NFRA debars CA from Audits for 5 Years and imposes Penalty for Professional Misconduct u/s 132(4)(2) of Companies Act [Read Notification]

The National Financial Reporting Authority (NFRA) imposed a monetary penalty of Five Lakhs upon a Chartered Accountant for professional misconduct. In addition, the CA Rakesh Puri was debarred 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.

The charges leveled against the Engagement Partner (EP) were that –

The EP committed professional misconduct as defined by clause 5 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he "fails 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".

This charge was proven as the EP had failed to disclose in their report the material non- compliances by the Company as explained in Para 19 to 22 above.

The EP had committed professional misconduct as defined by clause 6 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he "fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity". This charge is proved as the EP failed to disclose in the audit report the material misstatements made by the Company.

The EP had also committed professional misconduct as defined by clause 7 of Part I of the Second Schedule of the Chartered Accountants Act, which states that an EP is guilty of professional misconduct when he "does not exercise due diligence or is grossly negligent in the conduct of his professional duties.

This charge was proven as the EP had failed to conduct the audit in accordance with the SAS and applicable regulations, failed to report the material misstatements in the financial statements arising from overstatement of purchase and sales figures and failed to report non- compliances made by the Company.

The EP also committed professional misconduct as defined by clause 8 of Part I of the Second Schedule of the Chartered Accountants Act, which states that an EP is guilty of professional misconduct when he "fails 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".

This charge was also proven against the EP as he had failed to conduct the audit in accordance with the SAS and applicable regulations as well as due to his total failure to report the material misstatements and non-compliances made by the Company in the financial statements.

The Members of the Disciplinary Proceedings Committee also noted that the EP had committed professional misconduct as defined by clause 9 of Part I of the Second Schedule of the CA Act, which states that an EP is guilty of professional misconduct when he "fails to invite attention to any material departure from the generally accepted proce- dure of audit applicable to the circumstances".

This charge was also proven against the CA since he had failed to conduct the audit in accordance with the SAS.

The explanation and reply of the Engagement Partner (CA/EP) in response to a show cause notice was found unsatisfactory by the three-member NFRA Committee which observed that, “The EP neither adopted the Audit Procedure of external confirmation of balances of the debtors and the creditors, nor adopted the alternate Audit Procedures. It is only when the EP was questioned through the NFRA questionnaire and the SCN, he came up with some replies in support of his carrying out these procedures.”

As no Audit Documentation was found in support of the CA’s stand, his replies were deemed an afterthought and not acceptable.

“The EP's claim that the external confirmation was done through the SSWL, shows his complete disregard for it being done independently of the entity and does not add the required credibility and value to the Audit.

By failing to make independent verification, the EP lost the benefit of external confirmation, through which he could have sensed the degree of grave misstatement in purchase and sales. Proper application of Audit Procedures based on Standards on Auditing could save the EP rom improper reporting on the Financials of SSWL”, the members Dr. Ajay Bhushan Prasad Pandey (Chairperson), Praveen Kumar Tiwari (Full-Time Member) and Smita Jhingran (Full-Time Member) further observed.

It is the duty of an auditor to conduct the audit with professional skepticism and due diligence

and report his opinion in an unbiased manner. Statutory audits provide useful information to the

stakeholders and public, based on which they make their decisions on their investments or do

transactions with the public interest entity.

Without a credible Audit, Investors, Creditors and Other Users of Financial Statements would be handicapped. The entire corporate governance system would fail and result in a breakdown in trust and confidence of investors and the public at large if the professionals in charge of audit do not perform their job with professional skepticism and due diligence and adhere to the standards.

Section 132(4) of the Companies Act, 2013 provides for penalties in a case where professional misconduct is proved. The seriousness with which proven cases of professional misconduct are to be viewed, is evident from the fact that a minimum punishment is laid down by the law.

The EP in the present case was required to ensure compliance with SAS to achieve the necessary audit quality and lend credibility to Financial Statements. As explained in the order, substantial deficiencies in Audit, abdication of responsibility and inappropriate conclusions on the part of CA Rakesh Puri established his professional misconduct.

Revenue reported by an entity is the most important item in the financial statements, on the basis of the same, the stakeholders make their decisions.

Despite the management showing exponential rise in the revenue and presence of other factors, the EP failed to design sufficient appropriate audit procedures to test the veracity of such exponential growth, which resulted in misleading and presenting a rosy picture to the stakeholders.

To Read the full text of the Order CLICK HERE

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