NFRA Investigation Unveils Auditor Misconduct | Non-Compliance, Negligence & Serious Lapses in Professional Conduct

The National Financial Reporting Authority (NFRA) on receiving the information from the Securities and Exchange Board of India (SEBI) initiated an investigation against the member of ICAI serving as Engagement Partner (EP) in the statutory audit of the company. The NFRA held the auditor guilty of professional misconduct for non-compliance with SA 570, Going Concern, SA 200, Overall objectives of Independent Auditor, Ind AS 109, Financial Instruments. A Show Cause Notice was issued against the EP, where several charges were leveled against him. The EP was given a reasonable opportunity of being heard. After analyzing the replies of EP, the NFRA held the auditor guilty of professional misconduct on the following grounds:

i. The EP failed to report the non-recognition of interest expense in respect of loans classified as NPA by lenders resulting in an understatement of interest cost, current liabilities, and understatement of loss incurred by the company.

ii. The EP failed to report the non-provisioning of liability arising out of the Income Tax order and disclosure of contingent liability in the financial statements.

iii. Despite reporting a consistent loss, having negative net worth and negative working capital, the EP failed to test the appropriateness of the use of going concern basis of accounting in the preparation of financial statements.

To know the detailed description of charges leveled against the auditor, his contentions, NFRA conclusion on the same, and penalty imposed on EP.

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