NFRA member under Scanner for audit gaps in fraud-hit Company; cloud over selection process for regulatory posts

R Sridharan, the outgoing chairperson of the National Financial Reporting Authority (NFRA), the independent audit regulator, has emphasised the importance of keeping practising chartered accountants (CAs) out of part-time member posts with the NFRA.

“It is a travesty of independent audit regulation, and a mockery of the core principles underlying the same, to have practising CAs even as part-time members of the authority,” NFRA said in a letter to the Ministry of Corporate Affairs (MCA) earlier this year.

As per News Published in Economic times one of the part-time members of NFRA appointed by the MCA last year is embroiled in a probe into alleged audit lapses in a fraud-hit company.

AS per an office order dated June 24, 2020 named Gurugram-based Anil Sharma appointed as a part-time member of NFRA. Sharma was the statutory auditor for Simmtronics Semiconductors, a Delhi-based firm. He is a fellow member of The Institute of Chartered Accountants of India (ICAI). Nearly a decade after the audits were completed, this directive has come back to haunt Sharma and his firm.

Between FY11 and FY13, the Simmtronics Semiconductors numbers grew at a rapid pace. In FY12, revenues increased to INR335 crore, up from INR204 crore in FY11. From INR10.46 crore in FY11 to INR16.19 crore in FY12, net profit increased by more than half to INR16.19 crore.

Revenues increased to INR531 crore in the following year (FY13), with profits of INR24.84 crore. These figures are currently being scrutinised.

SIMMTRONICS SEMICONDUCTORS LIMITED is presently under liquidation, according to the MCA website, and has not filed any accounts beyond FY13. Indrajit Sabharwal did not respond to an emailed request for remarks. In 2014, something appears to have gone wrong.

Simmtronics had access to about INR180 crore in working cash from a group of banks led by SBI. Indian Overseas Bank, Bank of Maharashtra, IDBI, Central Bank of India, Bank of Baroda, and Corporation Bank were all part of the consortium.

In October 2018, the Bank of Maharashtra filed a complaint with the Central Bureau of Investigation (CBI). According to the bank’s complaint, Simmtronics, its founders, and executives conspired with unknown individuals to fabricate LC and confirmation documents ostensibly issued by SBI branches and misappropriate bank funds.

SBI had taken steps to recover its own debts in the meantime.

SBI started a collection procedure with the Debt Recovery Tribunal in 2015, through the vice-president of its Dubai International Centre (DRT).

SBI was entitled to recover an amount of INR23,911,9581 from defendants jointly and severally, together with pendente lite and future interest at 4.85 percent per annum until realisation, according to DRT’s final judgement in July 2019.

Simmtronics and Sabharwals were also ordered to pay the bank the aforementioned decretal amount plus future interest within sixty days, “failing which the same shall be recovered from their own moveable and immovable properties jointly and/or severally.”

The CBI FIR describes the sequence of events. The bank had written to the ICAI regarding the auditors in these circumstances.

SBI has requested that the ICAI investigate the audit deficiencies in the fiscal years FY12 and FY13 and take appropriate action against the auditor.

The president of the ICAI received a letter from the stressed assets management group (SAMG) branch of SBI in Delhi, stating that Simmtronics Semiconductors, which was banking with it, had been declared a fraud by the bank “based on several reasons (Sic) major of fudging of the company’s financials.”

“It was also seen throughout this period that accounts were audited for the creation of yearly financial statements, but no deficiencies were found by the auditor,” the letter continued.

The reference was received against the stated firm without any supporting documents, according to the ICAI. State Bank was asked to file a formal complaint with supporting papers as per process, and the form for registering a formal complaint was supplied in response.”

These developments raise major concerns regarding the selection procedure for members of regulatory agencies. Do the MCA’s appointments, in the case of Sharma, follow any kind of due diligence? Or just some favourable words or recommendation are enough? What harm such appointments do to the credibility and independence of NFRA, which is entrusted with disciplinary actions against a large section of auditors?

Source: Economic Times