Facts of the Case
The National Financial Reporting Authority (NFRA)
initiated an investigation based on information received from the Ministry of
Corporate Affairs regarding irregularities observed by the Financial Reporting
Review Board (FRRB) of ICAI in the financial statements of Anshu's Clothing
Ltd. (now known as Aditri Gems & Jewels Ltd.) for the Financial Year
2015-16.
During the relevant period, the company was a
listed entity on the Bombay Stock Exchange and Metropolitan Stock Exchange. M/s
S. Kansal & Associates acted as the statutory auditor, and CA Sachin Kansal
served as the Engagement Partner.
Upon examination of the financial statements and
audit records, NFRA found multiple instances of non-compliance with Accounting
Standards, Standards on Auditing, and statutory requirements under the
Companies Act, 2013. Consequently, a Show Cause Notice was issued under Section
132(4) of the Companies Act, 2013 alleging professional misconduct against the
Engagement Partner.
Issues Involved
- Whether the auditor failed to report material misstatements in the
financial statements of the company.
- Whether accrued interest on loans from banks and NBFCs was wrongly
omitted from the accounts.
- Whether deferred tax assets were improperly recognized in violation
of Accounting Standards.
- Whether the auditor failed to report non-compliance with Schedule
III of the Companies Act, 2013.
- Whether the auditor violated Standards on Auditing relating to
audit documentation, engagement quality review, audit engagement terms,
and communication with those charged with governance.
- Whether such failures constituted professional misconduct under
Section 132(4) of the Companies Act, 2013.
Petitioner’s Arguments (NFRA)
NFRA contended that:
1.
Non-Provision of Interest Costs
The company failed to recognize accrued interest
amounting to approximately ₹143.98 lakhs on loans obtained from banks and
NBFCs.
Had the interest been properly accounted for, the
reported loss of approximately ₹20.28 lakhs would have increased to
approximately ₹164.26 lakhs, resulting in a material and pervasive misstatement
in the financial statements.
The auditor failed to qualify the audit report
despite knowledge of such material misstatement.
2. Improper
Recognition of Deferred Tax Assets
The company recognized Deferred Tax Assets despite
continuous losses and absence of convincing evidence regarding future taxable
income.
Recognition of such assets violated Accounting
Standard (AS) 22.
3. Failure
to Disclose Inventory Cost Formula
The financial statements did not disclose the cost
formula used for inventory valuation as mandated by AS 2.
4. Wrong
Amortization of Expenses
Several expenses including preliminary expenses,
listing expenses and other items were improperly shown as unamortized expenses
contrary to AS 26 and AS 22.
5.
Non-Compliance with Schedule III
The company failed to prepare financial statements
in accordance with the prescribed format under Schedule III to the Companies
Act, 2013.
6. Violation
of Standards on Auditing
The auditor failed to:
- Properly document audit procedures.
- Assemble the audit file within the prescribed period.
- Maintain engagement letters.
- Appoint an Engagement Quality Control Reviewer (EQCR) despite
auditing a listed company.
- Communicate with Those Charged With Governance (TCWG).
- Maintain adequate audit evidence supporting audit conclusions.
According to NFRA, these failures amounted to gross
negligence and professional misconduct.
Respondent’s Arguments (CA Sachin Kansal)
The Engagement Partner submitted that:
Regarding
Interest Accrual
- Management was negotiating a one-time settlement with the lending
bank.
- Based on professional judgment, further interest liability was not
expected to be payable.
- The subsequent settlement supported the auditor's judgment.
Regarding
Deferred Tax Assets
- Recognition of Deferred Tax Assets was an unintended oversight.
- The amount involved was comparatively small and did not materially
affect the balance sheet.
Regarding
Audit Report Qualification
- Failure to appropriately modify the audit opinion was an
inadvertent drafting error.
- A combined reading of the audit report would reveal the auditor’s
intended qualification.
Regarding
Documentation and Other Lapses
- Audit records were scattered and not compiled in accordance with
auditing standards.
- Communication with management occurred verbally.
- Being a sole practitioner, appointment of an Engagement Quality
Control Reviewer was difficult.
Mitigating
Circumstances
The auditor pleaded for leniency on the grounds
that:
- He was newly qualified at the relevant time.
- It was his first audit assignment involving a listed company.
- There was no intention to misappropriate funds.
- The errors were unintentional and resulted from lack of experience
and knowledge.
Court Order / Findings
NFRA rejected the explanations furnished by the
Engagement Partner and held that:
Failure to
Report Material Misstatements
The omission of accrued interest resulted in a
substantial understatement of losses and constituted a material misstatement
which should have been reported by the auditor.
Violation of
Accounting Standards
The auditor failed to identify and report
violations relating to:
- AS 1 – Disclosure of Accounting Policies.
- AS 2 – Valuation of Inventories.
- AS 22 – Accounting for Taxes on Income.
- AS 26 – Intangible Assets.
Violation of
Standards on Auditing
The auditor violated several Standards on Auditing
including:
- SA 200
- SA 210
- SA 220
- SA 230
- SA 260
- SA 265
- SA 320
- SA 450
- SA 540
- SA 705
Lack of
Audit Documentation
NFRA emphasized that inadequate audit documentation
strikes at the very root of the audit process and undermines the reliability of
the audit opinion.
Failure to
Appoint EQCR
As the company was a listed entity, appointment of
an Engagement Quality Control Reviewer was mandatory. Being a sole practitioner
could not excuse non-compliance.
Professional
Misconduct Established
NFRA concluded that the Engagement Partner failed
to exercise due diligence, failed to obtain sufficient audit evidence, failed
to report material misstatements, and failed to comply with applicable auditing
and accounting standards.
Accordingly, the charges of professional misconduct
were held proved.
Important Clarifications
NFRA's
Observation on Auditor's Responsibility
An auditor cannot justify omission of liabilities
merely because future settlement negotiations are ongoing.
Materiality
Assessment
Even comparatively smaller accounting entries may
become material when they significantly affect losses or financial position.
Audit
Documentation
Audit documentation must be sufficiently detailed
to enable an experienced auditor with no previous connection to understand:
- Audit procedures performed.
- Evidence obtained.
- Conclusions reached.
Listed
Company Audits
Engagement Quality Control Review is mandatory for
listed entities and cannot be avoided merely because the auditor is a sole
practitioner.
Professional
Judgment Not Absolute
Professional judgment must be supported by
contemporaneous audit evidence and proper documentation.
Sections Involved
Companies
Act, 2013
- Section 128
- Section 129
- Section 132(4)
- Section 139
- Section 143
Accounting
Standards
- AS 1 – Disclosure of Accounting Policies
- AS 2 – Valuation of Inventories
- AS 22 – Accounting for Taxes on Income
- AS 26 – Intangible Assets
Standards on
Auditing
- SA 200
- SA 210
- SA 220
- SA 230
- SA 260
- SA 265
- SA 320
- SA 450
- SA 540
- SA 705
Standard on Quality
Control
- SQC 1
Final Order
NFRA imposed the following sanctions:
Monetary
Penalty
₹1,00,000 (Rupees One Lakh) upon CA Sachin Kansal.
Debarment
Debarment for one year from:
- Being appointed as an auditor,
- Being appointed as an internal auditor,
- Undertaking any audit relating to financial statements,
- Conducting internal audits of any company or body corporate.
The sanctions were directed to take effect after
thirty days from the date of issuance of the order.
Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/07/2023072723.pdf
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