National Financial Regulatory Authority (NFRA): While disposing of the show cause notice (SCN) issued to Ashok Holani and Co. (for FY 2018-19 and 2019-20) and CA Rahul Jangir (for FY 2017-18 and 2019-20), who were appointed as auditors of Morbi based Lexus Granito India Ltd. (LGIL), the Bench of Dr Ajay Bhushan Prasad Pandey (Chairperson) and Praveen Kumar Tiwari and Smita Jhingran (Full-time Members) in view of the professional misconducts committed by the auditors, imposed a monetary penalty of Rs 10 Lakhs on Ashok Holani and Co. and Rs 5 Lakhs on CA Rahul Jangir in addition to debarring him for 3 years from being appointed as an auditor and internal auditor in respect of financial statements for any company or body corporate.
The Authority observed that it is the duty of the auditor to conduct audit with professional skepticism and due diligence and report their opinions in an unbiased manner.
LGIL is a Small Medium Enterprise (SME) dealing in trading of tiles. LGIL prepared its financial statements in accordance with Accounting Standards Framework as it was not mandatory for LGIL to adopt to the Indian Accounting Standard Framework.
Ashok Holani and Co. were appointed as the statutory auditor for the first time in the FY 2017-18 and Rahul Jangir was appointed as Engagement Partner for the statutory audit.
NFRA took up suo motu investigation into the role of the statutory auditors for LGIL under Section 132(4) of the Companies Act, 2013 after receiving a letter from SEBI in 2021, pointing out the discrepancies of financial statements of LGIL due to improper writing-back of liabilities and reliance of the auditors on management for valuation of inventory and utilisation of IPO proceeds.
On examination of the audit files, it was observed that audit was prima facie conducted disregarding the relevant requisites provided in the Companies Act. Despite this the Engagement Partner had issued an unmodified audit opinion in the Independent Auditor’s Report on behalf of the firm.
On being satisfied with the existence of a sufficient cause to take action, a SCN was issued to the auditors and they were charged with professional misconduct for:
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Failure to disclose material fact known to them which was not disclosed in the financial statement wherein disclosure of such fact was necessary.
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Failure to report material misstatement known to them to have appeared in the financial statement.
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Gross negligence and failure exercise due diligence.
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Failure to obtain sufficient information necessary for expression of opinion.
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Failure to invite attention to any material departure from generally accepted procedures of audit.
Perusing the lapses by the auditors in a detailed manner, the NFRA found that the auditors made a series of serious non-compliances of the Standards on Auditing while conducting their audit of LGIL. The auditors issued unmodified opinion on financial statements despite existence of material misstatements in them.
The Authority further took note of the poor quality of the audit. It was pointed out that there was a cover up in terms of submission of additional documents, incomplete documentation and attempt to mislead through untenable replies.
The Authority concluded that the auditors committed Professional Misconduct in terms of Section 22 of Chartered Accountants Act, 1949 (CA Act) and under Schedule II Part I (5) to (9) of the CA Act.
Furthermore, the auditors were found guilty under of the CA Act for failing to disclose material non-compliances by the LGIL. The auditors were found guilty of failing to report material misstatements of the company in the audit report. The auditors were also charged for failing to conduct the audit in accordance with the applicable regulations in many critical areas.
The NFRA observed that statutory audits provide useful information to the stakeholders and public based on which they make their investment decisions. Without a credible audit, users of financial statements would be rendered handicapped.
The NFRA was of the view that the auditors placed blind reliance on the assertions of the management relating to accounting of unilateral extinguishment of liabilities, valuation of inventory, verification of utilisation of IPO proceeds, instead of discharging their statutory duty of questioning the management and maintaining a professional skepticism. The auditors abdicated their responsibility and failed to perform the due audit procedure.
The NFRA was also of the view that Asok Holani and Co. failed to exercise appropriate control and monitoring over the Engagement Partner. Hence, the Authority deemed it fit to impose the afore-stated penalty and debarment.
[In the matter of CA Firm Ashok Holani and Co. and CA Rahul Jangir u/s 132(4) of Companies Act, 2013, Order No. 59/2023, decided on 04-10-2023]
