The National Financial Reporting Authority (NFRA) has imposed a monetary penalty of Rupees Five Lakhs upon the statutory auditor of MAN Industries and debarred him for Five 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 for lapses in audit.
MAN Industries India Limited (MIIL) is a manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and Potable Water. By virtue of being listed, MIIL falls under the jurisdiction of NFRA under NFRA Rules, 2018.
Finding a prima facie case for investigation following the SEBI information, NFRA called for the Audit File on 03.08.2022. A review of the Audit File revealed a number of significant failures on the part of the Engagement Partner (EP) and a SCN identifying the EP’s professional misconduct was issued to the EP on 16.11.2022. The EP replied to the SCN on 16.01.2023 after availing extension of time. The EP availed of the personal hearing held on 21.09.2023 at the office of NFRA along with his legal counsel.
M/s Rohira Mehta & Associates, Chartered Accountants (presently RMA & Co.), was the statutory auditor of MIIL and CA Nilesh Chheda was the Engagement Partner (EP) for this statutory audit for the FY 2016-17. The EP & the Firm (statutory auditors) were instructed on 03.08.2022 to submit the Audit File and other relevant information, which they did on 18.08.2022.
The examination of the Audit File revealed that the audit had been conducted in disregard of most of the SAs and the requirements of the Act but the EP had issued an unmodified opinion in Independent Auditor’s Report for the Standalone Financial Statements (SFS) and a qualified opinion on the Consolidated Financial Statements (CFS) certifying that the Financial Statements of MIIL reflected true and fair view in conformity with the accounting principles generally accepted in India.
The EP was charged with professional misconduct of:
(a) failure to disclose a material fact known to him, which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement, where he is concerned with that financial statement in a professional capacity;
(b) failure to report a material misstatement known to him to appear in a financial statement with which the EP is concerned in a professional capacity;
(c) failure to exercise due diligence, and being grossly negligent in the conduct of professional duties;
(d) failure to obtain sufficient information which is necessary for expression of an opinion, or its exceptions are sufficiently material to negate the expression of an opinion; and
(e) failure to invite attention to any material departure from the generally accepted procedures of audit applicable to the circumstances.
The bench observed that the EP had committed professional negligence amounting to misconduct in the following aspects–
Failure to report non-consolidation of subsidiaries, Failure to prepare audit documentation, Failure to report issues related to disclosure of Credit Risk Exposure, Failure to plan the audit of Financial Statements Failure to perform Analytical Procedures, Failure to determine Materiality, Failure to perform risk assessment procedures and response to such risks, Failure to obtain Sufficient Appropriate Audit Evidence (SAAE), Failure to prepare documentation regarding Auditor’s responsibilities relating to fraud in an Audit of Financial Statements and Failure to communicate with Those Charged with Governance (TCWG)
In addition to the above stated major lapses, the following other lapses were also found to have been committed by the EP: –
Failure to report non-disclosure of Related Party Loans on gross basis, Failure to report non-disclosure of Trade Payable covered under the Micro, Small and Medium Enterprises Development Act, 2006 and Failure to report full particulars of loan to Related Party.
However, the serious allegation of Failure to report non-disclosure of Material Information relating to pledge of fixed deposits was dropped, in view of the explanation and workpapers submitted by the EP.
The NFRA Panel of Chairperson Dr. Ajay Bhushan Prasad Pandey and full time members Dr. Praveen Kumar Tiwari and Smita Jhingran observed that, “The Auditor in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to Financial Statements to facilitate its users. As detailed in this order, substantial deficiencies in audit, abdication of responsibility, failure to act with due diligence and inappropriate conclusions on the part of CA establish his professional misconduct. Despite being a qualified professional, the EP has not adhered to the Standards and has thus not discharged the duty cast upon him. Under the circumstances, we proceed to order the following sanctions keeping in mind deterrence, proportionality, and the signalling value of sanctions.”
In view of the above, NFRA made the following orders:
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
