Performing Audit of Public Company with Conflict of Interest and Other Professional Misconduct: NFRA slams CA with 5 Lakh Penalty and 5 Year Ban from Auditing [Read Order]

The National Financial Reporting Authority (NFRA) has imposed a penalty of Rs. 5 Lakhs and banned the Chartered Accountant of S Kumars Nationwide Limited (SKNL),

SKNL being a listed company comes under the jurisdiction of NFRA in terms of Rule 3 of NFRA

Rules 2018. It was engaged in textile business during the relevant period.

M/s Shyam Malpani & Associates was the Statutory Auditor of SKNL for Financial Year 2013-14 (April 2013 to September 2014). CA Shyam Malpani was the proprietor of this firm and signed the Independent Auditor's Reports and Financial Statements. Subsequently, "from May 2016, the practice and business of this firm was taken over by Ws SMMP & Company", a partnership firm in which CA Shyam Malpani is a partner.

The information collected from IDBI Bank showed the following major lapses and irregularities in the financial statements of SK.NL for the FY 2013-14 to 2017-18:

a) Financial interest of the Auditor in SKNL;

b) Writing off of receivables worth Rs 1044 crores;

c) Revaluation of Stock at a loss of Rs 678 crores;

d) Sale of Stock returned at a loss of Rs 1619 crores to the same non-operating parties;

e) Potential linkage of non-operating parties with real estate business of promoters' relatives;

f) Adjustment of Advance for capital assets of Rs 546 crores against trade payables;

g) Impairment of investment of Rs 515 crores mostly in overseas companies;

h) Repayment of loan of Rs 14 crores to potentially connected parties; and

i) Non-routing of sale proceeds of Rs 25 crores through SKNL's bank account.

NFRA's investigation revealed that CA Shyam Malpani, who served as SKNL's Auditor for the fiscal year 2013-14, failed to adhere to the relevant Standards on Auditing ('SA'), provisions of the Companies Act 2013, and the Companies Act 1956. The auditor displayed serious lapses and a lack of due diligence in his professional conduct.

A notable violation discovered during the investigation was CA Shyam Malpani's acceptance of the Audit Engagement for SKNL in FY 2013-14, despite owning shares of the company through a wholly-owned family company. This action directly conflicted with applicable laws and standards related to conflict of interest and independence.

Furthermore, CA Shyam Malpani issued Qualified Audit Opinions on both Standalone Financial Statements (SFS) and Consolidated Financial Statements (CFS) with eleven and fifteen qualifications, respectively.

These qualifications were deemed material and pervasive to the financial statements, warranting either an Adverse Opinion or Disclaimer of Opinion under Standard on Auditing (SA) 705. However, the auditor's issuance of Qualified Opinions was found to be non-conformant with SA 705.

As a consequence of the proceedings under Section 132(4) of the Companies Act 2013, NFRA, after providing the auditors with an opportunity to present their case, found CA Shyam Malpani guilty of professional misconduct.

In alignment with the judgment of the National Company Law Appellate Tribunal (NCLAT) dated 01.12.2023, NFRA has imposed a monetary penalty of Rs 5 Lakh on CA Shyam Malpani. The penalty has been limited to this amount due to the violations occurring between April 2013 and September 2014.

In addition, the NFRA has debarred CA Shyam Malpani for a period of five years from being appointed as an auditor or internal auditor.

The debarment extends to undertaking any audit related to financial statements or internal audit of the functions and activities of any company or body corporate. These sanctions will come into effect 30 days from the issuance of this Order, as per the regulatory directive.

To Read the full text of the Order CLICK HERE

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