NFRA debarred Two Chartered Accountants for Audit Lapses for 2 Years; Imposed fine of 2 Lakhs

In a recent judgement, the National Financial Reporting Authority (NFRA) prohibited two Chartered Accountants for two years and fined them Rs. two lakh each for audit failures in connection with Women Next Loungeries Ltd’s statutory audit for the financial year 2016-17.

The NFRA is India’s independent regulator in areas relating to accounting and auditing of designated groups of entities known as ‘Public Interest Entities’ or PIES.

The NFRA received a complaint to investigate professional misconduct by the Engagement Partner, CA Hemant Khator, partner of M/s GSV & Co, and CA Narayan Prasad Swamy, in response to information received from the Office of the Registrar of Companies, Mumbai, regarding the investigation conducted by the Office of the Regional Director, Mumbai, into the affairs of Women Next Loungeries Ltd.

During the audit for the financial year 2016-17, the investigation uncovered a number of severe failures on the part of the EP, Hemant Khator. Audit failures include the EP’s failure to plan the audit and understand the entity and its environment, failure to determine materiality and performance materiality, failure to obtain audit evidence regarding the existence and condition of inventory, failure to identify the related party and related party transactions, failure to obtain external confirmations for Trade Receivables and Trade Payables, and failure to report non-compliance with laws and regulations. Such failures violated the law and the Standards of Auditing, and resulted in professional misconduct as defined in Section 132(4) of the Act.

The NFRA concluded that “Given the EP’s actions and omissions, it is established that the EP, CA Hemant Khator, did not comply with the stipulations in the Chartered Accountants Act, 1949 (CAs Act) and demonstrated gross negligence and lack of due diligence in performing the statutory audit of WNLL.” Furthermore, the EP, CA Hemant Khator, failed to ensure audit quality and was grossly negligent in his professional duties by failing to follow the requirements outlined by the relevant SAS.

As a result, an audit report was issued that was not supported by legitimate audit evidence and lacked quality in the audit effort. The following failures on the part of EP, CA Hemant Khator are specifically established under the Articles of Charges in the SCN.

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