Facts of the Case

The National Financial Reporting Authority initiated an investigation into the professional conduct of the statutory auditors of Seya Industries Limited (SIL) for Financial Years 2018-19 and 2019-20.

The investigation was commenced pursuant to information received from the Securities and Exchange Board of India (SEBI) regarding:

  • Non-compliance with accounting standards by the company;
  • Misreporting in the financial statements;
  • Non-cooperation by the auditor.

SEBI, in its order dated 20.03.2023, observed that:

  • The company allegedly inflated purchases and sales through name lenders;
  • Related party relationships and transactions were not disclosed;
  • Funds were siphoned through undisclosed related parties;
  • Interest costs on NPA loans were not provided.

To investigate possible professional misconduct, NFRA sought audit files and related documentation from CA Anil Chauhan, Engagement Partner and proprietor of M/s Anil Chauhan & Associates. Multiple communications were issued on 27.04.2023, 23.05.2023 and 30.06.2023. However, no response was received.

Subsequently, NFRA issued a Show Cause Notice dated 22.09.2023. The Engagement Partner neither submitted any response nor availed the opportunity of personal hearing.

Issues Involved

  1. Whether failure to submit audit files and audit documentation despite repeated requests from NFRA amounts to professional misconduct.
  2. Whether failure to maintain audit documentation as required under SA 230 constitutes gross negligence in the conduct of professional duties.
  3. Whether non-cooperation with NFRA investigations attracts action under Section 132(4) of the Companies Act, 2013.
  4. Whether penalties and debarment should be imposed upon the Engagement Partner and audit firm.

Petitioner’s Arguments (NFRA)

NFRA contended that:

  • Audit files and relevant documents were repeatedly sought from the Engagement Partner.
  • Despite several opportunities, the Engagement Partner failed to furnish the required records.
  • Such conduct prevented NFRA from discharging its statutory oversight functions.
  • Audit documentation is mandatory under SA 230 and must be maintained and retained.
  • Failure to provide information called for by the regulator constitutes professional misconduct under Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949.
  • Non-production of audit files indicated either non-maintenance of audit records or deliberate non-cooperation.

 

Respondent’s Arguments

The Respondent did not submit any reply to the Show Cause Notice.

The Respondent also did not participate in the proceedings and did not avail the opportunity of personal hearing provided by NFRA.

Accordingly, the matter was decided on the basis of material available on record.

 

Court / Authority Findings

NFRA observed that:

Failure to Maintain Audit Files

SA 230 requires auditors to maintain sufficient audit documentation enabling an experienced auditor with no prior connection to understand:

  • Nature, timing and extent of audit procedures;
  • Audit evidence obtained;
  • Significant matters arising during the audit;
  • Conclusions reached and professional judgments exercised.

The auditor is also required to assemble audit documentation within sixty days of the auditor’s report.

Non-Cooperation with NFRA

NFRA found that despite repeated communications and opportunities:

  • No audit files were submitted;
  • No explanation was furnished;
  • No response was filed to the Show Cause Notice.

NFRA held that such conduct amounted to professional misconduct because:

  • The auditor failed to supply information called for by the regulator.
  • The auditor failed to comply with lawful requirements of NFRA.
  • The conduct obstructed NFRA from performing its statutory functions under Section 132 of the Companies Act, 2013.

Reliability of Audit Reports

NFRA further observed that absence of audit documentation or failure to submit audit files constituted clear evidence that the Engagement Partner failed to obtain reasonable assurance regarding the financial statements.

Accordingly, the auditor’s reports issued for FY 2018-19 and FY 2019-20 were held to be without any basis and therefore unreliable and invalid

Important Clarification

NFRA clarified that persistent failure to provide audit documentation can lead to the inference that:

  1. Audit documentation was never properly maintained in accordance with SA 230; or
  2. The auditor intentionally refused to cooperate with the regulator.

In either situation, professional misconduct is established under the Companies Act, 2013 and the Chartered Accountants Act, 1949.

The authority emphasized that regulatory investigations cannot be frustrated through non-response or withholding of audit records.

 

Relevant Sections Involved

Companies Act, 2013

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

Chartered Accountants Act, 1949

  • Clause 2 of Part III of First Schedule
  • Clause 7 of Part I of Second Schedule
  • Section 22

Standards on Auditing

  • SA 230 – Audit Documentation

Standards on Quality Control

  • SQC 1

NFRA Rules, 2018

  • Rule 3(1)(a)
  • Rule 11

Link to download the order -  https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2024/01/202401091408053562.pdf

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