Mere disclaimer of opinion not enough-NFRA holds CA guilty of professional misconduct
In a recent order, NFRA has held that though the chartered accountant issued a disclaimer of opinion both on Financial Statements and on the Internal Financial Controls, he was guilty of professional misconduct on account of failure to perform due diligence, to report fraud and comply with Standard on Auditing.
ABCAUS Case Law Citation:
4295 (2024) (10) abcaus.in NFRA
In the instant case, the respondent Chartered Accountant was the Engagement Partner (‘EP’) for the Statutory Audit of a limited company (the auditee company).
The NFRA received information from Central Economic Intelligence Bureau (CEIB) that based on SEBI report a FIR had been registered by the CBI against the said auditee company relating to bank fraud involving violation of Companies Act, 2013, manipulation of books of accounts/financials, submission of fake/forged/fabricated Financial Statements before banks to avail credit facilities.
The NFRA examined the professional conduct of the EP, for the said statutory audit under Section 132(4) of the Companies Act, 2013 (the Act). On examination of the Audit Files and on being satisfied that there were prima facie violations of the SAs and the relevant requirements of the Companies Act, 2013 a SCN was issued to the EP.
The NFRA observed that while audit of Financial Statements of companies under the Companies Act 2013 is conducted primarily to express an opinion on the Financial Statements by conducting the audit in accordance with the SAs prescribed u/s 143 (10), the auditor also has other reporting obligations under the Companies Act 2013 as recognised by various Standards on Auditing.
The EP was charged with failure to discharge his responsibilities relating to fraud as laid down in SA 240, reporting obligations under Section 143(12) of the Act and CARO, 2016. The EP was also charged with failure to comply with Para 6 of SA 500 which requires the auditor to design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. The EP was charged with non-compliance of Para 8 of SA 500 read with Para A44, A45, A46 and A48 of SA 500 which requires the auditor to evaluate the competence, capabilities and objectivity of the management expert, obtain understanding of the work of the expert and evaluate the appropriateness of that expert’s work. EP was charged with failure to comply with Para 9 of SA 230 which requires that in documenting the nature, timing and extent of audit procedures performed, the auditor shall record the identifying characteristics of the specific items or matters tested; who performed the audit work and the date such work was completed; and who reviewed the audit work performed and the date and extent of such review. The EP was charged with non-compliance with Section 143(3)(e) of the Companies Act, 2013, which requires the auditor to state in his report whether, in his opinion, the Financial Statements comply with the accounting standards. The EP was charged for not reporting the non-compliances by the company with Ind AS 16 and Ind AS 107. The EP was charged for failure to report that the company did not comply with Para 74(a) of Ind AS 16 which requires that the Financial Statements shall disclose the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities. The BP was also charged for not pointing out the non-compliances by the company in respect of Para 35 of Ind AS 107 as there are no disclosures in the Financial Statements regarding credit risk exposure of trade receivable
Although the EP has issued a disclaimer of opinion, he was charged for non-compliance with Section 143(3)(i) of the Companies Act, 2013 for not giving a proper basis for the Disclaimer of Opinion issued on the Internal Financial Control over Financial Reporting (ICoFR). Further the EP was charged with non-compliance with Para 10 and Para 25(a) of SA 315 which required the auditor to discuss the susceptibility of the entity’s Financial Statements to material misstatement.
The NFRA held that even though the EP has issued a Disclaimer of Opinion, he failed to exercise due diligence and displayed gross negligence in failure to adequately address the risks related to fraud, disclosures requirements and deficiencies in audit documentation and make appropriate reports under Section 143(12).
The NFRA concluded that the EP had committed professional misconduct as defined in Section 132 (4) of the Companies Act, read with Section 22 the Chartered Accountants Act 1949 (the CA Act), as amended from time to time, as detailed below:
(a) The EP committed professional misconduct by not exercising due diligence and being grossly negligent in the conduct ofhis professional duties.
(b) The EP committed professional misconduct by failing to invite attention to any material departure from the generally accepted procedure of audit applicable to the audit engagement.
The NFRA imposed a monetary penalty of Rs. 5,00,000/- on the EP.
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