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2023 (9) TMI 822 - NFRA - Companies LawProfessional 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.
Issues Involved:
1. Failure to detect fraudulent diversion of funds and evergreening of loans. 2. Continuation of the audit engagement disregarding independence requirements. 3. Tampering of the audit file and related lapses. 4. Lapse in audit of the sale of 'Global Village Undertaking'. 5. Other non-compliances with laws and standards. 6. Omissions and commissions by the audit firm. Summary: I. Failure to Detect Fraudulent Diversion of Funds and Evergreening of Loans: The auditors failed to detect and report the fraudulent diversion of Rs 2,448.23 crores to MACEL, a promoter-owned entity, and the evergreening of loans through circular transactions. The auditors did not exercise professional judgment and skepticism, and they did not question the management or report the lapses in their audit report. The auditors also failed to report land advances of Rs 375 crores to related parties as fraudulent diversions. The auditors did not comply with section 143(1)(b), section 143(3)(i), section 143(12) of the Companies Act, SA 200, SA 240, SA 250, SA 315, SA 330, and SA 500. II. Continuation of the Audit Engagement Disregarding Independence Requirements: The auditors violated the independence requirements of SQC 1, SA 200, and SA 220 by continuing the audit engagement despite having audit and non-audit relationships with a large number of Coffee Day Group entities and the promoters. The total billing for services rendered to the Coffee Day Group exceeded the 40% threshold allowed under the Code of Ethics. The auditors did not perform sufficient appropriate procedures to evaluate their independence from the Coffee Day Group and its promoters. III. Tampering of the Audit File and Related Lapses: The auditors tampered with the audit file by modifying and adding documents after NFRA asked for the audit file. This is not permissible under SA 230. The audit file did not contain sufficient documentation to enable an experienced auditor to understand the nature, timing, and extent of the audit procedures performed. The auditors violated SQC 1, SA 200, SA 220, and SA 230. IV. Lapse in Audit of the Sale of 'Global Village Undertaking': The auditors failed to obtain and examine the valuation report of the 'Global Village Undertaking' (GVU) sold for Rs 721 crores. The auditors did not verify whether TDL had complied with Ind AS 109 before extinguishing financial liabilities. The auditors did not perform audit procedures in this matter and violated SA 500 and Ind AS 109. V. Other Non-Compliances with Laws and Standards: The auditors failed to report non-compliances with section 134(1) of the Companies Act, SA 315, SA 330, SA 500, SA 700, SA 260, and SA 265. The auditors did not ensure that financial statements were approved by the Board before signing, did not perform risk assessment procedures, did not report material misstatements, and did not communicate with Those Charged With Governance (TCWG) about deficiencies in internal control. VI. Omissions and Commissions by the Audit Firm: The audit firm bifurcated the responsibility of the audit engagement into two partners, violating SQC 1. The audit firm did not establish and maintain a system of quality control to ensure compliance with professional standards and regulatory requirements. The audit firm is responsible for the lapses in the audit performed by the engagement team. Penalty & Sanctions: The NFRA imposed the following penalties and sanctions: - M/s Sundaresha & Associates: Monetary penalty of Rs One Crore and debarment for four years. - CA C. Ramesh: Monetary penalty of Rs Five Lakhs and debarment for five years. - CA Chaitanya G. Deshpande: Monetary penalty of Rs Five Lakhs and debarment for five years. - Proceedings against CA Megha Sundaresha Andani were dropped. The penalties are effective 30 days from the date of the order.
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