NFRA debars CA for Five year with 5 Lakhs Penalty for Audit Lapses

The National Financial Reporting Authority in the matter of CA Shyam Malpani debarred Chartered Accounts for five years with Rs. 5 lakh penalty for audit lapses.

Relevant Text of the Order:

NFRA‘s investigations inter alia disclosed that CA Shyam Malpani – the SKNL’s Auditor for the FY 2013-14 failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter); provisions of the Companies Act 2013 and the Companies Act 1956. He also demonstrated serious lapses and absence of due diligence. One of the lapses was that he accepted the Audit Engagement of SKNL for FY 2013-14 despite owning the shares of SKNL through a company which was wholly owned by him and his family members and thereby violated applicable Laws and Standards relating to conflict of interest and independence. Further, he had issued Qualified Audit Opinions on Standalone Financial Statements (‘SFS’ hereafter) and Consolidated Financial Statements (‘CFS’ hereafter) with eleven (SFS) and fifteen (CFS) qualifications respectively despite the fact that the nature and effect of qualifications in the Independent Auditor’s Reports were material and pervasive to the financial statements. As per the Standard on Auditing (SA) 705, if effects of qualifications in the Independent Auditor’s Reports are material and pervasive, the Auditor is required to give either Adverse Opinion or Disclaimer of Opinion. Mere qualified opinion would not suffice in such cases. Thus, the Qualified Opinions issued by the Auditor were in non-confonnity with SA 705.

Based on the proceedings under section 132 (4) of the Companies Act 2013 and after giving the Auditors opportunity to present their case, NFRA has found CA Shyam Malpani, the Engagement Partner, guilty of professional misconduct. In light of the judgment 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 the period April 2013 to September 2014. Therefore, we impose through this Order a monetary penalty of Rupees Five Lakh on CA Shyam Malpani and also debar him for 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. These sanctions will take effect after a period of 30 days from issuance of this Order.

M/s Shyam Malpani and Associates was the Statutory Auditor of SK.NL for Financial Year 2013- 14 (April 2013 to September 2014). CA Shyam Malpani was the proprietor of this firm and signed the Independent Auditor’s Reports and Financials Statements. Subsequently, “from May 2016, the practice and business of this firm was taken over by M/s SMMP and Company”, a partnership firm in which CA Shyam Malpani is a partner.

As discussed in section -D above, it is clear that CA Shyam Malpani had violated the Companies Act 1956, the Companies Act 2013, SQCl, SA 220 and SA 705 by perfom1ing this audit despite having serious conflict of interest and in not giving appropriate audit opinions. Therefore conclude that CA Shyam Malpani has committed Professional Misconduct as defined under Section 132 (4) of the Companies Act 2013 in te1ms of section 22 of the Chartered Accountants Act 1949 (CA Act). As per the clause 7 of Part I of the Second Schedule of the CA Act, an EP is guilty of professional misconduct if he “did not exercise due diligence and was grossly negligent in the conduct of his professional duties”. It has been established that CA Shyam Malpani accepted the appointment as auditor of SKNL despite having ownership interest in the shares of the auditee company i.e. SKNL and failed to fonn audit opinions in accordance with the SA 705, as explained in Section – D above. Since the EP compromised his independence and failed to recognize and report the pervasiveness of the deficiencies of the financial statements, his conduct undoubtedly falls into the category of lack of due diligence and gross negligence. Therefore, we hold that the charge of professional misconduct on the part of the EP on this account is proved.

Internationally also, similar cases of Auditor’s conflict of interest with the auditee company has been viewed seriously. The US Audit regulator- Public Company Accounting Oversight Board (PCAOB)- in the matter of Wanen Averett, LLC has observed that “Rule 2-01 (b) of the Commission’s Regulation S-X provides that an accountant is not independent of an audit client if, at any point during the audit and professional engagement period, “the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompa sed within the accountant’s engagement. ” In applying this standard, it is appropriate to “look in the first instance to whether a relationship or the provision of a service creates a mutual or conflicting interest between the accountant and the audit client.” In this case, PCAOB imposed a penalty of $2,00,000 on the Auditor besides advising the Auditor to review independence policies.

Order:

Section 132( 4)( c) of the Companies Act 2013 provides that National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for:

(A) imposing penalty of- (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and (II) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms;

(B) debarring the member or the firm from-(I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.

In this case the audit done by the EP related to SKNL which was a large public listed company and involved interest of large number of shareholders and other stake holders such as banks, creditors etc. It is critical that the auditor and the EP performed their job with due diligence to give assurance to the investors and stakeholders on true and fairness of the financial statements and thereby protect public interest. Any default on this account impacts and jeopardises the larger public interest which needs to be considered while determining the quantum of punishment.

The professional misconduct has been detailed and proven on various counts in the body of this Order. Considering the nature and seriousness of violations and principles of proportionality, we, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, order the sanctions detailed below. In light of the judgment of the Hon’ble National Company Law Appellate Tribunal (NCLAT) dated 01.12.2023,9 we have limited the monetary penalty to Rs. 5 Lakh only since the violations relate to the period April 2013 to September 2014. Therefore impose a monetary penalty of Rupees Five Lakh upon CA Shyam Malpani. In addition, CA Shyam Malpani 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 be effective after 30 days from the date of its issue.

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