Latest NFRA Order in the Matter of CA Santosh Deshmukh for the Statutory Audit of Sanwaria Consumer Limited
The National Financial Reporting Authority (NFRA) is an independent regulatory body in India that oversees the quality of accounting and auditing for Public Interest Entities (PIEs). Its role includes ensuring that financial reporting practices are upheld to maintain transparency and integrity in financial statements. A recent case involving CA Santosh Deshmukh, the Engagement Partner (EP) from M/s Khandelwal Kakani & Co., highlights NFRA’s commitment to upholding these standards. This blog delves into the NFRA’s order concerning CA Santosh Deshmukh’s statutory audit of Sanwaria Consumer Limited (SCL) for the fiscal year 2017-18. The findings underscore critical issues related to audit failures and penalties, providing a stark reminder of the importance of adherence to auditing standards in India.
Background
The NFRA initiated action against CA Santosh Deshmukh following concerns raised by the Securities and Exchange Board of India (SEBI) about financial irregularities at Sanwaria Consumer Limited. SEBI’s information pointed to discrepancies and potential misstatements in the financial reports of SCL, which were not adequately addressed in the statutory audit conducted by M/s Khandelwal Kakani & Co., where CA Santosh Deshmukh was the Engagement Partner.
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Key Findings of the latest NFRA Order
The NFRA’s investigation uncovered several significant lapses in the audit process led by CA Santosh Deshmukh. These findings reflect serious breaches of auditing standards and professional competence, as detailed below:
1. Failure Relating to Audit of Inventory
The Latest NFRA Order found that CA Santosh Deshmukh failed to comply with Section 143(3)(e) of the Companies Act 2013, and Standards on Auditing (SA) 501 and SA 705. Specifically, there was a failure to verify the existence and valuation of SCL’s inventories. This oversight led to an overvaluation of soya seed inventories by approximately ₹18.93 crores and paddy inventories by ₹13.30 crores. Accurate inventory valuation is critical for reflecting the true financial state of the company.
2. Failure Relating to Audit of Investments
The audit did not adequately address the verification of ownership, valuation, and impairment testing of investments in SCL’s loss-making subsidiaries and associate companies. As of March 31, 2018, SCL held investments worth ₹36.29 crores, including unquoted shares in Sanwaria Energy Limited (SEL) and Shreenathji Solvex Limited (SSL). The investments were held at cost without proper impairment evaluation, which is essential for accurate financial reporting.
3. Lapses Relating to Consolidated Financial Statements
CA Santosh Deshmukh was found negligent in evaluating and reporting non-compliance with Ind AS-110 and Ind AS-28, which govern consolidated financial statements and investments in associates. This oversight represents a breach of Section 143(3)(e) of the Companies Act 2013 and standards SA 700 and SA 705.
4. Lapses Relating to Audit of Revenue
There was a failure to perform adequate audit procedures to address the risk of misstatement in revenue recognition. This lapse is in violation of SA 200, SA 240, and SA 315, which require auditors to obtain sufficient appropriate evidence and assess the risk of material misstatement, especially related to revenue recognition.
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5. Failure Related to Audit of Trade Receivables
The EP did not obtain sufficient appropriate audit evidence for trade receivables, which were 100% unsecured. This failure to assess risks and verify receivables properly undermines the reliability of the financial statements. According to SA 200, auditors must plan and perform audits with professional skepticism and recognize potential material misstatements.
6. Failure Related to Forming an Opinion on Financial Statements
The EP was charged with failing to form an audit opinion based on sufficient appropriate audit evidence, as required by SA 700. This failure means that the audit opinion provided did not adequately ensure that the financial statements were free from material misstatement.
7. Failure Related to Audit Documentation
The EP was found to have prepared inadequate audit documentation, failing to meet the requirements of SA 230. The latest NFRA order emphasizes that proper documentation is essential for providing a clear record of the audit procedures performed, results obtained, and professional judgments made.
8. Failures Relating to Communication with Those Charged With Governance (TCWG)
The EP did not adequately communicate with TCWG regarding the audit’s scope, timing, and deficiencies in internal control. This lapse is in violation of SA 260 and SA 265, which require effective communication and documentation of internal control deficiencies.
9. Failure to Report Non-Compliance with Provisions of the Companies Act 2013
The EP was charged with failing to comply with Section 143(9) of the Companies Act, 2013, which mandates adherence to auditing standards. The EP’s responses indicated a lack of acknowledgment of these non-compliances.
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NFRA's Action on Audit Failures and Penalties
Following the examination of the audit file and the responses provided by CA Santosh Deshmukh, the NFRA issued a Show Cause Notice (SCN) on April 8, 2024. Despite several opportunities for CA Santosh Deshmukh to present his case, including a personal hearing on July 5, 2024, the findings led to the conclusion that he was indeed guilty of professional misconduct.
The latest NFRA order imposes the following penalties on CA Santosh Deshmukh:
- Monetary Penalty: A fine of ₹5,00,000 (Five Lakhs Rupees).
- Debarment: A one-year debarment from being appointed as an auditor or internal auditor, or from undertaking any audit of financial statements or internal audit functions of any company or body corporate.
These penalties underscore the seriousness with which NFRA views the breaches of auditing standards and professional misconduct. They serve as a reminder of the stringent requirements and responsibilities that auditors must adhere to in their role.
Conclusion
The CA Santosh Deshmukh Case serves as a crucial reminder of the importance of adhering to auditing standards in India. The latest NFRA order in the Sanwaria Consumer Limited Audit highlight significant lapses and underscore the regulatory framework’s role in ensuring accurate and reliable financial reporting. The penalties imposed reflect the NFRA’s dedication to maintaining the integrity of the auditing profession and safeguarding public trust in financial statements. This case reinforces the need for auditors to conduct their work with diligence, integrity, and adherence to established standards.
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