NFRA imposes penalty of Rs. 4.50 crores on CA/Audit Firm for professional misconduct for not exercising due diligence
In a recent order, the NFRA has imposed penalty of Rs. 4.50crores on CA/Audit Firm for professional misconduct for not exercising due diligence and not adhering to the requirements as laid down by the relevant statutes.
ABCAUS Case Law Citation:
ABCAUS 3958 (2024) (04) NFRA
Under section 143(12) of the 2013 Act if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving Rs. one crores or above is being or has been committed by its officers or employees, the auditor shall report the matter to the Central Government.
In cases of a fraud involving lesser than Rs. one crores the auditor is required to report the matter to the audit committee or to the Board. It has been further provided that the companies, whose auditors have reported frauds to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report
In the instant case, the Ministry of Corporate Affairs wrote a letter informing the NFRA that the ex-auditor of Reliance Capital Limited (RCL) had filed a report to MCA under section 143(12) of the Companies Act 2013 (2013 Act) and resigned from the audit engagement on the same date without issuing an audit report for FY 2018-19.
The main concern of the ex-auditor was with respect to disbursement of amounts from group companies to borrowers with negative net worth and “Emphasis on matters paragraph” on going concern.
While examining the matter, it was observed that two auditors were appointed as joint statutory auditors of RCL for a term of 5 consecutive years. The one auditor filed form ADT-4 and reported fraud to the MCA as per the provisions of section 143(12) of the 2013 Act and resigned from the audit.
Thus, the audit report for the FY 2018-19 was signed only by other auditor. The audit Report contained an emphasis of matter paragraph, referring to the matters reported by the ex-auditor under section 143(12). The EoM stated that based on the facts and in-depth examination carried out by the independent legal experts of the relevant records, there were no matters attracting the Section 143(12).
The NFRA suo motu decided to examine the audit evidence that led ex-auditor to issue the above report and called for the Audit File and other information from the Audit Firm and Engagement Partner.
An examination of the Audit File, annual reports of the Company and other communications showed a prima facie case of professional misconduct on the part of the Auditors
The NFRA concluded that given the actions or omissions as the Auditors, it was proved that Engagement Partner, Engagement Quality Control Review (EQCR) Partner and the Audit firm did not exercise due diligence in ensuring the audit quality expected in an audit of a public interest entity and were grossly negligent in the conduct of their professional duties by not adhering to the requirements as laid down by the relevant statutes.
The Engagement Partner (the EP) and the Audit Firm had issued audit opinion on the Financial Statements without adequate basis, which was concurred by the EQCR Partner. The poor quality of the audit, incomplete documentation and attempt to mislead through evasive replies further compound the professional misconduct of the Auditors.
The NFRA held that EP, the Audit Firm and EQCR Partner committed Professional Misconduct as defined in section 132(4) of 2013 Act read with various clauses of Part I of the Second Schedule of the Chartered Accountants Act, 1949.
The NFRA imposed a total of monetary penalty of Rs. 4.50 crore, being Rs, 3 crores on the Audit Firm and Rs. 1 crore and Rs. 50 Lakh respectively on Engagement Partner and EQCR Partner.
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