2024 TaxPub(CL) 135 (NFRA)
COMPANIES ACT, 2013
Section
132
Auditor committed professional misconduct by not submitting audit files
and related documentation to NFRA and by not responding to SCN issued by NFRA
under section 132(4), in exercise of powers vested under section 132(4)(c),
penalty of Rs. 25 lakhs as well as debarment for ten years to be appointed as
an auditor was imposed upon the auditor.
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Constitution of National Financial Reporting
Authority - Auditor committed professional misconduct by not submitting
audit files and related documentation to NFRA - Imposition of penalty in
exercise of powers vested under section 132(4)(c) -
NFRA initiated investigation into professional
conduct of statutory auditors of the company in respect of non-compliance with
accounting standards by the company, misreporting in financial statements; and
non-cooperation by auditor. Therefore, the NFRA issued show cause notice to the
auditor for violation of professional misconduct as per section 132. Held:
The auditor failed to submit the audit files and other information, despite
repeated the requests by NFRA. He also failed to respond to the charge of non-maintaining
the audit files as levelled in the SCN. The auditor committed professional
misconduct by not submitting the Audit Files and related documentation to NFRA
and by not responding to the SCN issued by NFRA under section 132(4). Thus, in
exercise of powers vested under section 132(4)(c), penalty of Rs. 25 lakhs was
imposed upon the auditor. Further, he was also debarred from being appointed as
an auditor or internal auditor for ten years.
REFERRED :
FAVOUR : Against the noticee
A.Y. :
IN THE NATIONAL FINANCIAL
REPORTING AUTHORITY
AJAY BHUSHAN PRASAD PANDEY,
CHAIRPERSON, PRAVEEN KUMAR TIWARI, FULL TIME MEMBER & SMITA JHINGRAN, FULL
TIME MEMBER
Seya Industries Ltd.,
In re
Order No. 002/2024
5 January, 2024
In the matter of CA Anil
Chauhan under section 132(4) of the Companies Act, 2013
1. This Order disposes of the Show Cause Notice ('SCN'
hereafter) No. NF-23/11/2023 dated 22-9-2023, issued to CA Anil Chauhan
(Membership No. 166286), proprietor of Mis Anil Chauhan & Associates,
Mumbai (Firm Registration No. 0140786W), who is a member of institute of
Chartered Accountants of India ('ICAI' hereafter) and the Engagement Partner ('EP'
hereafter) for the Statutory Audit of Seya Industries Limited ('SIL' or 'the
company' hereafter) for the Financial Years ('FY' hereafter) 2018-19 and
2019-20.
2. This Order is divided into the following sections :--
A. Executive
Summary
B.
Introduction and Background
C. Major
lapses on the part of the EP
D. Articles of
Charges of Professional Misconduct by the EP
E. Penalty and
Sanctions
A. Executive summary
3. The National Financial Reporting Authority ('NFRA' hereafter)
initiated investigation into the professional conduct of statutory auditors of
Seya Industries Limited, Mumbai, for the F.Ys. 2018-19 and 2019-20 under
section 132(4) of the Companies Act, 2013 ('Act' hereafter). This was pursuant
to information received from the Securities and Exchange Board of India ('SEBI'
hereafter) dated 28-3-2023 about the non-compliance with the accounting
standards by the company; misreporting in the financial statements; and
non-cooperation by the auditor Anil Chauhan & Associates.
4. To investigate the professional misconduct, the audit files and some
other information were called for from the EP. Despite repeated reminders, the
EP did not submit the requisite documents and information. Thus, NFRA concluded
that the EP either had no such documents with him or was unwilling to cooperate
with NFRA in discharge of its statutory responsibility under section 132 of the
Companies Act. On 22-9-2023, a show cause notice for non-compliance was issued
to the EP, which was not responded to.
5. This Order concludes that the failure of the EP to cooperate with
NFRA is a professional misconduct under section 132(4) of the Companies Act,
2013, read with clause 2 of part-III of first schedule of The Chartered
Accountants Act, 1949, i.e., failure to supply the information called for, or
failure to comply with the requirements asked for.
6. Based on the proceedings under section 132(4) of the Act and after
giving multiple opportunities to the EP to present his case, we find the EP
guilty of professional misconduct in his failure to comply with the
requirements of provisions of the Act, Code of Ethics (2009) ('the Code'
hereafter), Standards on Auditing ('SA' hereafter), and gross negligence in
maintaining of the audit files and impose through this Order the following
monetary penalties and sanctions, that will take effect after 30 days from the
date of this Order :--
Imposition of
a monetary penalty of Rupees Twenty Lakhs upon CA Anil Chauhan, the Engagement
Partner. In addition, CA Anil Chauhan and the audit firm M/s. Anil Chauhan
& Associates (FRN: 0140786W) are debarred for Ten years from being
appointed as an auditor or 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.
B. Introduction and
background
7. The National Financial Reporting Authority is a statutory authority
set up under section 132 of the Act to monitor implementation and enforce
compliance of the auditing and accounting standards and to oversee the quality
of service of the professions associated with ensuring compliance with such
standards. NFRA is empowered under section 132(4) of the Act to investigate the
prescribed classes of companies and impose penalty for professional or other
misconduct of the individual members or firms of chartered accountants.
8. The statutory auditors, both individual and firm of chartered
accountants, are appointed by the members of a company under section 139 of the
Act. The statutory auditors, including the Engagement Partners and the
Engagement team that conduct the audit, are bound by the duties and
responsibilities prescribed in the Act, the rules made thereunder, the SAs,
including the Standards on Quality Control ('SQC' hereafter) 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.
9. Seya Industries Limited (SIL) was incorporated in 1990 and listed at
Bombay Stock Exchange in the financial year 1993-94 and at National Stock
Exchange in the financial year 2019-20, and therefore falls under NFRA domain
[Vide Rule 3(1)(a) of National Financial Reporting Authority Rules, 2018].
During the F.Ys. 2018-19 and 2019-20, SIL was in the business of manufacturing
of pharmaceutical/personal & health/printing inks & paints and
agrochemicals care products etc. As disclosed by the Company in its annual
report, the company prepared its Financial Statements ('FS' hereafter) in
accordance with Indian Accounting Standards ('Ind AS' hereafter) as notified by
Ministry of Corporate Affairs.
10. NFRA took up sou motu investigation into the role of the
statutory auditors of Seya Industries Limited under section 132(4) of the Act
after receipt of a Letter, dated 28-3-2023 from SEBI about
non-compliance with the accounting standards and misreporting in the financial
statements by the company, and non-cooperation by the auditor. Some serious
issues had been raised by SEBI in its Order, dated 20-3-2023, which
observed that the company had inflated its purchase and sales in the F.Ys.
2018-19 to 2020-21 through name lenders, did not disclose related party
relationships and their transactions, and siphoned off funds through
undisclosed related parties. SEBI also noted that the company did not provide
for interest costs on NPA loans.
11. Considering the gravity of the case and to investigate into any
professional misconduct, NFRA vide Letter, dated 27-4-2023, advised the
EP to submit the audit files including other requisite documents relating to
the statutory audit of Seya Industries Limited for the FYs 2018-19 and 2019-20
within 15 days' time. The communication was sent to the EP through speed-post
and email and was duly delivered, however the EP did not respond. Another
opportunity for submission of the same was given vide letter and email dated
23-5-2023, however the EP did not respond. A last opportunity, vide an email
dated 30-6-2023, was provided to the EP, however the EP again did not respond.
12. On finding sufficient cause for action under section 132(4) of the
Act, 2013 and Rule 11 of the NFRA Rules 2018, an SCN was issued to the EP
through post and email on 22-9-2023, asking him to show cause why action should
not be taken against him for being grossly negligent in the conduct of
professional duties in the statutory audit of SIL for the FYs 2018-19 and
2019-20, and for non-cooperation with NFRA. The SCN charged the EP for :--
(a) Failure to
exercise due diligence and being grossly negligent in the conduct of
professional duties as defined by clause 7 of Part I of the Second Schedule of
the Chartered Accountants Act 1949.
(b) Failure to
supply the information called for, and non-compliance with the requests of NFRA
as defined in clause 2 of Part-III of First Schedule of The Chartered
Accountants Act, 1949.
13. The EP was advised to reply to the SCN by 22-10-2023, failing which,
it would be construed to indicate that the EP had nothing to say in the matter
and NFRA would proceed to decide the matter based on the materials on record.
However, despite numerous opportunities, the EP did not respond to the SCN, nor
did he avail the opportunity of personal hearing offered in the SCN.
Accordingly, this Order is being issued based on the materials on record. The
specific failures of the EP are discussed in section C of this Order.
C. MAJOR LAPSES ON THE PART
OF THE EP
Failure to maintain Audit
Files and to co-operate with NFRA
14. The EP was charged with failure to maintain the Audit Files as per
the provisions of SA 230 [Audit Documentation] for the statutory audit of SIL
for the F.Ys. 2018-19 and 2019-20, and to submit the requisite information,
despite repeated communications from NFRA.
15. SA 230 states that audit documentation assists the engagement team
to plan and perform the audit, and hold them accountable for their work. It
also enables to conduct the external regulatory inspections (para 3). SA 230
requires an auditor to prepare audit documentation in timely manner, sufficient
to enable an experienced auditor, having no previous connection with the audit,
to understand: (a) The nature, timing, and extent of the audit procedures
performed to comply with the SAs and applicable legal and regulatory
requirements; (b) The results of the audit procedures performed, and the audit
evidence obtained; and (c) Significant matters arising during the audit, the
conclusions reached thereon, and significant professional judgments made in
reaching those conclusions (para 7 & 8). The auditor is also required to
assemble the audit documentation in an audit file within 60 days after the date
of the Auditor's Report (para 14). SQC 1 requires an audit firm to establish
policies and procedures for the retention of audit documentation for at least
seven years from the date of Auditor's Report to enable inter alia the
external parties to access and review for quality control or other purposes
(para 82 to 84), and the Audit Files are the property of Audit Finn (para 85).
Under section 132(4) of the
Companies Act, 2013, professional misconduct is as defined in The Chartered
Accountants Act, 1949. Clause 2 of part-III of first schedule of The Chartered
Accountants Act, 1949 states that failure to supply the information called for,
or failure to comply with the requirements asked for, is a professional
misconduct.
16. The EP failed to submit the audit files and other information
despite repeated requests by NFRA. He also failed to respond to the charge of
non-maintaining the audit files as levelled in the SCN. By not cooperating, the
EP has prevented NFRA from carrying out its legal mandate to exercise oversight
of auditing functions performed by the auditors and investigate cases of
professional misconduct under section 132 of the Act, 2013 in order to protect
public interest and the interests of investors, creditors and others associated
with the companies or bodies corporate governed under Rule 3 of NFRA Rules,
2018.
17. Therefore, the persistent failure of the EP to submit any documents
and his failure in responding to the communications from NFRA leads us to
conclude that either the EP did not maintain any such documents, which is a
violation of SA 230, or he is unwilling to cooperate with NFRA in discharging
its statutory authority and responsibility under section 132(4) of the Act,
which is a professional misconduct.
18. We note that in the case of R.C. Dutta v. Kailash C. Mishra,[R.C.
Dutta v. Kailash C. Mishra - Page 143 Vol. IX-1-21(6) of Disciplinary
cases, the Council's decision dated 5-1-2005 and Judgment of High Court
of dated 1-3-2007] a Chartered Accountant was held guilty of professional
misconduct under Clause (7) of Part I of Second Schedule and other misconduct
under section 22 of the Chartered Accountants Act 1949, for his failure to appear
before Tax Authorities. CA Gora Chand Mukherjee [Gora Chand Mukherjee in Re:
[PPR/P/1 0/E/2007/DD/6/E/SINF/08/DC/94/2010] Judgment delivered on 15-12-2016]
was also held guilty of professional misconduct falling within the meaning of
Clause (7) of Part J of the Second Schedule to the Chartered Accountants Act,
1949 for delay in submission of information to RBI and for not submitting
appropriate information.
19. At the International level also, such conduct is viewed seriously.
The Public Company Accounting Oversight Board (PCAOB), the USA Audit Regulator,
have sanctioned firms/individual Certified Public Accountants (CPAs) for
non-cooperation with the regulator, including revocation of license. Some such
instances are listed below :--
(i) In the
matter of Crowe Horwath (HK) CPA Limited [PCAOB Release No. 105-2017-031,
dated 25-7-2017], PCAOB censured the audit firm and revoked its
registration for non-cooperation with its investigation, by failing to comply
with Demand requiring production of documents, including audit work papers.
(ii) In the
matter of Li and Company, P.C. [PCAOB Release No. 105-2016-022, dated
14-6-2016], PCAOB censured and revoked its registration for non-cooperation
with a Board investigation and produce certain documents and information.
(iii) In the
matter of J. Crane CPA, P.C. and James Crane [PCAOB Release No.
105-2011-001, dated 19-1-2011], PCAOB permanently revoked the registration
of the firm and permanently barred James Crane from being an associated person
of a registered public accounting firm for their non-cooperation with a Board
inspection, and for Crane, P.C.'s failures to file an annual report and pay an
annual fee.
20. Absence of audit documentation or failure to submit the Audit File
to NFRA, is a clear evidence that the EP failed to obtain reasonable assurance
about whether the FS as a whole were free from material misstatement and that
the Auditor's opinion issued through the Independent Auditor's Report dated
14-5-2019 and 31-7-2020 for the FYs 2018-19 and 2019-20 respectively, was
without any basis and hence unreliable and invalid. Accordingly, we take a
serious view of the failure of the EP to respond to NFRA's repeated
communications and conclude that the EP by not responding to the proceedings
undertaken by NFRA, has violated section 132(4) of the Act, 2013, which is a
'professional or other misconduct' in terms of section 132(4)(c) of the Act,
2013, read with clause (2) of Part III of Schedule I of the Chartered
Accountants Act, 1949.
D. Articles of Charges of
Professional Misconduct by the EP
21. Given the above-mentioned actions and omissions, it is established
that CA Anil Chauhan committed professional misconduct by not submitting the
Audit Files and related documentation to NFRA and by not responding to the SCN
issued by NFRA under section 132(4) of the Act. We conclude that the following
failures on the part of CA Anil Chauhan as contained under the Articles of
Charges in the SCN stand established :--
(i) Failure to
exercise due diligence and being grossly negligent in the conduct of
professional duties as defined by clause 7 of Part I of the Second Schedule of
the Chartered Accountants Act 1949 because of the lapses and omissions as
explained and proved in parts C above.
(ii) Failure
to supply the information called for, and non-compliance with the requests of
NFRA, as defined in clause 2 of Part-III of First Schedule of The Chartered
Accountants Act, 1949 because the EP did not co-operate with NFRA as explained
and proved in parts B & C above.
E. Penalty and Sanctions
22. It is the duty of an auditor to conduct the audit with professional
skepticism and due diligence and report his opinion in an unbiased manner.
Statutory audits provide useful information to the stakeholders and public,
based on which they make their decisions on their investments or do
transactions with the public interest entity [Public interest entity as defined
in Rule 3 of NFRA Rules, 2018]
23. Section 132(4) of the Companies Act, 2013 provides for penalties in
a case where professional misconduct is proved. The seriousness with which
proven cases of professional misconduct are to be viewed, is evident from the
fact that a minimum punishment is laid down by the law.
24. As detailed in the preceding paragraphs of this Order, there was
complete non-cooperation by the EP with NFRA, which establishes his
professional misconduct.
25. Section 132(4)(c) of the Companies Act, 2013 provides that 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 than one lakh rupees, but which may extend to five
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 minimum period of
six months or such higher period not exceeding ten years as may be determined
by the National Financial Reporting Authority.
26. We note that the firm M/s. Anil Chauhan & Associates, Mumbai is
a proprietary concern of the EP. As per the information contained in the
financial statements of SIL for the F.Ys. 2018-19 and 2019-20, the EP was paid
..... for each financial year for the conduct of statutory audit.
27. Considering the aforementioned proved professional misconduct by the
EP and considering the nature of the violations, we in exercise of powers under
section 132(4)(c) of the Companies Act, 2013, order :--
(i) Imposition
of a monetary penalty of Rs. Twenty Lakhs on the EP, CA Anil Chauhan,
proprietor of M/s. Anil Chauhan & Associates.
(ii) Debarment
of CA Anil Chauhan and the audit firm M/s. Anil Chauhan & Associates (FRN:
0140786W), for Ten Years from being appointed as an auditor or 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.
28. This order will become effective after 30 days from the date of
issue of this Order.