ICAI reprimands CA for Neglecting to Qualify Audit Report Despite Fire Damage regarding Company's Stability as Going Concern

The Institute of Chartered Accountants of India ( ICAI ) has reprimanded the CA with a fine of Rs. 25,000, finding them guilty of professional misconduct. This decision arises from the CA's failure to qualify an audit report following a significant loss of assets due to a fire incident. Despite the adverse impact on the company's stability as a going concern, the CA neglected to include necessary qualifications in the report.

The complainant-CA, serving as a Resolution Professional since June 2018, was appointed by NCLT, Ahmedabad, on May 30, 2018. The respondent firm, M/s KMA & Co., represented by its CA acted as the Statutory and Tax Auditor of the company, including for the financial year 2017-18. Despite the complainant's appointment preceding the audit, the respondent audited and signed the financial statements on September 5, 2018.

The complaint was brought forward by the Resolution Professional appointed to oversee the Company's affairs by the National Company Law Tribunal ( NCLT ), Ahmedabad, in June 2018. The issue is that CA failed to qualify its report despite significant uncertainties regarding the Company's ability to continue as a going concern.

The Director ( Discipline ) had in his Prima Facie Opinion noticed that despite acknowledging the destruction of Unit II, the Company's only owned unit, and the cessation of its manufacturing operations, the audit report failed to address the question of the Company's future viability. While the auditor presented evidence indicating efforts to recover losses from insurance and settle liabilities with bankers, there was a lack of clarity regarding the Company's revival plans and the sufficiency of Unit I for business revival.

Further added that the failure to disclose this uncertainty in the audit report, especially when management had not filed a resolution plan even at the time of signing, has raised concerns about the adequacy of audit evidence and the omission of material facts. The omission of such critical information has prompted scrutiny of the audit firm's practices and adherence to auditing standards.

The Disciplinary Committee noted that SA 570, Going Concern provided that:

“..... (11) The auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern…”

The Committee observed that the audit report failed to address the crucial question of the company's future viability as a going concern. Despite the submission of certain documents indicating the relevance of the company's status as a going concern, including sales and purchase bills, electricity bills, and bank statements, the evidence provided was deemed insufficient. Notably, the bank statement primarily reflected loan payments without indicating plans for business revival.

The Committee held that “Thus, the Committee noted that the Respondent has failed to obtain sufficient audit evidence and has also failed to disclose a material fact known to him in his Audit Report. Accordingly, the Committee held the Respondent Guilty of Professional Misconduct falling within the meaning of Item(s) (5), (6), (7) and (9) of Part I of Second Schedule to the Chartered Accountants Act, 1949.”

Consequently, the Committee found the respondent guilty of professional misconduct for inadequately obtaining audit evidence and failing to disclose pertinent information in the audit report.

To Read the full text of the Order CLICK HERE

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