NFRA levies penalty of Rs.1 Lakh on CA for failure to assess use of Going Concern and improper reporting in Audit Report

The National Financial Reporting Authority(NFRA) has levied Penalty of Rs.1 Lakh on CA for failure to assess use of Going Concern and improper reporting in Audit Report.

NFRA initiated action under section 132 (4) of Companies Act 2013 (‘CA-2013’ or ‘Act’ hereafter) against CA Shekhar Sharad, the Engagement Partner, for professional misconduct in statutory audit of BCL for FY 2017-18, pursuant to information received from Registrar of Companies (‘ROC’ hereafter), West Bengal vide letter dated 24.11.2020. M/s Shekhar Sharad & Co., the Statutory Auditor of BCL for FY 2017-18, had resigned within one month after the issuing a Qualified Independent Auditor’s Report dated 28.05.2018.

BCL is a company dealing in the business of Cement Manufacturing and was listed on National Stock Exchange (‘NSE’ hereafter) and therefore falls under NFRA domain. BCL was required to prepare its Financial Statements (‘FS’ hereafter) for the FY 2017-18 in accordance with Indian Accounting Standards (‘Ind As’ hereafter), as notified by Ministry of Corporate Affairs.

As is set out in this Order, the EP did not comply with some of the Standards on Auditing (‘SA’ hereafter), failed to challenge the assessment of the management regarding use of Going Concern assumption in preparation of the Financial Statements, and failed to appropriately report the same in the Independent Auditor’s Report.

BCL had reported loss of Rs.44.49 crores for the year ended 31.03 .2018 and had accumulated loss of Rs.102.97 crores, which had resulted in erosion of its net worth to Rs.(-)0.416 crores. The company was highly debt ridden i.e., its Total Debt was 80.32% of its Total Assets and was defaulting in payment of debts amounting Rs.233.09 crores and had a negative working capital i.e.(-) Rs.238.85 crores. Despite such poor financial condition, which could significantly affect the use of going concern basis, BCL prepared its FS on the basis of going concern. The EP, without the requisite analysis to form an opinion in this regard, merely incorporated the matter under the Emphasis of Matter (‘EOM’ hereafter) without considering if the matter required a qualified or adverse opinion on this ground as per the applicable provisions of SA 570 and SA 705.

Findings and Penalty:

It is the duty of an auditor to conduct the audit with professional scepticism and due diligence and report his opinion in an unbiased manner. Statutory audits provide useful information to the stakeholders and public, based on which they make their decisions on their investments or do transactions with the public interest entity.

Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law.

The EP in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements. As we have explained in this Order, deficiency in the conduct of Audit, abdication of responsibility and inappropriate conclusions on the part of CA Shekhar Sharad establish his professional misconduct. Critical examination of the use of assumption of Going Concern is a significant audit procedure, as it can affect the value at which the reported figures are presented in the balance sheet and therefore could substantially influence the decision of the users of Financial Statements. Despite the presence of a plethora of negative indicators indicating serious threat to the financial health of BCL, CA Shekhar Sharad failed to obtain sufficient appropriate audit evidence in support of assumption of Going Concern basis and failed to report the conclusions in accordance with the applicable provisions of SA 570 read with SA 705. The EP vide his reply to the SCN has accepted all the charges listed in the SCN and also stated that BCL was his first audit of a listed company, and the lapses have not occurred due to gross negligence, but due to error in making professional judgement.

Section 132(4Xc) 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 Jess 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.

Considering the proved professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, and also keeping in mind that the EP has accepted all the charges and taken responsibility for the lapses pointed out in the SCN, we in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order imposition of a monetary penalty of Rs.1 Lakh upon CA Shekhar Sharad.

For Official Order Download PDF Given Below: