The National Financial Reporting Authority (NFRA) has imposed a penalty of Three Lakh Rupees on and debarred a Chartered Accountant and CA Firm from taking up audit assignments for faults in audit amounting to professional misconduct.
NFRA initiated action under section 132 (4) of Companies Act 2013 against the Auditors of SRS Real Infrastructure Limited for professional or other misconduct in relation to statutory audit for FY 2017-18, pursuant to information received from Serious Fraud Investigation Office (SFIO) indicating suspicious transactions in the Company and the group.
M/s SVP & Associates was the statutory auditor of SRSRIL and CA Pankaj Kumar was the Engagement Partner (EP) for this statutory audit for the FY 2017-18. Accordingly, NFRA initiated proceedings under Section 132 of the Companies Act for necessary action against the EP, Chartered Accountant.
The Order found that the EP failed to meet the relevant requirements of the Standards on Auditing (SA) in respect of several significant areas, reflecting a serious lack of professional competence to perform audit of a Public Interest Entity (PIE).
These include:
The EP failed to demonstrate sufficiency and appropriateness of audit work in virtually every aspect of the audit of the Financial Statements i.e., audit planning, determining materiality, evaluation of the going concern assumption, assessment of Risk of Material Misstatement and evaluating the audit results.
The EP failed to perform the substantive and analytical procedures to verify the revenue of 29.16 crore related to the real estate segment and also failed to evaluate the risk of fraud in revenue recognition in accordance with the requirements of SA 2402.
The EP failed to analyze the going concern assumption despite the fact that SRSRIL had continuing and increasing losses; negative operating cash flows amounting to Rs. 60.95 crore in the FY 2017-18; default in repayments of cash credit facilities and term loans from banks amounting to 132.85 crore and 127.72 crore respectively as on 31.03.2018; and had uncertainties relating to recoverability of trade receivables amounting to 240.43 crore (31.76% of total assets).
It was found that the EP also failed to perform physical verification or alternative audit procedure to determine thc existence and condition of inventory amounting to 102.69 crores (13.56 % of total assets) in accordance with the requirements of SA 501 and also failed to modify his opinion with respect to inventory in the audit report for the FY 2017-18 in accordance with the requirements of SA 705.
Thc EP failed to demonstrate compliance with the requirements of SA 7003 and SA 7054 as he gave a Qualified Opinion despite the fact that he was unable to comment upon more than 50% of the total assets of thc company which warranted expression of a Disclaimer of Opinion instead of a Qualified Opinion.
The EP failed to demonstrate compliance with the requirement of the Standards on Auditing concerning the EQC Reviewer.
Similarly, the EP failed to: determine materiality; plan the audit of Financial Statements; communicate with Those Charged with Governance (TCWG); and Failed to identify and assess the risks of material misstatement through understanding the entity and its environment, it was further noted.
It was thus held that, “Considering the proved professional misconducts and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, we, in exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby order imposition of monetary penalty of 3,00,000 (Rupees Three Lakhs) upon CA. In addition, CA Pankaj Kumar is debarred for 3 (Three) 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.”
Additionally, it was added that the debarment shall run concurrently with the Penalty Order dated 21.04.2023 in respect of the audit of M/s. SRS Ltd. issued against CA Pankaj Kumar.
It was observed that, “As is set out in this Order, the manner in which the audit was conducted, failed to meet the requirements of the SAs, the Act and the Code of Ethics in a number of significant aspects which demonstrated a gross negligence on the part of the EP. This can be gauged from the failure of the EP to critically assess the abnormal state of affairs in the Company, including its financial condition and existence of suspicious transactions/activities, and failing to apply the mandatory SAS in the audit.”
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