The National Financial Reporting Authority ( NFRA ) has slapped a monetary penalty of ₹2.5 Crore on a Chartered Accountants Firm and Chartered Accountants for audit irregularities.
“On examination of the Audit file for the Statutory Audit of RCFL conducted by the Audit Firm Shridhar & Associates, which was called for under Section 132 (4) of the Act, we were of the prima facie view that the Auditors had not discharged their professional duties under the Act as well as the Standards on Auditing (SA). Consequently, the SCN was issued to the Auditors asking them to show cause why action under Section 132(4) of the Act should not be initiated against them for professional misconduct”, observed NFRA.
The National Financial Reporting Authority ( NFRA ) After examining the detailed submissions, including written and oral, this Order concluded that the Auditors failed to meet the relevant requirements of the SAS and violated the Act, and the Code of Ethics in respect of several significant areas of audit. In the areas of the audit identified in this Order, the Auditors were grossly negligent, failed to apply professional skepticism and due diligence, and did not adequately challenge the management assertions.
Major violations proved in the NFRA order are as follows:
“a) The EP accepted the engagement without first communicating with the previous auditor and without waiting for a reasonable time for a reply. The Auditor’s deviation from the law and the firm’s quality policy shows the absence of due diligence and controls on client acceptance at the engagement level and firm level.
b) The Auditors issued an inappropriate Emphasis of Matter (EOM) in the audit report to members even though the contents of the disclosure in the financial statement (reporting of suspected fraud by the previous auditor) called for a modification of opinion. The audit report gives a clear impression to the users that the auditor fully agrees with and reiterates the inappropriate disclosure by the Company. The auditors also endorsed the company’s legal interpretation that there was no fraud and based on that dismissed any suspicions of fraud even while the matter was pending with MCA.
c) The auditors did not obtain sufficient appropriate evidence to conclude and report that there was no material uncertainty regarding the going concern status of RCFL.
d) The auditors did not perform the audit procedures to ensure the reasonability of the Expected Credit Loss provision of <537 crore on loans of < 12,224 crore.
e) Despite being aware of the report of suspected fraud by the previous auditor, the EP stated in the audit report that there were no matters falling under section 143(12). Therefore, the audit report to the members was misleading. The Auditors also failed to adequately examine the end-use of loans, indications of siphoning of funds from the company, management override of controls, and the business rationale of sanctioning and disbursing loans by the Company. None of these factors was adequately reflected in the Auditor’s assessment of risks of material misstatement due to fraud; in the Auditor’s assessment of risks of material misstatement due to fraud; consequently, the Auditors failed to perform audit procedures that were responsive to
the fraud risk.
Despite the resignation of the previous auditor and a reporting of suspected fraud, the Auditors failed to conduct the audit as per the standards on auditing. The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditors in disregard of their responsibilities under the Act and SAs. The deficiencies in the audit resulted in the audit opinion being rendered unreliable since the material misstatements in the financial statement assertions remained unreported. The Auditors also demonstrated a lack of professionalism by rationalizing the actions of the Company, performing insufficient evaluation of the work of the previous auditor, and ignoring the fundamentals of auditing.”
Based on the investigation and proceedings under Section 132(4) of the Companies Act, and after allowing them to present their case, it was found that the Audit Firm and the EP are guilty of professional misconduct and impose, through the Order, the following monetary penalties and sanctions were imposed:
a. Imposition of monetary penalty of Rupees Two Crore on the Audit Firm M/s Shridhar & Associates.
b. Imposition of monetary penalty of Rs. Fifty Lakhs on CA Ajay Vastani. In addition, EP CA Ajay Vastani was debarred for 5 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.
The NFRA Panel of Chairperson Dr Ajay Bhushan Prasad Pandey, Full-Time Member Dr. Praveen Kumar Tiwari and Full-Time Member Smita Jhingran had observed that, “As per the financial statements, RCFL’s total assets were Rs. 13,504 crore and total external liabilities were around Rs.12,623 crore as of 31.03.2019. The external liabilities included a debt of over Rs. 10,284 crore, in the form of debt securities and borrowings from banks, commercial papers etc. Given the high degree of public interest in this listed entity, it was the duty of the Auditors to conduct the audit with the highest level of professional skepticism and due diligence and report their opinion in an unbiased manner. Despite the resignation of the previous auditor and a reporting of suspected fraud, the Auditors failed to conduct the audit as per standards on auditing.”
It was also stated that, “The major lapses started from the acceptance of the initial appointment of Shridhar & Associates as statutory auditors and continued throughout the risk assessment, audit of loans, evaluation of going concern and reporting. The material misstatements in the financial statements due to inadequate provision, unjustified valuation of loans and irrational business practices were concurred by the Auditors in disregard of their responsibilities under the Act and SAs.”
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