NFRA levies penalty of Rs. 1 Lakh on CA who Audited without ensuring appropriate technical expertise and experience

The National Financial Reporting Authority(NFRA) has levied penalty of Rs.1 Lakh on CA who Audited without ensuring appropriate technical expertise and experience.

NFRA initiated action under section 132 (4) of Companies Act 2013 (‘CA-2013’ or ‘Act’ hereafter) for professional misconduct against CA Riya Agarwal, the EQCR partner in statutory audit of Burnpur Cement Limited (BCL), West Bengal for FY 2017-18, pursuant to information received from Registrar of Companies (‘ROC’ hereafter), West Bengal vide letter dated 24.11.2020. Mis Shekhar Sharad & Co., Statutory Auditor of BCL for FY 2017-18 had resigned within one month after issuing 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’s 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 under Companies (Indian Accounting Standards) Rules, 2015.

As discussed in the foregoing paragraphs, the EQCR partner has accepted that she made departures from the Standards and the Law, in her conduct of the duties of Engagement Quality Control Reviewer for the audit of BCL for the FY 2017-18. Based on the above discussion, it is proved that the EQCR partner provided her approval for the issuance of the audit report of BCL for the FY 2017-18 without carrying out due procedures as required by SQCl, SA 220 and SA 230. Based on the foregoing discussions and analysis, we conclude that the EQCR partner has committed Professional Misconduct as defined under section 132 (4) of the Companies Act 2013 in terms of Section 22 of the Chartered Accountant Act 1949 (CA Act) as amended from time to time, and as detailed below:

I. The EQCR partner committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 7 of Part I of the Second Schedule of the Chartered Accountants Act 1949, which states that a CA is guilty of professional misconduct when she “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

This charge is proved as EQCR partner failed to conduct the review of the work of ET in accordance with the SAs as explained in the Paras 14 to 23 above.

II. The EQCR partner committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 8 of Part I of the Second Schedule of the Chartered Accountants Act 1949, which states that a CA is guilty of professional misconduct when she ”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 the EQCR partner failed to conduct the review of the work of ET in accordance with the SAs as explained in the Paras 14 to 23 above.

III. The EQCR partner committed professional misconduct as defined by Section 132 (4) of the Companies Act, read with Section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949, which states that a CA is guilty of professional misconduct when she ”fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”.

This charge is proved as the EQCR partner failed to conduct the review of the work of ET in accordance with the SAs as explained in the Paras 14 to 23 above.

Therefore, we conclude that the charges of professional misconduct enumerated in the SCN dated 03.11.2022 stand proved based on the evidence in the Audit File, the Audit Report issued by EP, the submissions made by EQCR partner, the annual report of BCL for the FY 2017-18 and other materials available on record.

It is the duty of an EQCR partner to conduct the review of the work of the ET and ensure that the Independent Auditor’s Report issued is appropriate, as it provides useful information to the stakeholders and public, based on which they make decisions on their investments or do transactions with the public interest entity.

Without a credible Audit, Investors, Creditors and Other Users of Financial Statements would be handicapped. The entire corporate governance system would fail and result in a breakdown in trust and confidence of investors and the public at large if the auditors do not perform their job with professional scepticism and due diligence and adhere to the standards.

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.

The EQCR partner in the present case was required to ensure compliance with SAs to ensure the audit quality and lend credibility to Financial Statements. As we have explained in this Order, substantial deficiencies in her work, abdication of responsibility and omissions and commissions on the part of CA Riya Agarwal (EQCR partner) establish her professional misconduct. In the instant case, the EQCR partner was not bearing adequate experience to be appointed as the EQCR and also failed to review the important working papers. The limited WPs reviewed by the EQCR were also not in a timely manner, which resulted in her failure to provide an objective evaluation of the significant judgements made by the ET and the conclusions reached by them in formulating the report. As per the statutes, EQCR is an additional layer available to ensure the quality during the conduct of Audit, and the very objective of such quality review is defeated if the EQCR partner is appointed and performs in a perfunctory manner. The EQCR Partner vide her reply to the SCN has accepted all the charges listed in the SCN and also stated that the lapses occurred due to lack of expertise and are bonafide mistakes / errors.

Section 132(4) (c) of the Companies Act 2013 provides that the 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.

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

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

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