CA penalised: The National Financial Reporting Authority (NFRA) has found CA Naresh Kumar (CAI Membership No 085238), a partner at Oswal Sunil & Company (ICAI Firm Registration No 016520N), Delhi, to be guilty of professional misconduct under Section 132(4) of the Companies Act, 2013 and Rule 11(6) of the National Financial Reporting Authority Rules 2018.
Background of the Case: CA penalised
The SFIO investigation discovered that the Company and its Group Companies provided false financial statements and engaged in round tripping and transaction layering, resulting in inflated purchases and sales. As a result, the NCLT ordered the company to go through the Corporate Insolvency Resolution Process (CIRP) after it failed to repay a financial debt of Rs 543.36 crores, as requested by the State Bank of India.
Based on the SFIO letter about the investigation and findings, NFRA initiated action under Section 132(4) of the Companies Act to investigate professional or other misconduct of SRS Limited’s statutory auditors. SRS Ltd, a publicly traded company, is one of the companies in the SRS Group, which operates in the jewellery, cinema, real estate, and financial services industries, among others.
Oswal Sunil & Company was the Joint Statutory Auditor of SRS Limited for the FY 2017-18 and CA Naresh Kumar was the Engagement Partner (EP) for this audit, being responsible for the audit of 60.29% of the total assets of the company. The firm and the EP were also the Joint Statutory Auditor of SRS Limited for the FY 2016-17 and had issued a qualified opinion.
They were also engaged for a limited review of the quarterly financial results during the FY 2017-18 and had consistently issued ‘Qualified’ opinion on those financial results despite serious issues and questions regarding recoverability of trade receivables of overseas division, compliance with the provision of the Companies Act relating to creation of Deposit Repayments Reserves and decline in the net worth due to write off of a huge amount of trade receivables in the review report for Q3 of FY 2017-18.
NFRA Order to CA Penalised
The EP and the audit firm were directed to submit the Audit File, and a SCN identifying failures and negligences was issued to the EP in accordance with Rule 11 of the NFRA Rules, 2018. The EP was also given a personal hearing in the interest of natural justice.
The Audit lapses discovered as a result of the examination of the Audit File, related material on record, and the personal hearing conducted have been classified as major lapses and other lapses, and are discussed in sections C and D of this Order, respectively. These shortcomings stem from the EP’s failure to identify and report material misstatements in the financial statements, as well as audit work performed that fell far short of the mandatory standards prescribed by the Companies Act and required of an auditor of a Public Interest Entity (PIE).
NFRA Order dated 21/04/2023: CA Naresh Kumar EP of Oswal Sunil & Company, Delhi Penalised for Professional Misconduct in SRS Ltd Audit FY 2017-18.
Lapses identified
The EP’s opinion that the financial statements reflected a ‘true and fair view’ in accordance with generally accepted accounting principles in India and the provisions of the Companies Act was found to be unsupported by appropriate audit evidence. In a number of significant aspects, the audit failed to meet the requirements of the SAs, the Companies Act, and the Code of Ethics, demonstrating a serious lack of competence on the part of the EP.
Several indicators of potential fraudulent transactions that the EP was aware of were ignored during the audit, including an unusually high provision for bad/doubtful debts in respect of trade receivables of Rs 1,295.01 crores (99.85% of total trade receivables) and a significant decline in the carrying amount of inventories of Rs 207.74 crores. However, the auditor did not review these abnormal events for reporting under section 143(12) of the Companies Act, instead reporting only about Rs 10 crores of fraudulent transactions that the company had already reported to stock exchanges.
The Engagement Partner (EP) failed to demonstrate the sufficiency and appropriateness of audit work in almost every aspect of the financial statement audit, including audit strategy, planning, determining materiality, assessing the risk of material misstatement, and evaluating audit results. The EP also failed to demonstrate compliance with the Standards on Auditing requirement concerning the Engagement Quality Control Review (EQCR) and submitted false information on the appointment of an EQCR who denied playing any such role.
The EP also ignored a number of indicators indicating an abnormal state of affairs in the company, which had a negative impact on the true and fair view of financial statements. In accordance with SA 570, the EP failed to demonstrate professional scepticism and due diligence in forming his audit opinion.
Penalties Imposed on CA
The NFRA order imposes a monetary penalty of Rs 300,000/- (Rupees Three Lakhs) on the EP, CA Naresh Kumar, and bars him 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 for 3 (Three) years.
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