ICAI reprimands CA Failing to Disclose SARFAESI Action, Misrepresents Company’s Litigation Status in Audit Report [Read Order]

The auditor must thoroughly evaluate the management’s assessment of going concern by obtaining sufficient audit evidence and examining the company’s past and present situations
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The Institute of Chartered Accountants of India ( ICAI ) reprimanded a Chartered Accountant ( CA ) for failing to disclose the litigation status of a company in the audit report. Despite being aware of SARFAESI action against the client, the CA reported that no litigation was pending against the company. The CA failed to exercise the requisite due diligence while auditing and was found to have materially misstated the facts in the audit report.

The complainant, along with other directors, acquired a 2400 square meter plot of land at S. No 117, Manuj Kalas, Pune, on 7th February 2007, intended for a hospital project. They subsequently established M/s Orange Medicare and Research Centre Pvt. Ltd (“Company”), a private limited company, to which they sold the land.

The Saraswat Co-operative Bank extended a loan for the project, which the complainant and other directors guaranteed by mortgaging their personal properties as security. For the project’s development and financial management, an agreement was entered into on 11th February 2016 between the company and its then directors, including the complainant, and Mr. Sameer M. Patil, proprietor of M/s Samir Patil Group of Companies, Pune (SPGOCP).

However, the loan from Saraswat Co-operative Bank became a non-performing asset (NPA) in September 2017 due to non-payment of installments. Consequently, the bank initiated action under the SARFAESI Act, 2002, taking symbolic possession of the company’s property on 24th April 2018. The District Magistrate subsequently issued an order to take physical possession of the property. The complainant then identified discrepancies in the company’s financial statements for the financial year 2017-18, which were audited by the respondent.

The complainant has alleged that the respondent, the statutory auditor of the company, manipulated the financial statements in collusion with the company’s management. This manipulation allegedly resulted in the financial statements failing to present a true and correct view of the company’s financial position for the fiscal year 2017-18.

Additionally, the respondent did not provide the complainant with a copy of the financial statements. In the complaint dated 26th February 2019, eight allegations were levelled against the respondent, out of which the Director (Discipline) found him guilty of four charges.

The Committee observed that present charge related to a false disclosure in the audit report, where it was noted that no litigation was pending against the company, despite ongoing proceedings by Saraswat Co-operative Bank under the SARFAESI Act.

The loan from Saraswat Co-operative Bank had become a non-performing asset (NPA) in September 2017. The complainant provided an order dated 27th April 2018 from the District Magistrate, stating that the physical possession of the company’s property was to be handed over to the bank’s authorized officer for loan recovery.

The respondent-CA, in his submissions, stated that he was unaware of any recovery proceedings initiated through the court by the bank until the audit was completed for FY 2017-18. The management had not provided any documents on the matter, except notes confirming that the company had no pending litigation impacting its financial position and no significant events after the balance sheet date. The respondent also claimed to have sought verbal explanations from the company before concluding his audit.

Despite these claims, the Committee noted several discrepancies. Notices for property attachment dated 6th July 2018, 11th September 2018, and 11th March 2019 were submitted by the respondent during the hearing. After receiving the first notice, the company entered into a one-time settlement with the bank on 23rd August 2018 for six out of eight properties listed in the notice. However, the settlement payment was only Rs. 2.5 crores, indicating non-adherence to the settlement terms. The company did not settle the remaining two properties.

The Committee further observed that the order dated 27th April 2018 under the SARFAESI Act affected the fundamental accounting assumption of ‘Going Concern,’ as per paragraph 10(a) of Accounting Standard – 1. This assumption requires the management to disclose such facts in the financial statements, as proceedings under this act are similar to insolvency or liquidation proceedings.

According to SA 570 (Revised), Going Concern, the auditor’s conclusion on the going concern assumption relies on the adequacy of disclosures provided by management. The auditor must thoroughly evaluate the management’s assessment of going concern by obtaining sufficient audit evidence and examining the company’s past and present situations. The Committee noted that despite the bank not taking physical possession, the potential for this action existed due to unpaid loans and the incomplete one-time settlement.

The respondent-CA should have inquired further from the management, as this cast significant doubt on the company’s ability to continue as a going concern. The Committee concluded that the respondent was required to express a modified opinion in his audit report. His claim of ignorance regarding the order at the audit time was deemed untenable.

The committee noted that the respondent-CA disclosed in his audit report under the Companies (Auditor’s Report) Order, 2016, that the company had defaulted in loan repayments as of 31st March 2018. However, the respondent failed to mention the bank’s name and the default period, as required by the order. The financial statements showed significant defaults in long-term borrowings, with 65% of the borrowings being in default.

Further, the Respondent with respect to the other matters to be included in the Auditor’s report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 reported as under:

“The company does not have any litigation pending which would impact its financial position.”

The Committee on consideration of the same noted that the Respondent – CA, despite being aware of SARFAESI action against the client, had mentioned in his audit report that no litigation was pending against the Company. The same shows lack of diligence by the Respondent in the conduct of his professional duties.

Accordingly, the Committee decided to hold the Respondent guilty of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 with respect to aforesaid charge.  Thus, the Committee ordered that CA be reprimanded under Section 21B(3)(a) of the Chartered Accountants Act 1949.

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