Facts of the Case

The National Financial Reporting Authority (NFRA) initiated an investigation into the professional conduct of CA Sanjay Soni, Engagement Partner of M/s Lahoti Navneet & Co., who acted as the branch auditor for seventeen branches of Dewan Housing Finance Corporation Limited (DHFL) for the financial year 2017-18.

The investigation arose during NFRA's Audit Quality Review of the statutory audit of DHFL conducted by Chaturvedi & Shah. During the review, NFRA observed that several branch auditors had issued Independent Branch Auditors’ Reports for nearly 250 branches of DHFL.

NFRA found that the appointment of branch auditors, including CA Sanjay Soni, had not been approved by the shareholders of DHFL through the Annual General Meeting as mandated under the Companies Act, 2013. Despite the absence of a valid appointment, CA Sanjay Soni accepted the engagement, represented himself as Branch Statutory Auditor, and issued Independent Branch Auditors’ Reports.

NFRA further examined the audit work performed and found serious deficiencies in audit documentation, audit planning, risk assessment, materiality determination, sampling procedures, and compliance with applicable Standards on Auditing.

 

Issues Involved

  1. Whether CA Sanjay Soni accepted the branch audit engagement without a legally valid appointment under the Companies Act, 2013.
  2. Whether the acceptance of such appointment amounted to professional misconduct under the Chartered Accountants Act, 1949.
  3. Whether the auditor complied with the Standards on Auditing while conducting the branch audit.
  4. Whether sufficient audit evidence and audit documentation existed to support the audit opinion issued.
  5. Whether the conduct of the auditor constituted gross negligence and professional misconduct warranting action under Section 132(4) of the Companies Act, 2013.

 

Petitioner’s / NFRA's Arguments

NFRA contended that:

  • The appointment of CA Sanjay Soni as branch auditor was not approved by the shareholders as required under Section 139 read with Section 143(8) of the Companies Act, 2013.
  • The auditor failed to verify whether statutory requirements for appointment had been complied with before accepting the engagement.
  • The auditor violated ethical requirements and failed to exercise due diligence.
  • The engagement letter did not satisfy the requirements prescribed under SA 210.
  • Audit documentation was grossly inadequate and failed to meet requirements under SA 230.
  • There was no evidence of audit planning, risk assessment, materiality determination, audit sampling, analytical procedures, or adequate audit evidence.
  • The audit opinion issued was unsupported by sufficient and appropriate audit evidence, thereby violating SA 700.
  • The conduct amounted to professional misconduct under the Chartered Accountants Act, 1949 and Section 132(4) of the Companies Act, 2013.

 

Respondent’s Arguments

CA Sanjay Soni submitted that:

  • He was under the impression that the appointment process was valid because appointments in earlier years had been made in a similar manner.
  • Any lapse in appointment was attributable to the company and should not be treated as gross negligence on his part.
  • The appointment letter and acceptance contained sufficient information regarding the scope of work.
  • The branch audit assignment was recurring in nature and there had been no substantial change in the scope of engagement.
  • The audit file maintained was commensurate with the nature and scope of the work assigned.
  • Audit procedures were performed based on his familiarity with branch operations developed through prior years of engagement.
  • The branch audit report was issued after considering financial information summaries and audit procedures undertaken during the engagement.

 

Court Order / Findings

NFRA rejected the explanations provided by CA Sanjay Soni and held that:

Invalid Appointment

  • The auditor failed to ascertain whether the appointment was duly approved by shareholders.
  • Acceptance of the audit assignment without verifying statutory compliance violated the Chartered Accountants Act, 1949.
  • The branch audit engagement was legally invalid from inception.

Violation of SA 210

  • The engagement terms were not properly documented.
  • Essential elements required under SA 210 were absent.
  • The auditor failed to properly understand and document the objective and scope of the audit engagement.

Violation of SA 230

  • The audit file lacked sufficient documentation.
  • There was no evidence regarding the nature, timing, extent, and results of audit procedures.
  • Material audit judgments and conclusions were not documented.

Violation of SA 700

  • The auditor issued an unmodified audit opinion without sufficient audit evidence.
  • The audit opinion lacked an adequate basis.

Violation of Other Standards on Auditing

NFRA found non-compliance with:

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

Professional Misconduct Established

NFRA held that CA Sanjay Soni was guilty of:

  • Failure to exercise due diligence.
  • Gross negligence in professional duties.
  • Failure to obtain sufficient information necessary for expression of an audit opinion.
  • Failure to report material departures from generally accepted auditing procedures.

 

Important Clarification

NFRA clarified that:

  • Even though the appointment itself was legally invalid, the audit work performed was still examined for compliance with Standards on Auditing because the branch audit reports were relied upon by the statutory auditor of DHFL.
  • A chartered accountant is required to independently verify the legality of his appointment before accepting an audit engagement.
  • Reliance on prior years’ appointment practices cannot excuse non-compliance with statutory requirements.
  • Oral explanations cannot substitute proper audit documentation.
  • Audit documentation is fundamental to audit quality and accountability.

Sections Involved

Companies Act, 2013

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

Chartered Accountants Act, 1949

  • Section 22
  • Clause 9 of Part I of the First Schedule
  • Clause 7 of Part I of the Second Schedule
  • Clause 8 of Part I of the Second Schedule
  • Clause 9 of Part I of the Second Schedule

NFRA Rules, 2018

  • Rule 11(6)

Standards on Auditing (SAs)

  • SA 200
  • SA 210
  • SA 230
  • SA 300
  • SA 315
  • SA 320
  • SA 330
  • SA 450
  • SA 500
  • SA 510
  • SA 520
  • SA 530
  • SA 580
  • SA 700

 

Final Order

NFRA held CA Sanjay Soni guilty of professional misconduct and imposed the following sanctions:

Monetary Penalty

₹1,00,000 (One Lakh Rupees)

Debarment

Six months' debarment from being appointed as:

  • Auditor;
  • 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 issuance.


Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/09/20230930874985168.pdf

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