Facts of the Case

Burnpur Cement Limited (BCL), a listed cement manufacturing company, prepared its financial statements for FY 2017-18 on a going concern basis despite severe financial distress.

The company had reported:

  • Loss of ₹44.49 crores during FY 2017-18.
  • Accumulated losses of ₹102.97 crores.
  • Erosion of net worth resulting in negative net worth.
  • Negative working capital of ₹238.85 crores.
  • Debt amounting to 80.32% of total assets.
  • Defaults in repayment of debts amounting to ₹233.09 crores.

CA Shekhar Sharad, Engagement Partner of M/s Shekhar Sharad & Co., acted as statutory auditor of Burnpur Cement Limited for FY 2017-18.

The auditor issued a qualified audit report dated 28.05.2018 and subsequently resigned within one month. Following information received from the Registrar of Companies, West Bengal, NFRA initiated suo motu proceedings under Section 132(4) of the Companies Act, 2013.

Upon examination of the audit file, NFRA observed significant deficiencies in the auditor's evaluation and reporting of the company's ability to continue as a going concern.

Issues Involved

  1. Whether the Engagement Partner properly evaluated the appropriateness of the going concern assumption adopted by Burnpur Cement Limited.
  2. Whether the auditor complied with the requirements of SA 570 (Going Concern).
  3. Whether the auditor correctly reported material uncertainty relating to going concern in accordance with SA 705 and SA 706.
  4. Whether sufficient audit evidence and documentation were maintained as required under SA 230.
  5. Whether the conduct of the auditor amounted to professional misconduct under the Chartered Accountants Act, 1949 and Companies Act, 2013.

Petitioner’s / NFRA’s Arguments

NFRA contended that:

  • The company's deteriorating financial condition created serious doubt regarding its ability to continue as a going concern.
  • The auditor failed to obtain sufficient and appropriate audit evidence supporting management's assessment of going concern.
  • No adequate documentation existed regarding projected cash flows, financial forecasts, One-Time Settlement discussions with lenders, or capacity expansion plans relied upon by management.
  • The auditor merely used a checklist-based working paper without substantive analysis.
  • Material uncertainty regarding going concern was not properly evaluated.
  • Instead of determining whether a qualified or adverse opinion was required, the auditor merely included the matter under an Emphasis of Matter paragraph.
  • The company's disclosure regarding going concern was inadequate and failed to disclose crucial financial risks and operational issues.
  • Audit documentation was inconsistent and deficient.

Accordingly, NFRA alleged violations of SA 230, SA 570, SA 705 and SA 706 and charged the auditor with professional misconduct.

Respondent’s Arguments

CA Shekhar Sharad submitted that:

  • His assessment of going concern was based on discussions with management and projected cash flows presented during the audit.
  • Financial forecasts, cash flow projections and other relevant documents had been examined but were not retained in the audit file.
  • He reviewed correspondence relating to One-Time Settlement negotiations with lenders.
  • His conclusion was that the going concern assumption was doubtful because of closure of operational units, financial liabilities, erosion of net worth and negative working capital.
  • He incorporated the issue in the Emphasis of Matter paragraph because he considered the uncertainty significant but not sufficient to entirely reject the going concern basis.
  • He accepted the observations made by NFRA and acknowledged that a different interpretation of SA 570 could have resulted in a qualified or adverse opinion.
  • The lapses occurred due to an error in professional judgment rather than gross negligence.

 

Court Order / Findings

NFRA held that the Engagement Partner committed professional misconduct.

The Authority found that:

1. Failure to Properly Assess Going Concern

The auditor failed to:

  • Evaluate management's assessment adequately.
  • Obtain sufficient audit evidence.
  • Maintain supporting documentation.
  • Determine whether the going concern basis itself was inappropriate.

This constituted a violation of SA 570.

2. Improper Reporting of Material Uncertainty

NFRA held that:

  • If adequate disclosure exists regarding material uncertainty, the auditor must include a separate section titled "Material Uncertainty Related to Going Concern."
  • If disclosure is inadequate, a qualified or adverse opinion may be required.
  • The auditor failed to conduct this analysis and instead improperly used an Emphasis of Matter paragraph.

This violated SA 570, SA 705 and SA 706.

3. Deficient Audit Documentation

NFRA found that:

  • Critical documents supporting the auditor's conclusions were absent from the audit file.
  • Audit documentation was insufficient to enable an experienced auditor to understand the work performed.

This violated SA 230.

4. Professional Misconduct Established

NFRA concluded that the auditor committed professional misconduct by:

  • Failing to disclose material facts.
  • Failing to report material misstatements.
  • Failing to exercise due diligence.
  • Failing to obtain sufficient information for expressing an audit opinion.
  • Failing to draw attention to departures from accepted audit procedures.

Important Clarification

NFRA clarified that:

  • An Emphasis of Matter paragraph cannot be used as a substitute for a modified audit opinion.
  • Auditors must first determine whether material uncertainty related to going concern requires a qualified or adverse opinion.
  • Merely highlighting concerns through an Emphasis of Matter paragraph without performing the mandatory analysis under SA 570 and SA 705 is impermissible.
  • Proper audit documentation is an essential requirement and cannot be excused on the ground that supporting documents were voluminous or not retained.

 

Final Order

NFRA held CA Shekhar Sharad guilty of professional misconduct under Section 132(4) of the Companies Act, 2013.

Penalty Imposed

  • Monetary Penalty: ₹1,00,000 (One Lakh Rupees)

The order was directed to become effective after 30 days from the date of issuance.

 

Sections / Provisions Involved

Companies Act, 2013

  • Section 132(4)
  • Section 139
  • Section 247

National Financial Reporting Authority Rules, 2018

  • Rule 3
  • Rule 11(6)

Chartered Accountants Act, 1949

Part I of Second Schedule

  • Clause 5 – Failure to disclose material facts.
  • Clause 6 – Failure to report material misstatements.
  • Clause 7 – Failure to exercise due diligence.
  • Clause 8 – Failure to obtain sufficient information.
  • Clause 9 – Failure to invite attention to departure from audit procedures.

Standards on Auditing (SAs)

  • SA 230 – Audit Documentation
  • SA 570 – Going Concern
  • SA 580 – Written Representations
  • SA 705 – Modifications to the Opinion in the Independent Auditor’s Report
  • SA 706 – Emphasis of Matter Paragraphs and Other Matter Paragraphs

This precedent was cited to demonstrate that failures relating to going concern assessments are viewed seriously by audit regulators worldwide.

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/08/2023080169.pdf

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