[Opinion] NFRA Imposes 10 Years Ban & 20 Lakhs Penalty Upon Statutory Auditor for Professional Misconduct

Prof R Balakrishnan, FCS – FCWA – [2024] 158 taxmann.com 370 (Article)

1. Gist of the case

The National Financial Reporting Authority (NFRA) has passed an order on 5th January 2024 vide its order no 002/2024 whereby a chartered accountant of Anil Chauhan & Associates was penalized for professional misconduct under sub-section (2) of Section 132 of the Companies Act 2013. The order passed by the NFRA pertains to the statutory audit carried out by the chartered accountant for the financial year 2018-19 and 2019-20 in respect of M/s Seya Industries Limited, a company incorporated effective from 11th October 1990 having the registered office situated at T-14, M.I.D.C., Tarapur, Boisar in Thane District in the state of Maharashtra. NFRA initiated its investigation against the statutory auditor of the M/s Seya Industries Limited for the professional conduct of the chartered accountant who carried out the statutory audit for the company upon the intimation from the Securities Exchange Board of India (SEBI) in March 2023 abut the non-compliance with the accounting standards by M/s Seya Industries Limited. SEBI made the complaint to NFRA that the company’s financial report was misreported and also non-cooperation by the statutory auditor on this matter in respect of financial years 2018-19 and 2019-20.

Let us go through the case in details in order to understand the major lapses involved on the part of the chartered accountant in connection with the conduct of the statutory audit with reference to his professional conduct which is called for under the regulations and as well as by the code of conduct prescribed by the professional body i.e., the Institute of Chartered Accountants of India.

2. A brief about NFRA

The National Financial Reporting Authority (NFRA) is a statutory authority set up pursuant to the provisions of section 132 of the Companies Act 2013 to monitor implementation and enforce compliance of the auditing and accounting standards and to oversee the quality of service of the professions associated with ensuring compliance with such standards. The National Financial Reporting Authority is empowered under the sub-section (4) of section 132 ofthe Companies Act 2013 to investigate the prescribed classes of companies and impose penalty for professional or other misconduct of the individual members or firms of chartered accountants.

3. Statutory auditors – appointment their duties and responsibilities

The statutory auditors, both individual and firm of chartered accountants, are appointed by the members of a company under the provisions of section 139 of the Companies Act 2013. The statutory auditors, including the engagement partners i.e. the chartered accountant and the engagement team that conduct the audit, are bound by the duties and responsibilities prescribed as per the provisions of the Companies Act 2013 and the relevant rules made thereunder along with the prescribed standard on auditing including the standards on quality control (SQC)and above all the Code of Ethics, the violation of which constitutes professional misconduct, and is punishable with penalty prescribed under the provisions of section 132(4)(c) of the Companies Act 2013.

4. Details of the company & disclosure made by the company

M/s Seya Industries Limited, a company incorporated on 5th January 1990 and listed at the Bombay Stock Exchange, in the financial year 1993-94 and also listed at the National Stock Exchange in the financial year 2019-20, falls under NFRA domain’. During the financial years 2018-19 and 2019-20, M/s Seya Industries Limited who was in the business of manufacturing of pharmaceutical/personal & health/printing inks & paints and agrochemicals care products etc., disclosed in its annual report, that the company prepared its financial statements in accordance with Indian Accounting Standards (IndAS) as notified by Ministry of Corporate Affairs.

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