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2024 (5) TMI 75 - NATIONAL FINANCIAL REPORTING AUTHORITYProfessional Misconduct by CA - Liability of the Engagement Partner (EP) with Audit Firm - Failure to disclose a material fact known - Failure report a material misstatement known - Failure to exercise due diligence and being grossly negligent in the conduct of professional duties - Failure to obtain sufficient information which is necessary for expression of an opinion - Failure to invite attention to my material departure from the generally accepted procedures of audit applicable - sanctions and penalties - section 132 (4) of Companies Act 2013 - HELD THAT:- It is proved that the audit firm failed to implement the quality control policies as required by SAs, within the firm. Following are the observations:- I. The audit firm committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that a CA 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". This charge is proved as the audit firm failed to disclose in his report the material non-compliances by the company. II. The audit firm committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that a CA 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". This charge is proved as the audit firm, who was appointed as the statutory auditor, failed to disclose in its report the material non-compliances by the company. III. The audit firm committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the CA Act, which states that a CA is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties". This charge is proved as the audit firm, who was appointed as the statutory auditor, failed to exercise due diligence in the audit of the company in accordance with the SAs and applicable regulations. IV. The audit firm committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the CA Act, which states that an EP 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". This charge is proved as the audit firm, who was appointed as the statutory auditor, failed to conduct the audit in accordance with the SAs and applicable regulations and failed to analyse and report the appropriateness of accounting policy for recognition of interest cost on loans classifies as NPAs. V. The audit firm committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an FP is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable in the circumstances”. This charge is proved since the audit firm, who was appointed es the statutory auditor, failed to conduct the audit in accordance with the SAs. It is concluded that the charges of professional misconduct enumerated in the SCN dated 04.12.2023 stand proved based on the evidence in the Audit File, the Audit Report issued by the EP on behalf of the audit firm, the submissions made by the audit firm, the annual report of Vikas WSP Limited for the FY 2019-20 and other materials available on record. Penalties and sanctions - HELD THAT:- Section 132(4) (c) of the Companies Act 2013 provides that the National Financial Reporting Authority shall, where professional or other misconduct is proved, have the power to make order for. A) imposing penalty of (I) not less chart one lakh rupees, bat which may extend to Ave times of the fees received. in case of individuals, and (II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms. (B) debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate. or (II) performing any valuation as provided under section 247, for a minimums period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority. Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, and also keeping in mind that the audit firm has not accepted the charges as pointed out in thy SCN, in exercise of powers under Section 152(4)(c) of the Companies Act, 2013, it is hereby ordered imposition of a monetary penalty of Rs 5,00,000/- upon M/s S. Prakash Aggarwal & Co.
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