Facts of the Case

The matter arose from NFRA's investigation into the audit of Dewan Housing Finance Corporation Limited (DHFL), a company listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Following reports regarding large-scale financial irregularities and alleged fraud involving DHFL, NFRA initiated a suo motu Audit Quality Review (AQR) of the statutory audit of DHFL for the Financial Year 2017-18.

During the review, NFRA observed that several Chartered Accountants had acted as branch auditors and issued Independent Branch Auditors’ Reports for various DHFL branches. CA Harish Sharma, acting as Engagement Partner of R. Shah & Co., conducted audits of twelve DHFL branches.

NFRA found that:

  • The appointment of branch auditors had not been approved by the shareholders at the Annual General Meeting (AGM) as required under the Companies Act, 2013.
  • Despite the absence of a valid appointment, CA Harish Sharma accepted the engagement as Branch Statutory Auditor.
  • He issued Independent Branch Auditors’ Reports and related audit certifications.
  • The audit documentation maintained by him was inadequate.
  • Several Standards on Auditing (SAs) were violated during the conduct of the audit.

NFRA thereafter issued a Show Cause Notice alleging professional misconduct.

Issues Involved

  1. Whether CA Harish Sharma accepted the branch audit engagement without ensuring a legally valid appointment under the Companies Act, 2013.
  2. Whether the acceptance of such appointment constituted professional misconduct under the Chartered Accountants Act, 1949.
  3. Whether the audit was conducted in compliance with the applicable Standards on Auditing.
  4. Whether sufficient audit documentation and audit evidence existed to support the audit opinion issued by the auditor.
  5. Whether the conduct of the auditor warranted penalty and debarment under Section 132(4) of the Companies Act, 2013.

Petitioner’s / NFRA’s Arguments

NFRA contended that:

Invalid Appointment

  • The shareholders of DHFL had approved only Chaturvedi & Shah (CAS) as statutory auditors.
  • No separate branch auditors were appointed or ratified by the AGM.
  • Acceptance of branch audit assignments without verifying compliance with Section 139 of the Companies Act amounted to professional misconduct.

Violation of Ethical Requirements

  • The auditor failed to verify the legality of the appointment.
  • He accepted an appointment letter issued by an authorized signatory without obtaining shareholder approval.

Deficiencies in Audit Work

NFRA found non-compliance with various Standards on Auditing, including:

  • SA 200 – Overall Objectives of the Independent Auditor.
  • SA 210 – Agreeing the Terms of Audit Engagements.
  • SA 230 – Audit Documentation.
  • SA 300 – Planning an Audit.
  • SA 315 – Identifying and Assessing Risks.
  • SA 320 – Materiality in Planning and Performing an Audit.
  • SA 330 – Auditor’s Responses to Assessed Risks.
  • SA 450 – Evaluation of Misstatements.
  • SA 510 – Initial Audit Engagements – Opening Balances.
  • SA 520 – Analytical Procedures.
  • SA 530 – Audit Sampling.
  • SA 580 – Written Representations.
  • SA 700 – Forming an Opinion and Reporting on Financial Statements.

Inadequate Audit Documentation

NFRA observed that the audit file lacked:

  • Audit planning documentation.
  • Risk assessment procedures.
  • Materiality determination.
  • Internal control evaluation.
  • Audit evidence supporting conclusions.
  • Verification of loans and assets.
  • KYC and anti-money laundering verification records.
  • Review documentation.

According to NFRA, the audit opinion issued by the auditor lacked an adequate evidentiary basis.

Respondent’s Arguments

CA Harish Sharma submitted that:

  • He was not appointed as a statutory auditor of the company or its branches.
  • The engagement was only for certification and verification purposes.
  • The reports were prepared in formats provided by the company.
  • Several Standards on Auditing cited by NFRA were allegedly not applicable to the assignment.
  • The audit documentation maintained was sufficient for the work assigned.

Court/Authority Findings

NFRA rejected the contentions of the respondent and held that:

Acceptance of Invalid Appointment

The documents on record clearly established that:

  • The appointment letter described the engagement as a branch statutory audit.
  • The auditor accepted the appointment as Branch Statutory Auditor.
  • Independent Branch Auditors’ Reports were issued.
  • Audit certificates and Form 3CA reports described the engagement as statutory audit work.

Accordingly, NFRA held that the auditor knowingly acted as a branch statutory auditor despite the absence of a valid appointment.

Professional Misconduct Established

NFRA held that:

  • The auditor failed to ascertain compliance with Section 139 of the Companies Act.
  • Such conduct violated the Chartered Accountants Act, 1949.
  • The auditor failed to exercise due diligence and professional skepticism.

Non-Compliance with Standards on Auditing

NFRA found substantial violations of auditing standards, including:

SA 210

The auditor failed to properly document the audit engagement and determine the scope and objective of the audit.

SA 230

The audit file did not contain sufficient documentation to establish:

  • Nature of audit procedures.
  • Timing of audit work.
  • Extent of testing performed.
  • Audit conclusions reached.

SA 700

The auditor issued an unmodified opinion without sufficient audit evidence.

Other SAs

The auditor failed to comply with audit planning, risk assessment, materiality determination, analytical procedures, audit sampling and management representation requirements.

Audit Opinion Without Adequate Basis

NFRA concluded that:

  • The audit opinion was unsupported by sufficient and appropriate audit evidence.
  • The audit documentation was grossly inadequate.
  • The audit failed to satisfy the requirements of the Standards on Auditing.

 

Court Order / Final Decision

NFRA held CA Harish Sharma guilty of professional misconduct under Section 132(4) of the Companies Act, 2013 read with relevant provisions of the Chartered Accountants Act, 1949.

The Authority imposed the following sanctions:

Monetary Penalty

₹1,00,000 (One Lakh Rupees)

Debarment

Debarment for one year from:

  • Being appointed as an auditor.
  • Being appointed as an internal auditor.
  • Undertaking any audit relating to financial statements.
  • Conducting internal audits of any company or body corporate.

The order was directed to become effective after thirty days from the date of issuance.

 

Important Clarifications

1. Valid Appointment is Mandatory

An auditor must independently verify that the appointment complies with statutory requirements before accepting the engagement.

2. Audit Documentation is Fundamental

Audit documentation is not a procedural formality. It is the primary evidence demonstrating that an audit was planned and performed in accordance with auditing standards.

3. Branch Auditors Must Follow Full Auditing Standards

Even where the engagement relates only to branch operations, compliance with all applicable Standards on Auditing remains mandatory.

4. Unsupported Audit Opinions Constitute Professional Misconduct

An audit opinion issued without sufficient and appropriate audit evidence can attract regulatory action and disciplinary sanctions.

5. Professional Skepticism is Essential

Auditors are expected to apply professional skepticism throughout the engagement, including at the stage of accepting the appointment.

 

Sections Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 139
  • Section 140
  • Section 143(8)
  • Section 143(10)

Chartered Accountants Act, 1949

  • Section 22
  • Clause (9), Part I, First Schedule
  • Clause (7), Part I, Second Schedule
  • Clause (8), Part I, Second Schedule
  • Clause (9), Part I, Second Schedule

NFRA Rules, 2018

  • Rule 11(6)
  • Rule 3

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/20230930216615260.pdf

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