NFRA issues order in the matter of MAN Industries (India) Limited against CA Nilesh Chheda
The National Financial Reporting Authority (NFRA), India’s independent regulator overseeing accounting and auditing matters, recently concluded an investigation into the professional conduct of CA Nilesh Chheda, the Engagement Partner (EP) of M/s Rohira Mehta & Associates, the statutory auditor of MAN Industries (India) Limited (MIIL) for the fiscal year 2016-17.
Initiated in response to information provided by the Securities and Exchange Board of India (SEBI) regarding financial irregularities at MIIL, the NFRA found several instances of professional misconduct on the part of the EP. This blog post delves into the key findings of the NFRA order, shedding light on the lapses that led to the imposition of penalties.
NFRA Order - Background & Investigation Process
MIIL, a prominent manufacturer and exporter of large-diameter Carbon Steel Line Pipes, fell under NFRA’s scrutiny following information provided by the Securities and Exchange Board of India (SEBI) regarding financial irregularities. The NFRA initiated an investigation under Section 132(4) of the Companies Act, 2013, focusing on the professional conduct of CA Nilesh Chheda, the EP for the FY 2016-17 audit.
Findings and Lapses
The NFRA order, as outlined in sections C and D, identifies several instances of professional misconduct by the EP, which include:
- Qualification of Opinion: The EP failed to provide an adverse opinion despite material and pervasive misstatements, as required by auditing standards.
- Disclosures Mandated by Ind AS and the Act: MIIL’s Financial Statements lacked required disclosures mandated by Ind AS 242 and the Companies Act, especially regarding Related Party Transactions and loans.
- Errors in Credit Risk Profile Disclosures: The EP’s failure to provide accurate disclosures regarding the Credit Risk Profile of Trade Receivables violated Ind AS 107 requirements.
- Insufficient Audit Evidence: The EP did not obtain Sufficient Appropriate Audit Evidence (SAAE) in critical areas, such as non-consolidation of a material subsidiary and credit risk evaluation.
- Failure to Demonstrate Audit Work Adequacy: The EP fell short in demonstrating the sufficiency and appropriateness of audit work across various critical components, resulting in non-compliance with Standards on Auditing.
Find below more information on the NFRA Order & it's findings
1) Failure to Report Non-consolidation of Subsidiary
The EP faced charges for failing to appropriately modify the audit opinion, even though MIIL’s wholly-owned subsidiary, Merino Shelters Pvt. Ltd (MSPL), was not consolidated in the Financial Statements. The EP qualified the Audit Report for non-consolidation, citing an ongoing legal dispute between promoters and relying on a legal opinion. The NFRA found this non-consolidation to be a material misstep.
2) Failure to Prepare Audit Documentation
The EP was charged with non-compliance with SA 230, as audit documentation did not adequately reflect the nature, timing, and extent of audit procedures. The EP’s response emphasised the sufficiency of the documentation, including valuation and actuarial reports, external confirmations, and discussions with the EQCR Partner.
3) Failure to Report Issues Related to Disclosure of Credit Risk Exposure
Charges were levied against the EP for not reporting issues related to the disclosure of Credit Risk Exposure of financial instruments (Trade Receivables) as per Ind AS 107. The EP failed to report the company’s non-disclosure of critical information regarding credit risk profile, a material non-compliance with the financial reporting framework.
4) Failure to Plan the Audit of Financial Statements
The EP faced charges for not complying with SA 300, as there was no evidence in the Audit File of the establishment of an overall audit strategy and documentation of changes during the engagement. The EP’s response referenced various documents, including preliminary audit requirements and checklists, as evidence of audit planning.
5) Failure to Perform Analytical Procedures
The EP was charged with non-compliance with SA 520 for failing to design and perform analytical procedures to assess the consistency of financial statements. The NFRA noted substantial decreases in key financial parameters, questioning the lack of write-offs for the year 2016-2017 despite litigation and unsecured outstanding balances.
6) Failure to Determine Materiality
The EP faced charges for not complying with SA 320 by failing to determine materiality for the Financial Statements and document the amounts and factors considered in the determination. This failure raised concerns about the overall audit strategy and performance materiality.
7) Failure to Perform Risk Assessment Procedures and Response to Risks
The EP faced charges for non-compliance with SA 315 and SA 330, failing to perform risk assessment procedures and adequately responding to identified risks of material misstatement at both financial statement and assertion levels. The NFRA noted deficiencies in understanding the entity and its environment, as well as a lack of overall responses to identified risks.
8) Failure to Obtain Sufficient Appropriate Audit Evidence (SAAE)
The EP was charged with not complying with SA 200, as he failed to obtain reasonable assurance regarding the absence of material misstatements in the Financial Statements. Despite the EP’s assertion that the charge does not stand, the NFRA emphasised the lack of Sufficient Appropriate Audit Evidence in critical areas, such as non-consolidation of a material subsidiary, credit risk evaluation, and risk assessment procedures.
9) Failure to Prepare Documentation Regarding Auditor’s Responsibilities Relating to Fraud
The EP faced charges for failing to comply with the requirements of SA 240, specifically regarding the preparation of documentation related to the auditor’s responsibilities concerning fraud in an audit of financial statements. The NFRA found a lack of adequate documentation in this crucial aspect of the audit process.
10) Failure to Communicate with Those Charged with Governance (TCWG)
The EP was charged with failing to determine Those Charged with Governance (TCWG) and communicate with them regarding the auditor’s responsibilities, the planned scope and timing of the audit, and deficiencies in internal control. The absence of documented communication with TCWG raised concerns about the transparency and effectiveness of the audit process.
11) Failure to Report Non-disclosure of Related Party Loans on a Gross Basis
The EP was charged with failing to report the non-disclosure of related party loans on a gross basis, as required by Ind AS 24. The failure to report this non-disclosure, rendering the financial statements misleading, was considered a serious violation of auditing standards.
12) Failure to Report Non-disclosure of Trade Payable Covered under the Micro, Small and Medium Enterprises Development Act, 2006
The EP faced charges for not reporting the non-disclosure of principal and interest outstanding under the Micro, Small and Medium Enterprises Development Act, 2006. The absence of required disclosures in the Annual Report raised concerns about compliance with regulatory requirements.
13) Failure to Report Full Particulars of Loan to Related Party
The EP was charged with not reporting the non-disclosure of the rationale and purpose of loan transactions as per Section 186(4) of the Companies Act, 2013. The lack of disclosure concerning loans to related parties raised questions about transparency and compliance.
14) Failure to Report Non-disclosure of Material Information Relating to Pledge of Fixed Deposits
The EP faced charges for not reporting the non-disclosure of material information related to the pledge of fixed deposits, violating the requirements of Para 14 of Ind AS 107. The EP was accused of falsely reporting compliance with Ind AS despite the glaring omission.
Penalties Imposed
Given the severity of the professional misconduct, NFRA imposed a monetary penalty of Rs.5,00,000 on CA Nilesh Chheda. Furthermore, he is debarred for five years from being appointed as an auditor or undertaking any audit, reinforcing the consequences of lapses in auditing responsibilities.
Conclusion
NFRA order against CA Nilesh Chheda underscores the importance of maintaining the highest standards of professionalism in auditing, especially when dealing with entities of public interest. It serves as a stark reminder to auditors and accounting professionals about the repercussions of lapses in their responsibilities, reinforcing the need for strict adherence to auditing standards and ethical conduct in the financial reporting ecosystem.
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