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2023 (9) TMI 822 - NATIONAL FINANCIAL REPORTING AUTHORITYProfessional Misconduct - Failure to detect fraudulent diversion of funds and evergreening of loans through structured circular transactions of funds - Continuation of Audit engagement disregarding Independence requirements - Tampering of Audit File and related lapses (SA 230 'Audit Documentations) - Lapse in audit of sale of Global Village Undertaking - Failure to report non compliances with section 134(1) of the Act - Failure to comply with SA 315 - "Identifying and assessing the risk of material misstatement through understanding the entity and its environment", SA 330 "Auditors response to assessed risk" and SA 500 "Audit Evidence" - Failure to comply with SA 700 "Forming an Opinion and Reporting on Financial Statements" - penalty and sanctions. Failure to detect fraudulent diversion of funds of Rs 2,448.23 crores and evergreening of loans through structured circular transactions of funds - HELD THAT:- The Auditors were charged with non-Compliances with SA 550 (Related Parties) & SA 505 (External Confirmations), as they failed to perform appropriate audit procedures to identify the risk of material misstatements associated with related party relationships and transactions. Further, the Auditors were charged with failure to obtain balance confirmations from related parties. The Auditors have denied the charge stating that they have disclaimed the Financial Statements of TDL as a whole. They stated that they had verified completeness of related party list; obtained management representation; mapped nature of relationships in first year of audit; tracked related party transactions (RPT); checked authorisation of RPT and reported the RPT outside the normal course of business in the audit report and obtained balance confirmations. They also attached copies of balance confirmations obtained from related parties. Having considered the reply, it is noted that the reply is not supported by the evidence in the Audit File except that the Auditors had verified the arithmetical accuracy of the related party transactions - In similar cases of diversion of funds and failures to perform audit procedures and exercise professional skepticism in related party transactions and internal control over financial reporting, PCAOB (Public Company Accounting Oversight Board- US Audit regulator) have penalised the auditors. Continuation of Audit engagement disregarding Independence requirements - HELD THAT:- The Auditors were charged with non-compliance with requirements relating to independence of auditors as per SQC 1, SA 200 and SA 220. Before proceeding with the charge , a look at these provisions would be relevant. SQC 1 establishes standards and provides guidance regarding a firm's system of quality control for audit. SQC 1 requires an Audit Firm to establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel are subject to independence requirements (including experts contracted by the firm and network firm personnel), and maintain such independence where required by the Code of Ethics. SA 200 requires an auditor to comply with relevant ethical requirements, including those pertaining to independence, relating to audit engagements of financial statements. SA 220 requires the Auditor to form a conclusion on compliance with independence requirements that apply to the audit engagement. Tampering of Audit File and related lapses - SA 230 'Audit Documentations' - HELD THAT:- Considering the provisions of the auditing standards and the affidavit filed by the Firm, the submission of the Auditors regarding the additional documents cannot be accepted and in light of the facts, circumstances and analysis above, we find these additional documents to be an afterthought to cover up the deficiencies in the Audit. Further, this also constitutes tampering of the Audit File. This is unbecoming behavior on the part of Professionals. Besides our Standards, the case laws quoted above show that internationally Regulators treat the integrity of the Audit file as sacrosanct and any kind of tampering is viewed seriously attracting significant sanctions - the Auditors have violated SQC 1, SA 200, SA 220 and SA 230. Lapse in audit of sale of 'Global Village Undertaking" at a net consideration of Rs 721 crores - HELD THAT:- The Auditors were charged with failure to obtain and examine the valuation report of GVU. The transaction was arranged in such a fashion that the liabilities of Rs 1520.64 crores and assets of Rs 1051.25 crores were transferred to GVTPPL, which issued debentures of Rs 721 crores to TDL. Thereafter, the GVTPPL was taken over by the Sattva Group. Debentures worth Rs 286.72 crores were redeemed and debentures worth Rs 434.28 crores are held as investment in the balance sheet of TDL - There is no evidence in the Audit File that consent from the lenders was obtained before transfer of borrowings by TDL to GVTPPL. The Auditors did not verify whether TDL had complied with the requirement of lnd AS 109 before extinguishing financial liabilities. Failure to report non compliances with section 134(1) of the Act - HELD THAT:- As per section 134(1) of the Act, approval of the Financial Statements by the Board and its signing by the persons authorized by the Board are prerequisites before an auditor makes a report on such approved & signed financial statements. Further, the reliance on the "Doctrine of Indoor Management" is misplaced as this Doctrine is applicable to third parties, not having access to the internal records of a company. The Auditors should have obtained a certified copy of the Board resolution approving the Financial Statements and authorizing the Directors to sign the Financial Statements and should have kept the same in the Audit File before its assembly. The Auditors did not do the same. Thus, the charge that the Auditors did not ensure compliance with section 134(1) of the Act by TDL, is proved. Failure to comply with SA 315, "Identifying and assessing the risk of material misstatement through understanding the entity and its environment", SA 330 - "Auditors response to assessed risk" and SA 500, "Audit Evidence" - HELD THAT:- The risk assessment procedures are required to be performed every year by understanding the company and its environment. There is no evidence in the Audit File about performing any risk assessment procedure at planning stage of audit. No analysis of borrowings and loans/advances granted to related parties was done by the Auditors at planning stage to identify RoMM. Accordingly, we conclude that Auditors have failed to understand TDL and perform basic audit procedures for identification of RoMM, and thus violated SA 315, SA 330 and SA 500. Failure to comply with SA 700, "Forming an Opinion and Reporting on Financial Statements" - HELD THAT:- With respect to non-consideration of Disclaimer of Opinions given by the Auditors in case of GVIL and by their related Audit Firm M/s ASRMP & Co. in case of TRRDPL, the Auditors stated that it was premature to disclaim the Financial Statements as far as advances given to GVIL and TRRDPL were concerned. The detailed analysis of the replies in support of each charge mentioned above has already been done at section C-I and found not satisfactory. We are of the view that such fraudulent transactions were required to be considered while drawing conclusions, which the Auditors failed to do. Accordingly, the Auditors were grossly negligent in drawing conclusions and forming audit opinion. We find that the Auditors did not comply with SA 700. Failure to comply with SA 260, "Communication with Those Charged With Governance" (TCWG) & SA 265, "Communicating deficiencies in Internal Control to Those Charged With Governance and Management" - HELD THAT:- The communication with TCWG & its documentation in Audit File is a mandatory requirement, to be complied with by the auditors, which they did not comply. Further, deficiencies in internal control with reference to diversion of funds to promoter owned entities and evergreening of loans through structured circulation of funds have already been proved. The Auditors have failed to communicate such deficiencies in internal control with TCWG. Accordingly, it is found that this charge is proved - Auditors were also charged with non-compliance with SA 210- Agreeing the terms of audit engagements. Having considered the reply, this charge is dropped. Penalty and Sanctions - HELD THAT:- 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. Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, it is hereby ordered: a) Imposition of a monetary penalty of Rs One Crore upon M/s Sundaresha & Associates. In addition, M/s Sundaresha & Associates is debarred for a period of four 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 run concurrently along with debarment ordered by the Order no. NF-23/14/2022 dated 26.04.2023 in case of TDL for FY 2018-19 and Order no. NF-23/14/2022 dated 30.05.2023 in case of GVIL for FY 2019-20. b) Imposition of a monetary penalty of Rs Five Lakhs upon CA C. Ramesh. In addition, CA C. Ramesh is debarred for a period of five 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 run concurrently along with debarment ordered by the Order no. NF- 23/14/2022 dated 26.04.2023 in case of TDL for FY 2018-19 and Order no. NF-23/14/2022 dated 30.05.2023 in case of GVIL for FY 2019-20. c) Imposition of a monetary penalty of Rs Five Lakhs upon CA Chaitanya G. Deshpande. In addition, CA Chaitanya G. Deshpande is debarred for a period of five 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 run concurrently along with debarment ordered by the Order no. NF-23/14/2022 dated 30.05.2023 in case of GVIL for FY 2019-20 d) Proceedings initiated against CA Megha Sundaresha Andani are hereby dropped.
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