NFRA takes action against two auditors for lapses in Lexus Granito India Audit
Understanding CA Final audit professional ethics is essential for auditors to maintain the highest standards of integrity and compliance in their work. The integration of professional ethics in the CA Final audit curriculum not only prepares candidates for their exams but also instills a strong ethical foundation, emphasising the importance of integrity and accountability in the profession. CA Final’s audit professional ethics module equips students with the necessary knowledge and principles to make ethically sound decisions and recommendations as future auditors. FR lectures CA Final provide in-depth coverage of financial reporting standards which is very much required. One such lesson has been illustrated below to make students understand the reality of the audit profession.
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The National Financial Reporting Authority (NFRA) has recently made headlines with its order in the matter of Lexus Granito India Limited’s complaint against CA Firm M/s Ashok Holani & Co. and CA Rahul Jangir. The NFRA, established to oversee and regulate the auditing and accounting professions in India, has issued this order in response to allegations of accounting irregularities and professional misconduct.
Executive summary
The National Financial Reporting Authority, abbreviated as ‘NFRA,’ initiated an investigation into the professional conduct of statutory auditors responsible for overseeing Lexus Granito India Limited, located in Morbi, Gujarat, for the financial years spanning 2017-2018 to 2019-2020. This action was taken in accordance with Section 132(4) of the Companies Act of 2013. The impetus for this investigation stemmed from information provided by the Securities and Exchange Board of India, commonly referred to as ‘SEBI,’ in a communication dated August 6, 2021. SEBI had been conducting its own inquiry into the accounting irregularities of the company. Subsequent to a comprehensive investigation and proceedings conducted under Section 132(4) of the Act, an analysis of the auditors’ submissions, and an initial review of the Financial Statements and the Audit Files, NFRA found the auditors to be prima facie guilty of professional misconduct. Consequently, NFRA issued a Show Cause Notice to the auditors, specifically M/s Ashok Holani & Co., on December 7, 2022.
Audit Irregularities Highlighted
The audit irregularities highlighted in this case, involving the audit of Lexus Granito India Limited (LGIL) for the financial years 2017-18 to 2019-20, are as follows:
Failure to Disclose Material Facts: The auditors were charged with failing to disclose material facts known to them but not disclosed in the financial statement, which were necessary for making the financial statements. This charge is in violation of Clause 5 of Part I of the Second Schedule of the Chartered Accountants Act 1949.
Failure to Report Material Misstatements: The auditors were charged with failing to report material misstatements that were known to them and appeared in the financial statements they audited.
Failure to Exercise Due Diligence and Gross Negligence (SA 220): The auditors were found to be grossly negligent and failed to exercise due diligence in their professional duties, which contravenes the principles outlined in Standard on Auditing (SA) 220.
Failure to Obtain Sufficient Information: The auditors were charged with not obtaining sufficient information necessary for expressing an opinion, and they failed to adequately address exceptions that were sufficiently material to negate the expression of an opinion. This contravenes Standard on Auditing (SA) 705.
Failure to Comply with Generally Accepted Procedures of Audit: The auditors were charged with not adhering to the generally accepted procedures of audit applicable to the circumstances. This breach is against the established standards outlined in the applicable Standard on Auditing (SA).
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CA final audit professional ethics is a vital subject for CA Final students to succeed in their examinations and establish themselves as ethical professionals. The combination of audit and professional ethics in the CA Final program ensures that aspiring Chartered Accountants are not only well-prepared academically but also ethically responsible and equipped to uphold the integrity of the auditing profession. The Audit Academy tries to achieve this by not just focusing on curriculum but also developing the personality of future audit professionals.
Specific lapses in the audit include:
Lapses in Evaluation of Writing-Back of Liabilities (SA 220, SA 315): Auditors failed to apply professional skepticism and adequately address inappropriate reporting of the extinguishment of liabilities. They neglected to perform alternative audit procedures, as required by Standard on Auditing (SA) 220 and failed to document these in the audit file.
Non-Evaluation of Accounting Policy and Valuation of Inventories (SA 501, SA 315): They did not follow the required audit procedures for evaluating accounting policies and the valuation of inventories, as specified in SA 501 and failed to document this adequately.
Inappropriate Reporting of Matters through KAM (SA 705): They were charged with reporting through Key Audit Matters (KAM) without obtaining sufficient appropriate audit evidence, in violation of SA 705. Moreover, discrepancies were noted between the auditor’s report in the audit file and that available with NSE.
Unmodified Opinion Despite Material Misstatements (SA 200, SA 705): Auditors issued unmodified opinions despite the presence of material misstatements in the financial statements, which is a serious breach of SA 200 and SA 705.
Non-Evaluation of Utilization of IPO Proceeds (CARO 2016, SA 315): Auditors were charged with not obtaining sufficient appropriate audit evidence for reporting on the utilization of IPO proceeds, as required by the Companies (Auditor’s Report) Order, 2016, and for not following the necessary audit procedures outlined in SA 315.
Non-Evaluation of Related Parties Transactions (SA 550): Auditors failed to perform the necessary audit procedures for verifying and reporting on Related Party Transactions (RPTs) as mandated by SA 550.
Non-Implementation of Quality Control Measures (SA 220, SQC 1): The audit firm was charged with not establishing and maintaining a system of quality control, as required by SA 220 and the quality control standards outlined in SQC 1. This was viewed as a breach by international regulators as well.
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Penalties
Auditors have a solemn duty to conduct their audits with unwavering professional skepticism and unwavering due diligence, reporting their opinions in a wholly impartial manner. If auditors fail to carry out their responsibilities with the required level of professional skepticism and due diligence, and do not adhere to established standards, it can result in a breakdown of trust and confidence among investors and the public, ultimately jeopardizing the corporate governance system.
Section 132(4)(c) of the Companies Act, 2013 stipulates penalties for cases where professional misconduct is proven. The seriousness with which proven cases of professional misconduct are addressed is evident from the fact that the law prescribes a minimum punishment as follows:
(A) Imposing a penalty of not less than one lakh rupees, which may extend to five times the fees received, in the case of individuals, and not less than ten lakh rupees, which may extend to ten times the fees received, in the case of firms.
(B) Debarring the member or the firm from being appointed as an auditor, internal auditor, or from undertaking any audit related to financial statements or internal audit functions and activities of any company or body corporate. This debarring can last for a minimum period of six months or for a higher period not exceeding ten years, as determined by the National Financial Reporting Authority.
Highlights in this case:
- The auditors placed unwarranted reliance on the management’s assertions regarding the accounting of unilateral extinguishment of liabilities, inventory valuation, utilization of IPO proceeds, and related party transactions (RPTs). They failed to fulfill their statutory duty to safeguard public interest by exercising professional skepticism and questioning the management’s decisions regarding material misstatements in the Financial Statements.
- The auditors also neglected to conduct the necessary physical verification of inventory as mandated by auditing standards. They did not carry out the required audit procedures with the due level of professional skepticism and did not report material misstatements. Additionally, the firm, Mis Ashok Holani & Co., failed to exercise proper control and monitoring over the work of the Engagement Partner (EP) and the Engagement Team (ET) during the audit engagement, thus abdicating its responsibility to ensure audit quality as per professional standards. Considering these circumstances, we find it necessary to impose sanctions that align with the principles of deterrence, proportionality, and signaling the importance of adhering to professional standards.
In light of the proven professional misconduct and the nature of the violations, and in accordance with the principles of proportionality, NFRA, in the exercise of powers under Section 132(4)(c) of the Companies Act, 2013, hereby ordered the following:
- A monetary penalty of Rupees Ten Lakhs is imposed upon the Audit Firm Mis Ashok Holani & Co., the appointed Statutory Auditor.
- A monetary penalty of Rupees Five Lakhs is imposed upon CA Rahul Jangir, the Engagement Partner. Additionally, CA Rahul Jangir is debarred for a period of three years from being appointed as an auditor, internal auditor, or from undertaking any audit related to financial statements or internal audit functions and activities of any company or body corporate.
Our CA Final audit professional ethics module equips students with the necessary knowledge and principles to make ethically sound decisions and recommendations as future auditors.
Conclusion
The NFRA’s order in the matter of Lexus Granito India Limited against CA Firm M/s Ashok Holani & Co. and CA Rahul Jangir serves as a reminder of the critical role auditors play in upholding the integrity of financial reporting. It also highlights the importance of the NFRA in regulating the auditing and accounting professions to maintain trust and confidence in the financial markets.
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