Professional Misconduct: NFRA imposed Fine and Ban on Auditors for lapses in SRS Ltd. Audit

The National Financial Reporting Authority (NFRA) in India has imposed a Rs.300,000 penalty on the statutory auditor of now-de-listed company SRS Ltd, as well as a three-year ban on undertaking statutory or internal audits of any company, for alleged professional misconduct and lapses in the company’s FY18 audit. The company declared bankruptcy in 2018, and the NFRA launched an inquiry after receiving a referral from the Serious Fraud inquiry Office (SFIO).

In obtaining his audit opinion, the audit engagement partner reportedly missed indicators pointing to an irregular state of affairs in the organisation and failed to demonstrate professional scepticism and due diligence. For professional misconduct and other shortcomings in connection with the audit of SRS Ltd in 2017-18, the NFRA imposed a fine and a three-year ban on both auditors. The order was issued after the NFRA received a letter from the SFIO, which had conducted an investigation into the activities of SRS Ltd and the group entities. The SFIO investigation discovered that the corporation and its group companies had provided financial statements including fraudulent debtor claims and had engaged in the malpractice of round-tripping and stacking of transactions, resulting in inflated purchases and sales.

The NFRA took proceedings under the Companies Act to investigate professional or other misconduct by SRS Ltd’s statutory auditors.

SRS Ltd, a listed business and one of the SRS Group’s firms, was ordered by the NCLT to enter the Corporate Insolvency Resolution Process (CIRP) in August 2018. SRS Ltd’s joint statutory auditors for the financial year 2017-18 were audit firms SVP & Associates, its engagement partner (EP) Pankaj Kumar, and Oswal Sunil & Company, its EP Naresh Kumar, who were responsible for the audit of 39.71% and 60.29% of the firm’s total assets, respectively.

What happened?

The statutory auditors of SRS Ltd, Pankaj Kumar and Naresh Kumar, made multiple faults and inaccuracies in their audit of the company for the financial year 2017-18, according to the National Financial Reporting Authority (NFRA). The regulator claimed that the engagement partner failed to demonstrate professional scepticism and due diligence in reaching his audit opinion in accordance with audit standards by ignoring indicators pointing to an abnormal state of affairs in the company, which had negative implications for the true and fair view of financial statements.

The NFRA also noted that both auditors failed to evaluate the anomalous events in the financial accounts and chose to report only roughly Rs 10 crore of illegal transactions that the firm had already declared to stock exchanges. They also failed to identify the appointment of the Engagement Quality Control Review (EQCR) in a listed entity audit, jeopardising the audit process’s and its outcome’s quality.

Furthermore, they violated the code of ethics by providing the regulator with misleading and incorrect information about the appointment of an EQCR, demonstrating gross negligence in fulfilling their duties in violation of the rules. They misled the regulator and failed to carry out their responsibilities as ethical auditors entrusted with the vital role of a watchdog in the public interest.

Key Things to Learn from above Case:

Due Diligence and Professional Scepticism: Auditors must be more cautious and do extensive due diligence to identify any red flags or abnormalities in the organisation.

Compliance with Audit Standards: Auditors must adhere to audit standards and avoid any gaps in their audit opinion.

Observance of Ethical Principles: Auditors must follow ethical guidelines and not provide misleading information or falsify papers to the regulator.

Effective Communication with Stakeholders: Auditors must effectively interact with stakeholders in order to provide assurance about the financial statements’ honest and fair view.

To avoid such events in the future, auditors should perform thorough audits with adequate due diligence and adhere to audit standards. They must also maintain excellent contact with stakeholders while adhering to ethical norms. Furthermore, auditors should be aware of red flags and abnormalities in the company and disclose any such issues to the regulator as soon as possible.