TMI Blog2023 (10) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... work. Specifically, the following failures on the part of BP Aabhas Tiwari as contained under the Articles of Charges in the SCN are established. a) Failure to exercise due diligence and ascertain from the audited Company whether the requirements of Sections 139 of the Act in respect of such appointment had been duly complied with, as explained and proved in part C-1 above. (As per Section 22 and Clause 9 of Part I of the First Schedule to the CAs Act); b) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, because of the lapses and omissions as explained and proved in parts C-1 and C-11 above. (As per Section 22 and Clause 7 of Part I of the Second Schedule to the CAs Act); c) Failure to obtain sufficient information which is necessary for the expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion, because of the lapses and omissions as explained and proved in part C-11 above. (As per Section 22 and Clause 8 of Part I of the Second Schedule to the CAs Act); and d) Failure to invite attention to material departure from the generally accepted procedures of audit appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Professional Misconduct E. Penalty and Sanctions ACUTIVE SUMMARY 1. This Order is being passed as a result of an investigation by the National Financial Reporting Authority (NFRA) into the professional conduct of CA Aabhas Tiwari for his role as the Engagement Partner (EP) in the audit of six branches of DHFL. DHFL, a housing finance company listed on both NSE and BSE) and operating through a network of branches, was reportedly involved in financial fraud. NFRA took suo motu notice of the matter and pursuant of an Audit Quality Review (AQR) of the statutory audit of DHFL for FY 2017-18, conducted by Chaturvedi Shah (CAS), a Mumbai-based Chartered Accountant Finn. During the review, NFRA also noticed that 33 Engagement Partners (EP) or branch auditors had signed the Independent Branch Auditors' Report for nearly 250 branches. The Statutory Auditor of the Company viz CAS had referred to these so-called Branch Audits. NFRA investigated these Eps responsible for the branch audits under section 132 (4) of the Companies Act, 2013 (the Act), including CA Aabhas Tiwari, who was the EP for the audit of six of the 250 branches of DHFL. 2. NFRA's investigation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Standards on Auditing (SA), including the Standards on Quality Control and the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under Section 132 (4) (c) of the Act. 7. Following media reports on the alleged siphoning of public money of around Rs. 31000 crore and the Enforcement Directorate's reported action in April 2020 on an alleged banking fraud of about Rs. 3700 crore by the promoter/directors of DHFL, NFRA suo-motu initiated an Audit Quality Review (AQR) to probe into the role of the Statutory Auditors of DHFL for the FY 2017-18, the year in which the alleged fraud was primarily stated to have occurred. While examining the Audit Files [As defined in para 6 of SA 230] of the statutory audit carried out by CAS, a Mumbai-based CA firm, certain prima facie violations were observed relating to the appointment of Branch Auditors and the conduct of branch audits of DHFL, which were referred to by the statutory auditor CAS. Accordingly, NFRA suo motu called for the audit files from EP who had signed the Independent Branch Auditors' Report for nearly 250 branches, under Section 132(4) of the Act, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The EP availed of the opportunity for a personal hearing and attended the personal hearing on 14.03.2023 before the Executive Body of NFRA. During the personal hearing, the EP reiterated his written replies to the SCN. The various charges levied in the SCN and the response of the EP to the charges are discussed in Part C of this Order. C. MAJOR LAPSES BY THE EP 13. The major lapses for which the EP was issued the SCN primarily relate to (i) accepting the audit engagement without a valid authority and thus violating the provisions of the Act and (ii) violations of the Standard of Auditing in conducting the audit. I. Acceptance of audit engagement without valid authorization and without complying with ethical requirements; and issuing an audit report in violation of the Act 14. The EP was charged with acceptance of an audit engagement without complying with ethical requirements and issuing the audit report without a valid appointment as per the Act, as the appointment of the Audit Firm as Statutory Auditor for the branches of DHFL for FY 2017-18 was not done by the competent authority i.e., the shareholders. 15. On examination of the Audit File, we observe that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule framed thereunder. [except those resulted due to misinterpretation of the provisions of Section 22 of CA Act 1949 Part 1 _ Clause (9)] . 17. The BP also submitted that a mistake was committed regarding compliance with the Chartered Accountants Act, 1949 wherein he was required to verify compliance with the Companies Act, 2013, but he did not do it because such non-compliance was not expected from the company and there was a lack of awareness regarding the provisions. 18. The EP's admission that he did not verify the compliance with the Act regarding his appointment proves the charges in para 14 15 above. On examination of the replies of the EP, the appointment letter acknowledged by the EP and the Independent Branch Auditors' Report issued by him clearly described the engagement as a Branch Statutory Audit. However, the EP did not comply with the requirements of the CAs Act and SA 200 in this regard, as explained in subsequent paragraphs. 19. Under Section 22 of the Chartered Accountants Act, 1949 read with Clause (9) of Part I of the First Schedule to the said Act (the meaning of which is conceived in Section 132(4) as professional misconduct) a chartere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory Auditor (viz. Chaturvedi Shah) for the Company and its branches. Therefore, in the absence of a valid appointment order, EP's acceptance vide letter dated 13.09.2017 of the appointment as Statutory Auditor of the branches and issuance of the Independent Branch Auditor's Report for the six Branches of DHFL, describing the engagement as Branch Statutory Audit confirms the absence of professional skepticism and lack of due diligence on his part. 22. The 'doctrine of indoor management' is not applicable in this case in view of the specific requirement of the CAs Act as stated above, which casts a positive obligation on the part of the EP to verify compliance with the Act regarding his appointment. 23. Thus, the EP was required to exercise due diligence under SA 200 and adhere to the specific provisions of the Chartered Accountants Act, 1949 under Section 22 read with Clause 9 of Part I of the First Schedule. The non-compliance is therefore professional misconduct in terms of section 132(4)(c) of the Companies Act 2013. Branch Statutory Audit is rendered invalid ab-initio due to non-ratification by the shareholders of the Company which was the requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointment as the Branch Auditor. The principles and procedures laid down in the SAs including professional skepticism, audit documentation, sufficiency and appropriateness of audit evidence, audit planning, materiality, engagement risk, nature, timing and extent of evidence-gathering procedures and reporting are all applicable in the branch audit as well, being an audit of historical financial information. Accordingly, the various violations of the SAs with which the EP was charged in the SCN are discussed in the following paragraphs. Non-Compliance with SA 210 Agreeing the Terms of Audit Engagements 25. The EP was charged with non-compliance with SA 210 [Agreeing the Tenns of Audit Engagements] and displaying an absence of professional skepticism and professional judgment in documenting the objective and scope of the audit, thereby violating SA 200 [Para 15 and 16 of SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing] as well. SA 210 [Para 9, 10 and 11 of SA 210] stipulates that the auditor shall agree to the terms of the audit engagement with management or Those Charged With Governance (TCWG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed by SA 210) [The sample engagement letter provided in appendix I of SA 210 may be referred] was not found to have been issued by EP. The EP's response above shows a flawed understanding of the scope of SA 210. 28. Para 10 of SA 210 which refers to para 11 of the SA states that if law or regulation prescribes in sufficient detail the terms of the audit engagement referred to in paragraph 10 , the auditor need not record them in a written agreement, except for the fact that such law or regulation applies and that management acknowledges and understands its responsibilities. While the EP admits that the engagement was a branch statutory audit under section 143(8) of the Act, the EP ignored that para 11 of SA 210 can be invoked only if the terms of audit engagement such as the objective of the audit, the responsibilities of management, applicable financial reporting framework and expected form and contents of the audit report are prescribed by the Law, i.e., Section 143(8) of the Act, which is not the case. 29. Between 2015-16 and 16-17, there was a significant change in the circumstances relating to the branch audit. In 2015-16 the AGM decided to have a separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit documentation are to provide evidence of the auditor's basis for a conclusion about the achievement of the overall objectives of the auditor; and evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. SA 230 lists enabling the conduct of quality control reviews and inspections in accordance with SQC 1; and enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements among the additional purposes that are served by the audit documentation. Para 7 of SA 230 emphasises the Timely Preparation of Audit Documentation i.e. in a manner contemporaneous with the events that are being sought to be documented. 34. Apart from SA 230, there are other SAs that also require the documentation of events, data, evidence, opinions and conclusions. SA 230 makes it very clear that reliance can be placed only on the audit file as evidence of what was done. Para AS of SA 230 makes explicit that: Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntive audit procedures). 10. 11 38. In the absence of such proof documented in the audit file, the inevitable conclusion is that the requirements of the SAs are not met. The above facts are evidence that the EP did not follow the requirements of SA 230 and the audit documentation does not give evidence of the nature, timing and extent of audit procedures performed, results of those audit procedures and conclusions reached during the audit. Hence the charges in para 30 above regarding non-compliance with SA 230 stand established. 39. The lack of sufficient documentation in an audit is not merely a technical and procedural formality but is a serious issue which strikes at the very root of the audit and may defeat the very purpose of the audit itself. Lack of sufficient documentation has been viewed seriously by national and international regulators as well. For example, in the matter of Bharat Parikh Associates Chartered Accountants, dated 19-03-2019, the US audit regulator PCAOB took a serious view on the lack of sufficient documentation and imposed penalties and sanctions for violations including insufficient documentation. The PCAOB Order states Audit documentation must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As, the EP is required to evaluate the effect of the misstatements, if any, and decide to appropriately modify his opinion. In the absence of documented procedures and conclusions, there is no evidence that the EP has obtained reasonable assurance that the financial information is free from material misstatements. Thus, the contention of the EP that I have obtained reasonable assurance and evidence to form an opinion on financial statement of branches. is baseless and the EP issued an unmodified opinion without complying with the requirements of SA 700. 43. Therefore, in the absence of any documented conclusions, determination of materiality and assessment of the risk of material misstatements and the test of controls, we observe that the unmodified opinion issued by EP is unsupported by evidence. Hence, the charges in para 40 above regarding non-compliance with SA 700 stand proved. Non-Compliance with other SAs 44. The EP was charged with non-compliance with the following provisions of SAs: a. Para 6, 7, 8, 9 10 of SA 300 [planning an Audit of Financial Statements] as the EP failed in establishing an overall audit strategy and development of audit plan etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointment, the EP also did not ensure the audit quality. The EP was grossly negligent in performing his professional duties by not adhering to the requirements laid down by the relevant SAs. This has led to the issuance of an audit report not backed by valid audit evidence and the absence of quality in the audit work. Specifically, the following failures on the part of BP Aabhas Tiwari as contained under the Articles of Charges in the SCN are established. a) Failure to exercise due diligence and ascertain from the audited Company whether the requirements of Sections 139 of the Act in respect of such appointment had been duly complied with, as explained and proved in part C-1 above. (As per Section 22 and Clause 9 of Part I of the First Schedule to the CAs Act); b) Failure to exercise due diligence and being grossly negligent in the conduct of professional duties, because of the lapses and omissions as explained and proved in parts C-1 and C-11 above. (As per Section 22 and Clause 7 of Part I of the Second Schedule to the CAs Act); c) Failure to obtain sufficient information which is necessary for the expression of an opinion or its exceptions are sufficiently material to n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to the reports he issued to facilitate the Company's Auditor to issue their report on the Financial Statements. As detailed in the foregoing paragraphs, there were deficiencies in the Audit right from the acceptance of the Audit without due diligence in ascertaining the validity of the offer, to the actual conduct of the audit, which establishes his gross negligence resulting in professional misconduct. In fact, accepting an audit assignment in contravention of the Law and continuing it in non-conformity with the SAs, constitutes a flagrant violation of the Law. We also conclude that despite being a qualified professional, CA Aabhas Tiwari has not adhered to the Standards on Auditing and the provisions of the law. 53. As demonstrated by the discussions above, there are gaps in his understanding of SAs that need to be addressed. 54. We also note that the EP has admitted the lapse in accepting the Audit. Considering the fact that the EP has admitted his mistake regarding the acceptance of the engagement and that professional misconduct has been proved and considerin ..... 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