Facts of the Case

The National Financial Reporting Authority (NFRA) initiated an investigation into the professional conduct of CA Vishwanath Goswami, who acted as the Engagement Partner and branch auditor for six branches of Dewan Housing Finance Corporation Limited (DHFL) for Financial Year 2017-18.

DHFL, a listed housing finance company, came under scrutiny following allegations of large-scale financial fraud and diversion of funds. During NFRA's Audit Quality Review of DHFL's statutory audit conducted by Chaturvedi & Shah, NFRA observed that approximately 250 branch audits had been conducted by 33 branch auditors.

The investigation revealed that the appointment of these branch auditors, including CA Vishwanath Goswami, had not been approved by the shareholders of DHFL in accordance with the Companies Act, 2013. Despite the absence of a valid appointment, the auditor accepted the engagement, represented himself as a Branch Statutory Auditor, and issued Independent Branch Auditors' Reports.

NFRA further found serious deficiencies in the audit process, including non-compliance with Standards on Auditing (SAs), inadequate audit documentation, failure to obtain sufficient audit evidence, and issuance of an audit opinion without an adequate basis.

Issues Involved

  1. Whether CA Vishwanath Goswami accepted a statutory audit engagement without a legally valid appointment under the Companies Act, 2013.
  2. Whether the auditor failed to exercise due diligence before accepting the audit engagement.
  3. Whether the auditor violated the Standards on Auditing while conducting branch audits of DHFL.
  4. Whether the audit documentation maintained was sufficient and compliant with SA 230.
  5. Whether the auditor issued an audit opinion without obtaining sufficient and appropriate audit evidence.
  6. Whether such acts constituted professional misconduct under the Chartered Accountants Act, 1949 and Companies Act, 2013.

Petitioner’s Arguments (CA Vishwanath Goswami)

The auditor contended that:

  • The appointment letter was received through the official email and subsequently through a hard copy issued by DHFL.
  • The appointment letter was signed by an authorized signatory of the company and therefore appeared valid.
  • He relied upon the Doctrine of Indoor Management, believing that the company had complied with all internal legal requirements.
  • Telephonic confirmation was allegedly obtained regarding the appointment.
  • The scope of audit received from the company was treated as equivalent to an audit engagement letter.
  • The audit was conducted following auditing standards and based on professional experience gained through audits of banks, public sector undertakings, and other entities.
  • Any deficiencies pointed out by NFRA were claimed to be clerical or attributable to lack of information from certain branches.

Respondent’s Arguments (NFRA)

NFRA argued that:

  • The auditor failed to verify whether his appointment complied with Sections 139 and 140 of the Companies Act, 2013.
  • The shareholders had approved only Chaturvedi & Shah as statutory auditors for DHFL and its branches.
  • No valid shareholder approval existed for appointment of CA Vishwanath Goswami as Branch Statutory Auditor.
  • Acceptance of the audit assignment without verifying statutory compliance amounted to professional misconduct.
  • The auditor failed to comply with several mandatory Standards on Auditing.
  • Audit files lacked evidence of audit planning, risk assessment, materiality determination, testing procedures, internal control evaluation, audit conclusions, and review documentation.
  • The auditor issued an unmodified audit opinion despite absence of sufficient audit evidence.
  • Such conduct compromised audit quality and public confidence in financial reporting.

Sections Involved

Companies Act, 2013

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

Chartered Accountants Act, 1949

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

National Financial Reporting Authority Rules, 2018

  • Rule 11(6)

Standards on Auditing

  • 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 – Risk Assessment
  • SA 320 – Materiality
  • 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.

Court Order / Findings

NFRA held that:

1. Invalid Acceptance of Audit Appointment

The auditor accepted a branch statutory audit assignment without verifying whether the appointment had been duly approved under the Companies Act, 2013.

2. Violation of Professional Duties

The auditor failed to exercise due diligence and professional skepticism before accepting the engagement.

3. Non-Compliance with SA 210

No valid audit engagement letter containing mandatory terms and responsibilities was found.

4. Non-Compliance with SA 230

Audit documentation was inadequate and failed to demonstrate:

  • Nature of audit procedures performed.
  • Timing and extent of audit work.
  • Audit evidence obtained.
  • Conclusions reached.

5. Non-Compliance with SA 700

The auditor issued an unmodified audit opinion despite lacking sufficient and appropriate audit evidence.

6. Non-Compliance with Multiple Auditing Standards

The auditor failed to comply with requirements relating to audit planning, materiality assessment, risk evaluation, audit sampling, analytical procedures, audit evidence, and management representations.

7. Professional Misconduct Established

NFRA concluded that the auditor's actions constituted professional misconduct under the Chartered Accountants Act, 1949, read with Section 132(4) of the Companies Act, 2013.

 

Important Clarification

NFRA clarified that:

  • A statutory auditor must independently verify compliance with statutory requirements before accepting an audit engagement.
  • Reliance on management representations or the Doctrine of Indoor Management cannot substitute statutory verification obligations imposed by law.
  • Audit documentation is fundamental to audit quality and cannot be replaced by oral explanations.
  • Issuing an audit report without sufficient audit evidence undermines the credibility of financial reporting and constitutes professional misconduct.
  • Compliance with Standards on Auditing is mandatory and not merely procedural.

 

Penalty Imposed

NFRA imposed the following sanctions:

Monetary Penalty

₹1,00,000 (One Lakh Rupees) upon CA Vishwanath Goswami.

Debarment

One-year debarment from:

  • Being appointed as an auditor;
  • Being appointed as an internal auditor; or
  • Undertaking any audit relating to financial statements or internal audit functions 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/2023/10/20231003371781422.pdf

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