Facts of the Case

NFRA initiated proceedings against CA Supreet Sachdev, the Engagement Partner of BSR & Co. LLP, who conducted the statutory audit of Sobha Limited for FY 2017-18 and FY 2018-19. The proceedings were initiated pursuant to information received from the Securities and Exchange Board of India (SEBI).

Sobha Limited, a listed real estate company, had substantial unsecured land advances amounting to ₹1843.13 crore. Certain land parcels lacked marketable title, some were under litigation, and significant weaknesses existed in internal controls relating to such advances. Despite these circumstances, the auditor failed to appropriately report the risks, uncertainties, and potential impairment in the financial statements.

NFRA also examined issues relating to non-provisioning of receivables, VAT/GST liability disclosures, refundable security deposits, and the adequacy of audit procedures performed by the Engagement Partner.

 

Issues Involved

  1. Whether the Engagement Partner failed to obtain sufficient appropriate audit evidence regarding unsecured land advances of ₹1843.13 crore.
  2. Whether the auditor failed to assess and report material uncertainty regarding recoverability of land advances and related assets.
  3. Whether the auditor violated Standards on Auditing by not exercising professional skepticism and professional judgment.
  4. Whether non-provisioning of outstanding receivables and advances required disclosure or qualification in the audit report.
  5. Whether deficiencies in internal financial controls should have resulted in a modified audit opinion.
  6. Whether such failures constituted professional misconduct under Section 132(4) of the Companies Act, 2013.

 

Petitioner’s Arguments (NFRA)

NFRA contended that:

  • The auditor failed to report uncertainty regarding recovery of unsecured land advances amounting to ₹1843.13 crore.
  • The audit file itself revealed weaknesses in internal controls, including:
    • Absence of ageing schedules.
    • Lack of monitoring of advances.
    • Non-obtaining of confirmations from parties.
  • Significant amounts remained outstanding for several years without adequate supporting evidence regarding recoverability.
  • Certain land parcels lacked marketable title and were subject to litigation.
  • The auditor failed to evaluate impairment indicators despite the existence of material risks.
  • The audit report did not adequately address concerns already under investigation by SEBI.
  • The Engagement Partner violated SA 540, SA 200 and SA 315 by failing to obtain sufficient appropriate audit evidence and by not exercising adequate professional skepticism.

 

Respondent’s Arguments

CA Supreet Sachdev submitted that:

  • Real estate projects generally require substantial lead time and advances are common industry practice.
  • Management had represented that land values were appreciating and recoverability was expected.
  • Supporting documents and legal opinions had been reviewed.
  • Confirmation procedures and audit tests were performed.
  • Receivables under examination were expected to be recovered and therefore no provision was considered necessary.
  • VAT/GST liability had already been discharged by Sobha Limited and therefore no liability existed.
  • Security deposits were considered recoverable based on the available circumstances and documentation.

 

Court Order / Findings

NFRA rejected the explanations offered by the Engagement Partner and held that:

1. Failure to Report Non-Provisioning of Land Advances

The auditor failed to adequately evaluate the recoverability of unsecured land advances amounting to ₹1843.13 crore despite clear indicators of impairment and uncertainty.

2. Failure to Obtain Sufficient Appropriate Audit Evidence

NFRA observed several deficiencies:

  • Inadequate confirmation procedures.
  • Lack of documentation supporting recoverability.
  • Failure to assess legal disputes affecting land parcels.
  • Failure to evaluate implications of absent marketable title.

3. Violation of Standards on Auditing

The auditor violated:

  • SA 540 – Auditing Accounting Estimates.
  • SA 200 – Overall Objectives of the Independent Auditor.
  • SA 315 – Identifying and Assessing Risks of Material Misstatement.

4. Internal Financial Control Deficiencies Ignored

Despite identifying weaknesses in internal controls, the auditor failed to consider issuing a modified opinion regarding Internal Financial Controls.

5. Lack of Professional Skepticism

NFRA concluded that the Engagement Partner relied excessively on management representations and failed to independently evaluate contradictory evidence available in audit records.

6. Professional Misconduct Established

NFRA held that the Engagement Partner committed professional misconduct under Section 132(4) of the Companies Act, 2013.

 

Important Clarifications by NFRA

NFRA's Jurisdiction

NFRA clarified that:

  • Section 132(4) empowers NFRA to investigate professional misconduct.
  • NFRA's jurisdiction extends to misconduct committed before its establishment if proceedings are initiated after the provision came into force.
  • The authority may investigate both individual chartered accountants and audit firms in appropriate cases.

Auditor’s Duty

NFRA emphasized that:

  • Auditors must obtain sufficient appropriate audit evidence.
  • Mere reliance on management representations is inadequate.
  • Professional skepticism is a fundamental requirement throughout the audit process.
  • Material uncertainties and impairment indicators must be properly evaluated and disclosed.

 

Sections / Provisions Involved

Companies Act, 2013

  • Section 132
  • Section 132(4)
  • Section 132(4)(c)
  • Section 143

Chartered Accountants Act, 1949

  • Part I of Second Schedule
  • Clause 5 of Part I of Second Schedule
  • Clause 7 of Part I of Second Schedule

Standards on Auditing (SA)

  • SA 200 – Overall Objectives of the Independent Auditor
  • SA 315 – Identifying and Assessing Risks of Material Misstatement
  • SA 540 – Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures

Accounting Standard

  • Ind AS 32 – Financial Instruments: Presentation

 

Related Case Laws

1. NFRA v. Deloitte Haskins & Sells LLP

NFRA emphasized auditor independence, professional skepticism, and accountability for deficient audits.

2. NFRA v. Coffee Day Global Limited Auditors

NFRA held auditors responsible for failure to detect material misstatements and inadequate audit procedures.

3. NFRA v. Branch Auditors of DHFL

The authority imposed penalties for audit failures involving insufficient audit evidence and lack of professional skepticism.

4. Zile Singh v. State of Haryana, (2004) 8 SCC 1

Relied upon by NFRA while discussing retrospective operation and statutory interpretation principles.

 

Final Order

NFRA held CA Supreet Sachdev guilty of professional misconduct in connection with the statutory audit of Sobha Limited for FY 2017-18 and FY 2018-19 and imposed a monetary penalty of ₹5,00,000 (Rupees Five Lakh Only) under Section 132(4) of the Companies Act, 2013. The order was directed to become effective after thirty days from its issuance.

Link to download the order -  https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/10/20231018844731969.pdf 

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.