NFRA Order | 10 Years Debarment & Heavy Monetary Penalty Imposed on CA Due to Lack of Professional Skepticism

Pursuant to the Securities and Exchange Board of India (SEBI) investigation regarding the fraudulent diversion of funds between the group companies, NFRA initiated an investigation into the professional conduct of the statutory auditors under section 132(4) of the Companies Act 2013. NFRA has issued this order in series to earlier orders against the group companies issued by NFRA on 26.04.2023 imposing a penalty of Rs. One crore on CA firm and 5-year debarment. This order charges auditors who failed to exercise professional judgment and skepticism during an audit of the company where there was the fraudulent diversion of funds to a subsidiary company, ever-greening of loans through the structured circulation of funds among group companies, fraudulent repayment of loans to the subsidiary partnership firm, etc.

1. One of the partners of the related audit firm acted as an engagement team member in the statutory audit of the company and performed the majority of the audit work. This was a clear threat to independence, but the same was ignored by the auditor and the auditor has not performed any audit procedure to reduce the threat to independence to an acceptably low level.

2. The audit workings were done in the editable Excel files without any security features to prevent alteration of audit documentation. The majority of workings were modified after the date the NFRA asked for the audit file. This clearly evidences the tampering of the audit file.

3. A company is required to obtain prior approval under section 188 of the Companies Act, 2013 to purchase goods from related parties amounting to 10% or more of the turnover of the company. The auditors had reported in the audit report that the company had complied with section 188 of the Act. However, there is no evidence in the audit report that the auditors verified compliance with these statutory provisions. NFRA charged the auditors with violation of section 143 of the Companies Act.

4. Several cheques are issued by the related party near the year-end and remained unrealized on 31.03. and were cleared in the next financial year, by ever-greening of loans through structured circulation of funds among group companies. NFRA charged the auditors with failure to perform risk assessment procedures to identify, assess and respond to the risk of material misstatement in the financial statement due to fraud, in relation to the ever-greening of loans through structured circulation transactions of funds.

5. The company is involved in the round-tripping that has resulted in the conversion of “loan to subsidiary partnership firm” into “loan to group company” which has resulted in material miss-statement in the financial statement of the company. NFRA charged the auditors with violation of provisions of SA 200, 240, 315, and section 143 of the Companies Act.

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