Facts of the Case

The National Financial Reporting Authority (NFRA) initiated an investigation into the role of CA Mangesh Vitthal Kekre, who acted as the Engagement Partner and branch auditor for seventeen branches of Dewan Housing Finance Corporation Limited (DHFL) during the financial year 2017-18.

DHFL, a listed housing finance company, was allegedly involved in large-scale financial irregularities and fraud. During NFRA's Audit Quality Review of the statutory audit conducted by Chaturvedi & Shah, NFRA observed that several branch auditors had issued Independent Branch Auditors' Reports for nearly 250 branches.

CA Mangesh Vitthal Kekre acted as branch auditor for seventeen DHFL branches and issued Independent Branch Auditors' Reports. During the investigation, NFRA found that the appointment of branch auditors had not been approved by the shareholders of DHFL at the Annual General Meeting as required under the Companies Act, 2013.

Despite the absence of a valid statutory appointment, the auditor accepted the engagement, represented himself as Branch Statutory Auditor, and issued audit reports.

NFRA further examined the audit files and found substantial deficiencies relating to audit planning, audit documentation, risk assessment, materiality determination, audit evidence collection, and compliance with Standards on Auditing.

 

Issues Involved

  1. Whether the auditor accepted a branch statutory audit assignment without verifying the legality of his appointment under Section 139 of the Companies Act, 2013.
  2. Whether the auditor failed to exercise due diligence and professional skepticism before accepting the engagement.
  3. Whether the auditor violated Standards on Auditing while conducting branch audits.
  4. Whether the audit documentation maintained by the auditor satisfied the requirements of SA 230.
  5. Whether the auditor obtained sufficient and appropriate audit evidence before issuing an unmodified audit opinion.
  6. Whether such conduct amounted to professional misconduct under the CharteredAccountants Act, 1949 and the Companies Act, 2013.

 

Sections and Provisions Involved

Companies Act, 2013

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

Chartered Accountants Act, 1949

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

NFRA Rules, 2018

  • Rule 11(6)

Standards on Auditing (SAs)

  • 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 of Financial Statements
  • SA 315 – Identifying and Assessing Risks of Material Misstatement
  • SA 320 – Materiality in Planning and Performing an Audit
  • SA 330 – Auditor's Responses to Assessed Risks
  • SA 450 – Evaluation of Misstatements
  • SA 500 – Audit Evidence
  • SA 510 – Initial Audit Engagements
  • SA 520 – Analytical Procedures
  • SA 530 – Audit Sampling
  • SA 580 – Written Representations
  • SA 700 – Forming an Opinion and Reporting on Financial Statements

 

Petitioner’s / Respondent Auditor's Arguments

CA Mangesh Vitthal Kekre contended that:

  • The appointment communication was received from senior officials of DHFL and there was no reason to suspect that the appointment was legally defective.
  • He acted in good faith while accepting the engagement.
  • The company officials were responsible for obtaining necessary approvals from shareholders.
  • The doctrine of indoor management should protect him from internal procedural irregularities committed by the company.
  • He had complied with audit procedures and relied upon documentation available from previous years.
  • The appointment letter and acceptance documents sufficiently covered the engagement requirements.
  • Missing loan files represented less than 3% of branch business and therefore were not material.
  • There was no intentional violation of auditing standards.

 

NFRA's Findings / Respondent Authority's Arguments

NFRA rejected the explanations and held that:

1. Invalid Acceptance of Audit Engagement

The auditor failed to verify whether his appointment complied with Section 139 of the Companies Act, 2013.

The law imposes a positive obligation on a chartered accountant to ascertain that statutory requirements relating to appointment have been complied with before accepting an audit engagement.

The AGM of DHFL had approved only Chaturvedi & Shah as statutory auditor for the company and its branches. No separate branch auditors were approved.

Therefore, the appointment of the auditor as Branch Statutory Auditor was legally invalid.

2. Doctrine of Indoor Management Not Applicable

NFRA held that the doctrine of indoor management could not override the specific statutory duty imposed upon auditors to verify compliance with legal requirements concerning appointment.

3. Violation of SA 210

The engagement documentation failed to properly define:

  • Audit objectives
  • Scope of audit
  • Responsibilities of management
  • Responsibilities of auditor
  • Applicable financial reporting framework

The engagement terms were therefore deficient.

4. Violation of SA 230

NFRA found serious deficiencies in audit documentation.

The audit file lacked evidence relating to:

  • Understanding of branch operations
  • Internal controls
  • Audit planning
  • Materiality assessment
  • IT control evaluation
  • Verification of loans
  • KYC verification
  • Anti-money laundering checks
  • Security verification
  • Audit conclusions and review documentation

NFRA observed that oral explanations cannot substitute proper audit documentation.

5. Violation of SA 700

The auditor issued an unmodified opinion despite:

  • Missing loan files
  • Lack of documented procedures
  • Absence of materiality assessment
  • Insufficient audit evidence

NFRA held that the opinion was unsupported by adequate audit evidence.

6. Violation of Other Standards on Auditing

NFRA also found non-compliance with:

  • SA 300
  • SA 315
  • SA 320
  • SA 330
  • SA 450
  • SA 500
  • SA 510
  • SA 520
  • SA 530
  • SA 580

because the audit file did not contain evidence demonstrating compliance with these standards.

Important Clarifications by NFRA

Auditor Must Verify Appointment Legality

An auditor cannot merely rely upon communications issued by company officials.

The auditor must independently verify whether statutory requirements regarding appointment have been complied with.

Audit Documentation Is Fundamental

Audit documentation is not a procedural formality. It forms the foundation of audit quality and serves as evidence that audit procedures were actually performed.

Oral Explanations Cannot Replace Documentation

Audit work must be evidenced through contemporaneous documentation.

Branch Auditors Are Equally Responsible

Even where branch audit reports are subsequently relied upon by the statutory auditor, branch auditors remain independently responsible for compliance with auditing standards.

Professional Skepticism Is Mandatory

Acceptance of audit assignments and issuance of audit opinions require continuous exercise of professional skepticism and due diligence.

 

Court Order / Final Findings

NFRA concluded that CA Mangesh Vitthal Kekre:

  • Accepted a statutory audit assignment without ensuring legal validity of appointment.
  • Failed to exercise due diligence.
  • Acted with gross negligence in the conduct of professional duties.
  • Failed to obtain sufficient audit evidence.
  • Failed to comply with multiple Standards on Auditing.
  • Issued audit reports unsupported by adequate audit documentation.
  • Committed professional misconduct under the Chartered Accountants Act, 1949 and the Companies Act, 2013.

Accordingly, NFRA ordered:

Monetary Penalty

  • ₹1,00,000 (One Lakh Rupees)

Debarment

  • Debarment for six months from:
    • Being appointed as auditor;
    • Being appointed as internal auditor; and
    • Undertaking any audit relating to financial statements or internal audit of any company or body corporate.

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

Link to download the order -https://www.bseindia.com/bseplus/AnnualReport/511072/5110720318.pdf

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