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TMI Blog2022 (9) TMI 1479X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013 and Accounting Standards (AS hereafter) notified under the Companies (Accounting Standards) Rules, 2006. 3. M/s. Subramaniam Bengali & Associates was the statutory auditor of TDML for FY 2016-17 and CA Rajiv Bengali was the Engagement Partner (EP hereafter) for this audit. 4. On a preliminary examination of Financial Statements downloaded from BSE website (TDML did not have a working website), it was found that the TDML had not complied with the Accounting Standards and provisions of the Act in the preparation and presentation of its Financial Statements for FY 2016-17, resulting in material misstatements of various figures and disclosures. Vide letter dated 22.03.2022, the Audit File along with other information were called from M/s. Subramaniam Bengali & Associates and the EP, giving 30 days' time for submission of required documents. CA Rajiv Bengali, the EP of the Audit Firm, submitted the Audit File in respect of audit of TDML for FY 2016-17 on 03.05.2022. 5. On examination of the Audit File, it is observed that the audit had been conducted in disregard of most of the Standards on Auditing (SA hereafter) and the Act. Despite this, on 30.05.2017 the EP had issued a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not specifically responded to the allegations of non-compliance with statutory requirements. He has mentioned that non communication with the management and breakdown of Computer Systems were the reasons for non-availability of Audit Evidence in Audit File. The EP has accepted his lapses in respect of some of the charges in the SCN, adding that the audit was completed when he was under stress because of his health and was completed in a hurried manner. He also submitted that his Systems were damaged, and he had to change almost the entire Systems; and that all the data could not be recovered, especially the mails which were very much part of the documentation. 9. The SCN gave the EP an opportunity of personal hearing but the EP has chosen not to avail of the same. Thus, this order is based on the written replies of the EP and other materials available on record. 10. We have perused all the materials on record including the written response of the EP. Some of the major violations relate to False reporting in the Independent Auditor's Report about truthfulness & fairness of Cash Flow Statement (CFS hereafter) despite non preparation of CFS by TDML, False reporting that TDML ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation & signing of the CFS submitted by the EP along with reply to SCN is totally different from that of the Balance Sheet and the Statement of Profit and Loss submitted along with the Audit File. The differences are tabulated as under: 11.3 From the above, it can be reasonably inferred that the EP has prepared the Cash Flow Statement after receipt of SCN and attached the same with his reply to SCN with the intention to mislead us. This act of the EP amounts to falsification of the Financial Statements. 12. The EP was charged2 with false reporting in the Independent Auditor's Report which shows that TDML was registered under section 45IA of the Reserve Bank of India Act 1934 (applicable for Non-Banking Finance Companies-NBFCs) and was holding a registration certificate for the same. In fact, as seen from Annual Report, TDML was in the business of media and content syndication and not an NBFC. TDML was not registered under RBI Act and was not holding such registration certificate. 12.1 Responding to this charge the EP stated that, "Reporting company as NFBC is purely a Typographical Error and which should not have been done ". 12.2 We find that the Auditor was required as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s I have said earlier the query sheet and points raised during the audit were replied by the Company based on which the Financial Statements and Report was made. However due to mainly non communication with the Company I could not complete the Audit File along with necessary documents and secondly my systems were also damaged, and I had to almost change the entire system and all the data could not be recovered especially the mails which were very much part of the documentation ". 14.2 We note that the EP had a statutory duty6 to retain the audit documentation for seven years from the date of the Auditor's Report. The Audit report in this case was signed on date 30-05-2017. Accordingly, the EP had a statutory duty to preserve the Audit File at least till 29-05-2024. Due diligence would require the EP to proper upkeep of Systems including back up of Audit File to ensure compliance with his statutory obligations. That he failed to do so points to gross negligence and unprofessionalism on his part. In any event, accepting such irresponsible replies would create a moral hazard making it easy for an Auditor to cite such lame excuses to shirk responsibility, defeating the very purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 15.1 The EP was also charged10 with non-compliance to SA 450 relating to 'Evaluation of misstatements identified during the audit' as he failed to document evidence of corrections of misstatement regarding bad debts from Rs. 23.11 crores to Rs. 14.87 crores. The EP was required to document the corrections of misstatements in the Financial Statements11. We observe that the EP had enquired with the management regarding details of Bad Debts amounting to Rs. 23.11 crores shown in the Trial Balance. The Audit File do not reflect any work paper showing how the EP's query was resolved. In the audited Financial Statements, however, Sundry Balance Written off (net) of Rs. 14.87 crores was disclosed. No audit procedures were performed to verify the correctness of Sundry Balance Written off (net) for Rs. 14.87 crores and genuineness of this transaction. 15.2 Responding to the charge relating to non-compliance to SA 240 the EP stated that - "There was no such circumstances and situation which would draw the attention to risk related to Material Misstatement due to Fraud." 15.3 Responding to the charge of misstatement identified during audit the EP has stated that - "The reply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficant doubt about the 'Going Concern' assumption and management's intentions to continue operations. Such indicators included: (i) Reduction in 'Revenue from Operations' from Rs. 51 crores in FY 2015-16 to Rs. 17.06 crores in FY 2016-17, (ii) Reduction in Inventory from Rs. 12.71 crores in FY 2015-16 to NIL in FY 2016-17, (iii) Sundry Balances worth Rs. 14.87 crores had been written off during the year, (iv) Recognition of abnormal Miscellaneous Expenses of Rs. 24.06 crores during the year and (v) The company had incurred loss of Rs. 54.37 crore, which resulted in substantial reduction in Net Worth from Rs. 58.89 crores as on 31.03.2016 to Rs. 4.52 crores as on 31.03.2017. 16.1 Responding to the charge as to why the appropriate audit evidence about 'Going Concern' assumption was not obtained by the auditor, the EP stated that - "Revenue from operations had decreased due to some of the clients cancelled their orders and other business reasons. The stock of Rights of File Shoukeen was nil because it turned out to be super flop and it was not realizable. It can be verified now also because the said film is not shown on any TV channel. The Sundry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther you must have also observed that the Note No. 27 to the Financial Statement seems not complete. This is the reason the names of other related party which were there. Generally, the Full table is made but unfortunately not able to recover that data. As far as the change of Directors are concerned, I have no idea on that issue at present." 17.2 As discussed earlier, the reply of the EP that he is not able to retrieve e-mails is unacceptable. The EP having failed to evaluate RPT and make appropriate disclosures regarding the same has thus not complied with SA 550. 18. The EP was charged18 with non-compliance with SA 230 relating to 'Audit Documentation' in that he had failed to document the nature, timing and extent of audit procedure performed and results thereof; failed to document audit evidence obtained, conclusions reached, communication with management & Those Charged With Governance (TCWG) etc.; he did not assemble the Audit File within 60 days of signing of audit report which is evident from the fact that he did not send the Audit Report and Financial Statements to NFRA along with the Audit File on 03.05.2022 but submitted them only on 10.05.2022 after NFRA ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Statements were approved by Board of Directors of TDML. Further, the Financial Statements were not signed by the Chief Finance Officer and Company Secretary, in violation of the provisions of the Act. The names of other signatories were not mentioned in the Financial Statements. 20.1 Responding to the charges the EP stated that "The Financial Statements were signed by the directors. The Audit report was signed and was given in good faith after getting the signature on the Balance Sheet but it was a mistake on my part to trust them for the same ". 20.2 Thus, the EP has accepted his lapse in not ascertaining that the persons as prescribed in the Act had signed the Financial Statements, and absent these, placing disclaimers about the same in his audit report. This is extreme lack of diligence on the part of a qualified professional to not insist to write the names of persons who signed on the Financial Statements as Directors of the TDML. The EP has not responded to the non-availability of audit evidence regarding approval of Financial Statements by the Board of Directors of TDML. Absent these the Financial Statements remain unverified thus making a mockery of the auditing responsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to FS has not been given. (vii) Classification of Short Terms Loans & Advances at Note 15 to FS, has not been given. 22.1 Responding to the charges the EP stated that "(i) Short Term Borrowing of Rs. 1.40 crores was from Aparna Shah as explained to us and what I recollect which was given to Company for payment of Taxes, (ii) Deferred Tax Asset shown under Current Asset. It is a mistake and should have been stated under Non Current Assets, (iii) The nature of business of the Company is of Media content and not manufacturing or Trading in Goods - and hence instead of Material Consumed it has been shown as Operating Cost. However, the details has been given, in the Schedule, (iv) Diluted Earnings per share shown at Rs. 0.53 for 31st March 2016 on the face of Profit & Loss account, However, in the Schedule Note No. 25 it has been correctly shown at Rs. 0.45, (v) Terms of Repayment of Loans. Both are car loans as mentioned in the notes and further bifurcation is not given for each of the loan, (vi) Classification of Short Term Borrowings, as already stated earlier the loan was given by Aparna Shah for payment of taxes and (vii) Classification of Short Term loans and Advances Given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ror. As an Auditor the EP should have pointed out these discrepancies, but failed to do so. His explanation that the working in the FA schedule implied that WDV method was used and therefore the company had not disclosed the depreciation method in the SAP is not acceptable. The method of depreciation is required to be specifically disclosed. Further, TDML's SAP for valuation of inventories gives the impression that inventory is valued at cost of production plus relevant overhead cost whereas, as per AS 2, Inventories are required to be valued at lower of cost and net realisable value. Therefore, it is clear that the EP failed to report non-compliance with SAP of the company and Schedule II of Companies Act, 2013. 24. The EP was charged27 with incorrect reporting as the audit work papers show payment of salary of Rs. 25.76 lakhs to Aparna Shah, Director of TDML, while the EP had reported that the company had not paid any managerial remunerations. In Note no-7 to FS relating to Trade Payables there is a reference to 'Note 2.25', while in Note no - 22 to the FS relating to Other Expenses, there is a reference to 'Note 2.28'. However, on perusal, it is seen that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em. Since it was oral discussion the same has not been put in the audit report." 25.2 The reply of the EP does not justify non-disclosure of the reason for non-compliance with AS 15 and its financial effect. Besides, verbal explanations or oral discussions cannot be the reason for non disclosure in the Independent Auditor's Report. 26. As discussed, the EP has made a series of serious departures from the Standards and the Law, in conduct of the audit of TDML for FY 2016-17. Based on above discussion, it is proved that EP had issued unmodified opinion on the Financial Statements without any basis. The poor quality of Audit followed by the cover up in terms of Cash Flow Statement that did not exist at the time of Audit, incomplete documentation and attempt to mislead through evasive replies further compounds the professional misconduct on the part of the EP. Based on the discussion and analysis, we conclude that the EP has committed Professional Misconduct as defined in the Act, as below: i. CA Rajiv Bengali committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 and clause 5 of Part I of the Second Schedule of the Chartered A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 EP failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his total failure to report the material misstatements and non-compliances made by the Company in the financial statements, as explained in the para No. 11, 13 to 17, 19, 20, 21, 24 and 25 above. v. CA Rajiv Bengali committed professional misconduct as defined by Section 132(4) of the Companies Act, read with section 22 and clause 9 of Part I of the Second Schedule of the Chartered Accountants Act 1949 (No. 38 of 1949) as amended from time to time, which states that an EP is guilty of professional misconduct when he "fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances". This charge is proved since the EP failed to conduct the audit in accordance with the SAs (as explained in para No. 11 to 25 (except point No. iii of para 22) above but falsely reported in his audit report that the audit was conducted as per SAs. Therefore, we conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 33. This order will become effective after 30 days from the date of issue of this order. Foot Note 1'At para No. 3.1 of SCN' 2At para No. 3.2 of SCN 3At para No. 3.3 of SCN 4Consequent upon demonetization, GSR-308-E dated 30.03.2017, inserted a new clause for disclosure of Specified Bank Notes in division I of schedule III of the Act. 5At para No. 3.4 of SCN 6As per para 82 of Standard on Quality Control-1 and para A23 of SA 230-Audit Documentation. 7SA 700 - Forming An Opinion And Reporting On Financial Statements 8At para 4.2 of SCN 9Para 4.2, 8 and 12 of AS 5- "Net Profit or Loss for the period, Prior period items and changes in accounting policies" 10At para 4.4 of SCN 11Para 5 & 7 of SA 450 - Evaluation of misstatements identified during the audit. 12As per para 32(c) of SA 240. 13As per para 15 of SA 200- 'Overall objectives of the Independent Auditor and the conduct of an audit in accordance with Standards on Auditing', EP was required to plan and perform an audit with professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X
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