The National Financial Reporting Authority (NFRA) in India has imposed a penalty of ₹300,000 on the statutory auditor of now-de-listed company SRS Ltd, along with a three-year ban on taking up statutory or internal audits of any company, for alleged professional misconduct and lapses in the FY18 audit of the company. The company went into bankruptcy proceedings in 2018, and the NFRA initiated its investigation after receiving a reference from the Serious Fraud Investigation Office (SFIO). The audit engagement partner allegedly ignored indicators pointing to an abnormal state of affairs in the company, and failed to display professional skepticism and due diligence in reaching his audit opinion. The NFRA has imposed a fine and a three-year ban on both auditors for professional misconduct and other lapses in connection with the audit of SRS Ltd in 2017-18. The order came after the NFRA received a letter from the SFIO, which had investigated the affairs of SRS Ltd and the group companies. An investigation by the SFIO revealed that the company and its group companies had presented financial statements containing false statements of debtors and indulged in the malpractice of round-tripping and layering of transactions resulting in inflated purchases and sales. The NFRA initiated action under the Companies Act for investigating professional or other misconduct of the statutory auditors of SRS Ltd.
SRS Ltd, a listed entity and one of the companies of SRS Group, went under the Corporate Insolvency Resolution Process (CIRP) by the order of the NCLT in August 2018. The audit firm SVP & Associates, its engagement partner (EP) Pankaj Kumar, and audit firm Oswal Sunil & Company, its EP Naresh Kumar were the joint statutory auditors of SRS Ltd for the FY 2017-18, and they were responsible for the audit of 39.71% and 60.29% respectively of the total assets of the firm.
What went wrong
1. According to the National Financial Reporting Authority (NFRA), the statutory auditors of SRS Ltd, Pankaj Kumar and Naresh Kumar, committed several failures and mistakes in their audit of the company for the fiscal year 2017-18. The regulator alleged that the engagement partner ignored the indicators pointing to the abnormal state of affairs in the company having adverse implications for the true and fair view of financial statements and failed to display professional skepticism and due diligence in reaching his audit opinion in accordance with standards of audit.
2. NFRA further stated that both auditors failed to review the unusual events in the financial statements and chose to report only about Rs 10 crore of fraudulent transactions, which had already been reported by the firm to stock exchanges. They also failed to determine the appointment of the Engagement Quality Control Review (EQCR) in the audit of a listed entity, compromising the quality of the audit process and its outcome.
3. Moreover, they breached the code of ethics by submitting misleading and false information on the appointment of an EQCR to the regulator, showing gross negligence in performing their duties in violation of the norms. By doing so, they misled the regulator and failed to discharge their duties cast upon them as ethical auditors entrusted with the critical role of a watchdog in public interest.
The key lessons that can be learned from the above incidence are as follows
1. Professional scepticism and due diligence: Auditors need to be more sceptical and conduct thorough due diligence to identify any red flags or abnormal state of affairs in the company.
2. Compliance with audit standards: Auditors must comply with the standards of audit and avoid any lapses in reaching their audit opinion.
3. Adherence to ethical standards: Auditors must adhere to ethical standards and not submit false information or falsify documents to the regulator.
4. Effective communication with stakeholders: Auditors need to effectively communicate with stakeholders to provide assurance about the true and fair view of financial statements.
To avoid such incidents in the future, auditors should ensure that they conduct a thorough audit with proper due diligence and comply with the audit standards. They should also adhere to ethical standards and maintain effective communication with stakeholders. Additionally, auditors should be aware of the red flags and abnormal state of affairs in the company and report any such issues to the regulator in a timely manner.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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