The National Financial Reporting Authority (NFRA) has banned the Chartered Accountants Firm Sundaresha and Associates for a period of two years from audit. The NFRA has also imposed a hefty penalty of Rs. 1 Crore for the professional misconduct in the audit of shell companies.
NFRA’s investigations revealed that the Auditors of GVIL for FY 2019-20 failed to meet the relevant requirements of the Standards on Auditing (SA) and the provisions of the Companies Act 2013 and demonstrated a serious lack of competence Illey failed to evaluate their potential conflict of interest and failed to maintain their independence from GVIL by having audit and non-audit relationships with a large number of Coffee Day Group companies and the family members of the promoters. blatantly violated the Code of Ethics issued by ICAI, as the percentage of professional fees received from Coffee Day Group (including Promoters) was more than 40% of their total professional fees.
It was also unearthed that the Auditors failed to comprehend that GVIL was a shell company used by promoters for financial maneuvers. The Auditors did not exercise professional judgment & skepticism during audit of (a) Rs 581.16 crores borrowed from subsidiary companies of CDEL; (b) loan of Rs 370 crores fraudulently given to promoter’s company MACEL; (c) loan of Rs 105 crores fraudulently given to a related party named SICAL Logistics Ltd; (d) land advance of Rs 45 crores fraudulently given to Mrs Razia Sultana, which was subsequently provided for and written off; (e) bank transactions-failing to detect evergreening of loan through structured circulation of funds; and (f) the going concern risk in GVIL, thus violating SA 570. All these loans and advances were given without any business rationale, without any authorisation and without any written agreements with counterparties.
It was also noted that the Auditors failed to perform sufficient appropriate audit procedures while doing audit of related party balances, thus failing to detect & report understatement of related party loans by Rs 350 crores. They failed to report the misstatement of Rs 325 crores in the Statement of Cash Flow.
The total misstatements in the Financial Statements of GVIL were of Rs 1776.16 crores. The
Auditors failed to report absence of Internal Financial Controls in respect of fraudulent diversion
of funds, pre-signing of blank cheques and evergreening of loans They also violated a number
of Standards on Auditing and provisions of the Companies Act 2013.
It was observed that” The Auditors committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial
statement where he is concerned with that financial statement in a professional capacity”.”
It was also noted that “The Auditors committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity”.”
“The Auditors committed professional misconduct as defined by clause 7 of Paxt I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”,”It was further observed.
Thc Auditors had also committed professional misconduct as defined by clause 8 of Part 1 of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “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”.
In addition, The Auditors committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an auditor is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”.
After giving the firm Sundaresha and Associates, an opportunity to present their case, NFRA found the Audit Firm and its Engagement Partners, guilty of professional misconduct and imposes through this Order imposed the following monetary penalties and sanctions to take effect after 30 days from the date of this Order: –
Imposition of a monetary penalty of Rs One crore only upon M/s Sundaresha & Associates.
In addition, M/s Sundaresha & Associates is debarred for a period of Two 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 debarment period will start after completion of two years debarment period imposed in case of Tanglin Development Limited for FY 2018-19 vide NFRA Older dated 26.04.2023.
Thus the firm is effectively debarred for 4 years from the implementation of the debarment order dated 26.04.2023.
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