Facts of the Case

  • SEBI reported that Vikas WSP Limited (VWL) failed to recognize interest expense on borrowings in FY 2019–20, overstating profits.
  • VWL, listed on BSE and NSE, was required to comply with Ind AS under the Companies (Indian Accounting Standards) Rules, 2015.
  • CA Som Prakash Aggarwal, Engagement Partner of M/s S. Prakash Aggarwal & Co., conducted the statutory audit.
  • NFRA found lapses in reporting interest costs, understatement of liabilities, overstatement of profits, and inadequate audit documentation.

Issues Involved

  1. Failure to report lapses in accounting of interest costs on borrowings classified as NPAs.
  2. Non-compliance with Standards on Auditing (SAs) and Ind AS.
  3. Inadequate audit documentation and lack of professional skepticism.
  4. Misunderstanding of Effective Interest Rate (EIR) under Ind AS 109.

Petitioner’s Arguments (NFRA)

  • VWL understated interest costs by ₹16.91 crores, overstating PBT by 88%.
  • Auditor failed to report inconsistencies in accounting policy and gave an unmodified opinion despite material misstatements.
  • Audit documentation was poor, lacking confirmations, loan agreements, and communications with governance.
  • No Engagement Quality Control Reviewer (EQCR) was appointed, violating SA 220.

Respondent’s Arguments (CA Som Prakash Aggarwal)

  • Claimed auditors have discretion under SAs and can adopt alternative processes.
  • Argued that Ind AS 109 allows judgment based on expected cashflows under OTS proposals with banks.
  • Denied failure of professional skepticism, stating discussions with management were held but not documented.
  • Asserted absence of working papers does not constitute misconduct if audit judgment is sound.
  • Denied mandatory requirement of EQCR appointment.

Court Order / Findings (NFRA)

  • NFRA held that the auditor’s understanding of SAs and Ind AS was flawed.
  • Found professional misconduct under Section 132(4) of the Companies Act, 2013.
  • Determined that reliance on undocumented OTS proposals and defective Management Representation Letters was unprofessional.
  • Concluded that failure to recognize interest costs and inadequate documentation constituted gross negligence.

Important Clarifications

  • Section 132(4), Companies Act, 2013 empowers NFRA to act against professional misconduct.
  • Ind AS 109 (Financial Instruments) requires recognition of interest costs until liabilities are extinguished.
  • Standards on Auditing (SA 200, SA 220, SA 260, SA 230) mandate compliance and proper documentation.
  • Section 143(9) of Companies Act, 2013 makes adherence to auditing standards mandatory.

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/01/2023010514-1.pdf

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