Facts of the Case

  • A Show Cause Notice was issued to CA Gulshan Jagdish Jham for his audit of Prabhu Steel Industries Limited (PSIL) for FY 2019–20.
  • PSIL, listed on BSE, failed to comply with Ind AS and provisions of the Companies Act, 2013.
  • Major violations included:
    • No provision for impairment/expected credit loss on debtors and loans (53.5% of assets).
    • Failure to present a Statement of Changes in Equity.
    • Failure to prepare Consolidated Financial Statements despite having an associate company.
  • Despite these lapses, the auditor issued an unmodified audit opinion.

Issues Involved

  1. Failure to disclose material facts in financial statements.
  2. Failure to report material misstatements.
  3. Gross negligence and lack of due diligence.
  4. Failure to obtain sufficient information for audit opinion.
  5. Failure to highlight departures from accepted auditing procedures.

Petitioner’s Arguments (NFRA)

  • The audit was conducted in disregard of Standards on Auditing (SAs).
  • The auditor failed to exercise professional skepticism and diligence.
  • The audit report falsely claimed compliance with SAs despite clear violations.
  • Misstatements misled investors and creditors by inflating profits and omitting key disclosures.

Respondent’s Arguments (CA Gulshan Jham)

  • Admitted lapses but claimed they were unintentional.
  • Stated he was unaware of Ind AS requirements as a small-town practitioner.
  • Submitted that revised financial statements were being prepared by the company.
  • Denied any fraudulent intent and argued no damage was caused to the public.

Court Order / Findings (NFRA)

  • NFRA held that the auditor committed professional misconduct under Section 132(4) of the Companies Act, 2013.
  • All charges under the Second Schedule of the Chartered Accountants Act, 1949 were proved.
  • The audit was found to be casual, negligent, and misleading.
  • NFRA emphasized the importance of auditor diligence for investor confidence.

Important Clarifications

  • Section 132(4), Companies Act, 2013 empowers NFRA to penalize professional misconduct.
  • Violated Standards on Auditing (SA 200, SA 230, SA 240, SA 570, etc.).
  • Violated Ind AS 1, Ind AS 109, Section 129(3), and Schedule III of the Companies Act, 2013.

 

 Sanctions

  • Monetary penalty of ₹1,00,000 imposed on CA Gulshan Jham.
  • Debarred for one year from auditing any company or body corporate.


Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/01/2023010517.pdf

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