provisions

  • Standards on Auditing (SAs)
  • Standards on Quality Control
  • Code of Ethics applicable to Chartered Accountants

 

Penalty and Sanctions

Exercising powers under Section 132(4)(c) of the Companies Act, 2013, NFRA ordered:

Monetary Penalty

  • ₹1,00,000 (Rupees One Lakh) upon CA Krishna Bihari Chaturvedi.

Debarment

  • Debarment for a period of One Year from:
    • Being appointed as an auditor;
    • Being appointed as an internal auditor; or
    • Undertaking any audit relating to financial statements or internal audit of any company or body corporate.

The order was directed to become effective after 30 days from the date of issue.

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/06/202406211115088640.pdf

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