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2023 (12) TMI 1250 - NFRA - Companies LawProfessional misconduct - Auditor's conflict of interest with the auditee company - Acting as statutory auditor of SKNL while holding or controlling shares of SKNL in violation of section 141 of the Companies Act 2013 & section 226(3)(e) of the Companies Act 1956 resulting in failure to maintain independence of auditor - Non-compliance with para 7 to 9 of Standard on Auditing (SA) 705 - penalties and sanctions - HELD THAT:- It is clear that CA Shyam Malpani had violated the Companies Act 1956, the Companies Act 2013, SQC1, SA 220 and SA 705 by performing this audit despite having serious conflict of interest and in not giving appropriate audit opinions. It is therefore concluded that CA Shyam Malpani has committed Professional Misconduct as defined under Section 132 (4) of the Companies Act 2013 in terms of section 22 of the Chartered Accountants Act 1949 (CA Act). As per the clause 7 of Part I of the Second Schedule of the CA Act, an EP is guilty of professional misconduct if he "did not exercise due diligence and was grossly negligent in the conduct of his professional duties" - Since the EP compromised his independence and failed to recognize and report the pervasiveness of the deficiencies of the financial statements, his conduct undoubtedly falls into the category of lack of due diligence and gross negligence. Therefore, the charge of professional misconduct on the part of the EP on this account is proved. Internationally also, similar cases of Auditor's conflict of interest with the auditee company has been viewed seriously. In this case the audit done by the EP related to SKNL which was a large public listed company and involved interest of large number of shareholders and other stake holders such as banks, creditors etc. It is critical that the auditor and the EP performed their job with due diligence to give assurance to the investors and stakeholders on true and fairness of the financial statements and thereby protect public interest. Any default on this account impacts and jeopardizes the larger public interest which needs to be considered while determining the quantum of punishment. Considering the nature and seriousness of violations and principles of proportionality, in the exercise of powers under Section 132 (4) (c) of the Companies Act, 2013, the sanctions ordered - a monetary penalty of Rupees Five Lakh imposed upon CA Shyam Malpani. In addition, CA Shyam Malpani 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. Application disposed off.
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