CA Guilty of non-disclosure of financial irregularities & siphoning of funds in the Audit Report

The Committee noted that in the present case, the Respondent being Statutory Auditor of M/s. Shree Ashtavinayak Cine Vision Ltd. (hereinafter referred to as the “Company”) was held Prima-facie Guilty of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 by Director (Discipline) on the charge that the Respondent/ Respondent firm relied on the management representations of the Company and failed to verify whether the funds diverted by the Company as loans granted to the overseas subsidiary and capital advances were actually represented by any assets or whether the amounts shown as recoverable from subsidiaries were in fact recoverable or not.

FINDINGS

The Committee noted that the Counsel for the Respondent in his defence made by oral/ written submissions had inter-alia submitted as under:

a. That the Respondent had complied with the applicable five Auditing Standards viz. SA 240, SA 500, SA 505, SA 600 and SA 610.

b. The Company advanced certain moneys to their subsidiaries who were successful production house.

c. The Respondent had not only taken confirmation from the management of the Company but also had taken confirmation from the auditors of the subsidiaries.

d. The investigator appointed by CLB did not provide opportunity to him for hearing. Further the investigator was hot a Chartered Accountant.

e. The EOW after three years of investigation discovered fraud in the Company.

f. The forensic auditor had confirmed that charges against the Respondent were dropped, and his name was not included in the charge sheet filed by EOW. The arrests included the Directors and the internal auditor but did not include the Respondent.

Committee noted that the Respondent in Emphasis of matter had mentioned as under (Page B-171 of prima-facie opinion):

“Attention is invited to Sub Note No. 6 of Note No. 31 of Annual Accounts as regards the challenges that the Company is facing on financial front; and thus has not been able to repay the loans, secured and unsecured, statutory dues, and other unsecured creditors. A few parties have filed a suits against the Company for recovery of debts including winding up of the Company. One of the main reasons for the financial challenges is money raised by the Company through various sources are deployed in various projects of production and distribution of films which have been delayed owing to various reasons. The money advanced to Indian and foreign subsidiaries of the Company are deployed by the said subsidiaries in various production and distribution of films projects which are also delayed. The management is hopeful to overcome the challenges that are in way. The management is of the view that amounts realizable by the Company are larger than the liabilities of the Company, and the present financial challenges are part of temporary phase. Our opinion is not qualified in respect of this matter.”

The Committee on perusal of the same noted that the Company was unable to carry on the business at a particular point of time because the funds invested by the Company were sunken. The Committee further observed that in such a circumstance the Company was required to make appropriate provision for the same.

The Committee observed that the movement of assets, liabilities, revenue and expenses as highlighted in the investigation report (A-17) and financial statements of the overseas subsidiary company for the financial year ended 31st March, 2013 (B-19 to B-35) indicates that the Company has granted loans to its overseas subsidiary company which have been advanced as capital advances to the third parties for acquiring copyrights for making motion pictures which are still not completed. It has been observed that the subsidiary company has not earned any revenue during the period from the financial year 2009-10 to 2012-13 except during the period from 01.04.2010 to 30.09.201 0 and thus, it appears that there is no business activity in the subsidiary company. It is pertinent to note that the Respondent cannot be relieved of his professional duties by merely highlighting the fact of financial crisis in the Company, however he is required to report such frauds and financial irregularities and its repercussions on the financial position of the Company. The various stands taken in defence by the Counsel are not tenable and the Respondent fail to produce any evidence to substantiate his claim rather more of conservative accounting was followed and merely emphasis of matter was placed by the Respondent.

Committee further noted that the Company had given advances to the actors (film stars) in lieu of certain films to be produced. The Committee is of the view that such amount cannot be treated as advance to the star cast rather it will be treated as work-in-progress. The Company showing it as advance to the person concerned but it was a part of work-in-progress of the Company which will be evaluated whether it is likely to happen or is not likely to happen in near future. The Committee further noted that Company had advanced money of Rs. 2.75 crores to Akshay Khanna through Neeraj Vohra on 11.02.2008 and the said amount was still outstanding in 2013. Similarly in other cases monies were advanced to various persons (film actors etc.) in past and the same were still outstanding.

Committee noted that as per SA 500, an external confirmation represents audit evidences secured from the third party either through the paper or electronic mode. External confirmation needs to be secured to reduce the audit risk to an acceptable level. Notingly, no confirmation of balances had been secured by the Company and the Respondent in respect of above-mentioned advances. Therefore, the Committee concluded that the Respondent did not exercise due diligence in the audit of the auditee company and did not plan the audit in such a way to apply additional-substantive audit procedures.

Committee observed that there are lots of adverse inferences in the CARO report which also indicates defaults in Company such as Item No.9 on the CARO report that TDS was not paid for years 2012-13, 2013-14. The Committee also observed certain unusual practices adopted by the Company such as loan is repayable along with interest after 60 months the date of loan agreement. The Committee noted that inspite of non-recovery of the principle amount the interest charged on the said principle was reversed by the Company. The Respondent as auditor of the parent company failed to qualify in this aspect.

The Committee in view of the facts and submission made on records, that there are non-disclosure of financial irregularities in the Audit Report issued by the Respondent. Such financial irregularities are reportedly on account of siphoning of funds by the Company by way of granting loans and capital advance payments made for film production projects to the wholly owned subsidiary of the Company, which is carrying no business activity, which could have a bearing of materially affecting the financial position of the Company. The Respondent failed to disclose various disclosures required proves lack of due diligence on the part of the Respondent.

CONCLUSION

In view of the above findings stated in above paras vis a vis material on record, Accordingly, in the considered opinion of the Committee, the Respondent is GUILTY under Clause (7) of Part- I of the Second Schedule to the Chartered Accountants Act, 1949.

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