The National Financial Reporting Authority (NFRA) has debarred the Chartered Accountant of Burnpur Cements from practicing for a period of 5 years from being appointed as an auditor or internal auditor and has additionally levied a fine of Rs. 5 Lakhs observing significant audit lapses. Also, the audit firm was imposed with a penalty of Rs. 25 lakhs.
The Bumpur Cement Limited (BCL) is engaged in the business of Cement Manufacturing and was listed on Bombay StockExchange and National Stock Exchange and therefore falls under NFRA’s domain. The important lapse identified was the auditor has failed to report the effect of Income Tax order in the Financial Statements of the Burnpur Cements.
The issues were investigated by the NFRA in pursuant to the receipt of letter from Securities Exchange Board of India (SEBI) is the non-reporting by BCL of contingent liability arising out of the Income Tax Department order dated 31.12.2018.
The NFRA observed that the auditors were charged with failure to perform audit procedures to analyse and point out nonreporting of the effect of Income Tax Assessment Order in the form of provision for liability or disclosure of the contingent liability.
Further, as per the information received from SEBI, the Income Tax department had issued an assessment order (‘ITAO’) dated 31.12.2018 against BCL, identifying additional undisclosed income of Rs. 63.11 crores pertaining to FYs 2010-11 to 2016-17, on which additional income tax (including interest) of n 7.53 crores was levied.
The company was required to make provision for such liability or had to disclose it as contingent liability, which it failed to do. The Auditors also failed to challenge that such accounting treatment by the management was in violation of Para 14 of Ind AS 37 and Para 28 of Ind AS 37.
The Auditors claimed that they first came to know about the contingent liability vide the SEBI letter, and since they were unaware of the ITAO, Ind AS 37 was not to be invoked and that nothing was concealed while reporting under CARO 2016.
Conversely, the NFRA observed that the EP’s reply to SEBI clearly showed that the Auditors were fully aware of the said ITAO. Therefore, the contention of the Auditors that since they were not aware of ITAO & the dispute related to the same, they did not conceal any information under CARO 2016, cannot be accepted.
The other audit lapses noted by the NFRA were:
The authority stated that the Auditors failed in applying sufficient appropriate audit procedure and professional skepticism in identifying and reporting material misstatements in the financial statements. They were grossly negligent in the conduct of the audit, which led to erroneous reporting and portraying a misleading picture of the company to the investors and stakeholders.
In addition to the lapses mentioned in the foregoing paragraphs of this Order, the Audit Firm was charged in the SCN specifically for the failure to fulfil its duties prescribed under section 143 of Companies Act, along with failure to adhere to the requirements of SQC 1.
However, In its reply to SCN, the audit firm has not responded to the above charges and therefore NFRA conclude that the audit firm has nothing to say in its defence of the systemic lapses in ensuring quality control in the audit.
The authority observed that “As we have explained in this Order, substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of Mis K. Pandeya & Co. (Audit Firm) and CA Manjeet Kumar Verma (EP) establish their professional misconduct. The Auditors chose to place blind reliance on the assertions of the management without applying professional skepticism to the assessment of impact ofIT AO, accounting of interest cost on borrowings classified as NP As and assumption of Going Concern basis for the preparation of Financial Statements and failed in discharging their statutory duty to protect public interest by exercising professional skepticism and questioning the management’s decisions leading to material misstatement in the Financial Statements.”
Considering the proved professional misconduct and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, the NFRA imposed a monetary penalty of Rs. 25 Lakhs upon the Audit firm, Mis K. Pandeya & Co and Rs. 5 lakhs on CA Manjeet Kumar Verma.
The authority also debarred CA Manjeet Kumar Verma 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.
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