ICAI Reprimands CA for Wrong FCCB Classification and Failure to Qualify Audit

The Disciplinary Committee of the Institute of Chartered Accountants of India examined information from the Financial Reporting Review Board (FRRB) regarding the statutory audit of Prakash Industries Limited for FY 2015-16 conducted by CA Laxmi Narain Jain.

The FRRB alleged multiple non-compliances with Accounting Standards, Standards on Auditing, CARO 2016 and Schedule III to the Companies Act, 2013. The Director (Discipline) formed a prima facie opinion of guilt.

Issue Before Committee: Whether reporting matured FCCBs as non-current liabilities based on legal opinion, without issuing a qualified audit opinion under SA 705, amounted to failure to exercise due diligence and professional misconduct.

Committee’s Decision: The Committee held that the classification of matured FCCBs as non-current liabilities was inconsistent with Schedule III to the Companies Act, 2013, as the liability had fallen due for settlement. It observed that mere reliance on legal opinion and management representations, without sufficient independent audit evaluation, fell short of the professional skepticism required under auditing standards.

Further, instead of modifying the audit opinion as mandated under SA 705 in case of material misstatement, the Respondent included the matter only as an Emphasis of Matter under SA 706. The Committee clarified that an Emphasis of Matter cannot substitute a modified opinion where warranted. Thus, the Respondent was held guilty of professional misconduct and was ordered to be Reprimanded.

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