CA Debarred for a Year along with Penalty of Rs.5L for Audit irregularities

The National Financial Reporting Authority (NFRA) has debarred a Chartered Accountant for one year along with a Penalty of Rs.5L for Audit irregularities.

NFRA initiated action under section 132 (4) of the Companies Act 2013 (‘CA-2013’ or ‘Act’ hereafter) against the Auditor of Sanwaria Consumer Limited for professional or other misconduct in relation to the statutory audit for FY 2017-18, pursuant to information received from Securities and Exchange Board of India (SEBI) pertaining to the financial irregularities in the company and the failure of the auditor to qualify or emphasize in his independent audit report, any matter related to misstatement/ irregularities in the transactions.

Facts of the Case

M/s Khandelwal Kakani and Co. was the statutory auditor of SCL and CA Santosh Deshmukh was the Engagement Partner (EP) for this statutory audit for the FY 2017-18. Accordingly, NFRA initiated proceedings under Section 132 of the Companies Act, 2013 for necessary action against the EP, CA Santosh Deshmukh.

On examination of the Audit File and financials of the subsidiary and associates of SCL and on being satisfied that sufficient cause existed to take action under sub-section (4) of Section 132 of the Companies Act, 2013, a Show Cause Notice (SCN hereafter) was issued to CA Santosh Deshmukh on 08.04.2024 asking him to show cause why action should not be taken against him for professional misconduct in respect of his performance as EP on behalf of Mis Khandelwal Kakani and Co., the Statutory Auditor of SCL for the FY 2017-18. The EP, submitted his reply vide email dated 24.05.2024 and refuted all charges, requesting a personal hearing.

This Order finds that the BP failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter) in respect of several significant areas, reflecting a serious lack of professional competence to perform the audit of a Public Interest Entity (PIE). These include:

a. The EP failed to verify the existence and valuation of material inventories of SCL resulting in overvaluation of the soya seed inventories by approx. Rs.18.93 crores and of paddy inventories by Rs.13.30 crores.

b. The BP failed to verify the ownership, valuation and evaluate the impairment testing of the investments made by SCL in its loss-making subsidiary and associate companies.

c. The EP failed to perform an evaluation and report the non-compliance by SCL related to the consolidation of Financial Statements.

d. The EP failed to obtain sufficient appropriate audit evidence relating to trade receivables despite the fact that 100% of the trade receivables were unsecured.

e. The EP also failed to carry out the risk assessment procedures in order to obtain sufficient audit evidence so as to minimise the risk of material misstatement due to fraud or otherwise in the revenue recognition.

f. The EP was grossly negligent in preparing sufficient audit documentation in accordance with the requirements of SA 230.

g. The EP failed to communicate deficiencies in internal control to Those Charged with Governance (TCWG).

Order

Independent Auditors of Publicly Listed Companies are expected to demonstrate sufficiency and appropriateness of audit work in every aspect of the critical building blocks of an audit of the Financial Statements of a PIE. Failure of the auditor to meet the requirements envisaged under the Law and Professional Standards on Auditing is conspicuous in this audit engagement performed by the EP.

As is set out in this Order, the manner in which the audit was conducted, failed to meet the requirements of the SAs, the Act and the Code of Ethics in a number of significant aspects which demonstrated gross negligence on the part of the EP. This can be gauged from the failure of the EP to critically assess the existence and valuation of inventories, failure to comment in the audit report about the non-consolidation of financial statements, failure to verify the impairment testing of the investments of SCL and failure to apply the mandatory SAs in the audit. We, therefore, conclude that the EP’s failure to comply with the provisions of SAs, exhibit professional scepticism, and fulfill the necessary audit procedures led to significant deficiencies in the audit. This non-compliance, combined with the consequent reporting failures, constitutes a breach of professional responsibilities and statutory requirements. The EP’s actions (or inactions) constitute a serious violation of·audit standards, leading to significant repercussions for the integrity and reliability of the financial statements.

Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proved cases of professional misconduct are viewed is evident from the fact that a minimum punishment is laid down by the law.

The professional misconduct of CA Santosh Deshmukh has been detailed in the foregoing paragraphs of this Order. Considering the proven professional misconducts and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in the exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order imposition of monetary penalty of Rs.5,00,000 and also debars CA Santosh Deshmukh for 1 (One) year from being appointed as an auditor or internal auditor or from undertaking any audit in respect of Financial Statements or internal audit of the functions and activities of any company or body corporate. In light of the judgement of the Hon’ble National Company Law Appellate Tribunal (NCLAT) dated 01.12.2023, we have limited the monetary penalty to Rs.5 Lakh only since the violations relate to FY 2017-18.

This Order will become effective after 30 days from the date of its issue.

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