[Opinion] NFRA Takes Action | Second-time Statutory Auditor Debarred From Practice for 3 Years and Penalized for Professional Misconduct

Prof. R Balakrishnan FCS, FCWA – [2024] 159 taxmann.com 670 (Article)

1. Gist of the case

The National Financial Reporting Authority (NFRA) has passed an order on 8th January 2024 vide its order no 003/2024 whereby a statutory auditor – one of the partners of M/s SVP & Associates was penalized for professional misconduct under the provisions of section 132 of the Companies Act 2013. The order passed by the NFRA pertains to the statutory audit carried out by the auditor for the financial year 2017-18 in respect of M/s SRS Real Infrastructure Limited, a company incorporated effective from 26th June 1990 under the provisions of the Companies Act 1956 and having the registered office at SRS Multiple, Top Floor City Centre, Sector 12, Faridabad in the state of Haryana. The company was engaged in real estate, manufacturing and trading of construction materials. NFRA initiated its investigation against the statutory auditor of M/s SRS Real Infrastructure Limited (earlier known as Manu Leasing Limited) for the professional conduct of the statutory auditor who carried out the statutory audit for the company.

Under the powers of section 212(1) (a) of the Companies Act 2013, the Ministry of Corporate Affairs assigned the investigation into the affairs of M/s. M/s SRS Real Infrastructure Limited and its group of companies to the Serious Fraud Investigation Office (SFIO) on 1st August 2018. M/s SRS Real Infrastructure Limited was listed with the Bombay Stock Exchange and therefore falls under the domain of NFRA. The company was required to prepare its financial statements for the year 2017-18 in accordance with the Indian Accounting Standards (Ind AS) as notified by the Ministry of Corporate Affairs. The investigation conducted by the SFIO revealed that the company and its group of companies presented falsified financial statements containing the falsified statements of debtors, adopted the malpractice of round-tripping and layering the transactions that resulted in inflated purchases and sales. The investigation also revealed inter-alia siphoning of funds of Rs. 671.48 crores and diversion of funds of Rs. 645.86 crores in the company and its group companies SFIO accused the auditors of the company and its group companies under the provisions of sections 143, 147 and 448 of the Companies Act 2013.

MCA vide its letter dated 10th June 2021, directed SIFO to share the investigation report with NFRA and according the SFIO shared the report vide its letter dated 31st August 2021 with NFRA for taking necessary action against the statutory auditor of the company and also with the group companies. Pursuant to the sharing of the information the NFRA considered the case under the provisions of section 132 (4) of the Companies Act 2013, to assess as to whether any professional misconduct was committed by the auditor of M/s SRS Real Infrastructure Limited in his role as an engagement partner in the statutory audit of the company conducted by the auditors for the financial year 2017-18.

Let us go through the case in detail in order to understand the major lapses discovered on the part of the auditor in connection with the conduct of the statutory audit along with reference to his professional conduct which was 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. The NFRA passed an order in this case levying a penalty of Rs. 3 lakh upon the auditors and also debarred him from his practice for a period of 3 years.

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 with 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 sub-section (4) of section 132 of the 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.

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