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NFRA Imposes a Penalty on Auditors

Introduction

The National Financial Reporting Authority (‘NFRA’) has taken strong action against M/s M H Dalal & Associates, a renowned Chartered Accountancy firm, and its engagement partner, CA Devang Dalal in the recent case[i]. The NFRA's investigation revealed instances of professional misconduct and violations of both accounting and auditing standards, as well as non-compliance with the provisions of the Companies Act, 2013 (‘Act’). Consequently, significant penalties have been imposed, and CA Devang Dalal has been barred from performing certain roles within the financial ecosystem.

Brief Facts

  • M/s MAN Industries (India) Limited (‘MIIL’), a small-cap company based in Mumbai and listed on both BSE and NSE has had M/s M H Dalal & Associates as its statutory auditor since financial year (‘FY’) 2017-18 with CA Devang Dalal as the engagement partner for the FY 2020-21.

  • The NFRA initiated under s. 132(4) of the Act on M/s M H Dalal & Associates based on the information received from the Securities Exchange Board of India (‘SEBI’) regarding financial irregularities.

  • Preliminary examinations of MIIL’s financial statements for FY 2020-21 revealed several non-conformities with regulatory requirements during the preparation of these statements.

  • The auditors were requested to provide their audit file and Standard on Quality Control (SQC-1) policy. A thorough examination showed that the audit did not adequately address the relevant Standards on Auditing (‘SA’) and provisions of the Act.

  • The NFRA found that the auditor failed to apply professional judgment and scepticism during the audit, notably:

1.      Omitting essential disclosures required by AS 24 related to sensitive transactions with related parties.

2.      Providing inaccurate disclosures about the credit risk profile of trade receivables, contrary to AS 107 requirements.

3.      Recording insufficient impairment losses for trade receivables, other assets, and investments in loans to subsidiaries.

4.      Neglecting to verify physical inventories and related procedures managed by the company.

5.      Failing to consider the relevant Indian Accounting Standard, Ind AS 115, and the associated fraud risks in revenue recognition.

6.      Making false claims about the effectiveness of internal controls without sufficient testing, contrary to the Guidance Note of the ICAI.

7.      Not obtaining sufficient appropriate audit evidence for material account balances and transaction classes, such as Trade Receivables.

Held

NFRA passed an order under s. 132 (4)(c) of the Act against the auditors based on the investigation conducted and held the auditors liable for professional misconduct and for contravening various sections of the Act.

NFRA imposed the following penalties:

  1. M/s M H Dalal & Associates was fined Rs. 50,00,000.

  2. CA Devang Dalal was debarred for 5 years from being appointed as an auditor or undertaking internal audits of any company or body corporate.

  3. A penalty of Rs. 10,00,000 was imposed on CA Devang Dalal as he was serving as the statutory auditor.

Conclusion

The penalties imposed on M/s M H Dalal & Associates and CA Devang Dalal stress the grave consequences of failing to adhere to professional standards and ethical conduct within the auditing profession.




End Note

[i] Order No. 021/2023 dated 28.06.2023.




Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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