NFRA debars 2 CAs and levies the penalty of Rs.5 Lakhs

The National Financial Reporting Authority(NFRA) debarred 2 Chartered Accountants and levies the penalty of Rs.5 Lakhs for professional misconduct.

Based on the foregoing discussion and analysis, we conclude that the Auditors have committed Professional Misconduct as defined under section 132 (4) of the Companies Act 2013 in terms of section 22 of the Chartered Accountants Act 1949 (CA Act) amended from time to time, and as detailed below:

a) The Auditors committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity”. This charge is proved as explained in Section-C-3 to C-5 and D (b) above.

b) The Auditors committed professional misconduct as defined by clause 6 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity”. This charge is proved as explained in Section-C-3 to C-5 and D (b) above.

c) The Auditors committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties” This charge is proved as explained in Section C and D above.

d) The Auditors committed professional misconduct as defined by clause 8 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion”. This charge is proved as explained in Section-C-2 to C-5 and Section-D above.

e) The Auditors committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”. This charge is proved as explained in Section C and D above.

In addition to above, the Audit Firm has committed Professional Misconduct as defined Section 132 (4) of the Act as failure to exercise due diligence and being grossly negligent in the conduct of professional duties in respect of matters explained at Section – E above as the Audit Firm failed to exercise due diligence and was grossly negligent in the conduct of professional duties, thus, violated SQC 1.

Therefore, we conclude that all the charges of professional misconduct in the SCN (Except charges relating to noncompliance with SA 320, which has been dropped) stand proved based on the evidence in the Audit File, the Audit Report dated 21.11.2020 issued on behalf of the Firm, the submissions made by the Auditors and the Financial Statements of GVIL for the FY 2019- 20.

Order and Penalty

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.

Existence of “Shell Companies” for effecting sham or unlawful transactions is injurious to the economic health of India. Auditors of shell companies have greater responsibilities of exposing promoters’ nefarious actions to use such shell companies for illegal and/or unethical activities.

This Order has detailed all the lapses in Audit and the non-compliances with the Standards on Auditing made by the Auditors. The constant refrain of the Auditors throughout their reply has been that they had given the Disclaimer of Opinion indicating non recoverability of advances made to MACEL and Razia Sultana. The death of VGS happened in July 2019 and the Auditors had sufficient time to evaluate all the areas spelt out in this Order where the Standards have not been adhered to. The Auditors had access to the investigation report of Mr. Ashok Kumar Malhotra, which contained complete details of diversion of funds and its modus operandi, including signing of blank cheques. Despite this, they did not report fraudulent diversion of funds, just to preserve their professional relationship with the promoters of the auditee company. The Standards on Auditing do not free an Auditor from reporting all other misstatements once a Disclaimer on a particular aspect is given. The Auditors have failed in their statutory duty and have tried to hide behind one Disclaimer of opinion, which was incomplete as they did not cover all aspects of infraction of the Laws and the Standards. All of this weighs heavily on our mind while determining the quantum of penalty.

Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order:

a) Imposition of a monetary penalty of Rs.One Crore upon M/s Sundaresha & Associates. In addition, M/s Sundaresha & Associates is debarred for a period of Two years 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. This debarment period will start after completion of two years debarment period imposed in case of Tanglin Development Limited for FY 2018-19 vide NFRA order dated 26.04.2023.

b) Imposition of a monetary penalty of Rs.Five Lakhs upon CA C. Ramesh. In addition, CA C Ramesh is debarred for a period of Five years 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.

c) Imposition of a monetary penalty of Rs.Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande is debarred for a period of Five years 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.

This order will become effective after 30 days from the date of issue of this order.

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