Analysis of Recent Judgments by NFRA against Auditors

“Explore the recent judgments by NFRA against auditors in India. Learn from the analysis of violations, including unauthorized appointments, false reporting, lack of testing, document retention, fraud possibilities, and more. Stay informed on the quality enhancement measures taken by NFRA to ensure compliance in the auditing and accounting profession.”

National Financial Reporting Authority (NFRA), the accounting and auditing regulator of India is working towards the quality enhancement of auditing and accounting work performed by professionals.

Since 2020, NFRA has passed various judgements wherein the Auditors’ i.e., Chartered Accountants were held guilty of professional misconduct. There may be difference of opinions amongst the professionals on the judgements passed by NFRA but our focus at the moment should be on the bright side of the same.

In this article, I’ll be talking about the recent judgements given by NFRA against the auditors which should be the eye opener for other Chartered Accountants. Going by the phrase that “One should always learn from the mistakes of others”, I am trying to put the points of negligence by the auditors in some cases due to which NFRA took a stand against them.

Without quoting the cases, I’ll be pointing out the violations so that we can focus more on the essence of judgements. Also note, these violations are not the part of single case/judgement.

Let’s discuss:

Violation 1: SA-200 – Unauthorised Appointment: As per Section 139 of the Companies Act, 2013, the appointment of the auditor must be done by the shareholders of the company but in the case under discussion, auditor accepted the appointment letter that was signed by the authorised signatory of the auditee company, but the signature of Board of Directors and the approval of shareholders were missing. There can be 2 points of view on this: Either the Auditor unintentionally accepted the engagement without checking the necessary approvals or there was something suspicious on the part of management and the auditor both. Undoubtedly, regulator won’t accept the first point of view as that would not be less than any story telling during the scrutiny. NFRA highlighted that the auditor was lacking professional competence, due care, integrity, and due diligence as per SA-200 and therefore held guilty.

Violation 2: False Reporting:  Now this is something to which the juniors and assistants would relate more. The regulator found that the audit report has a line which says, “the auditor has audited the cash flow statement and give a true and fair view” whereas the financial statements submitted to the regulator didn’t have cash flow statement. We all grew up from that basic level where we had the habit to roll forward the reports to save our time and efforts. Lot of time, the staff simply copy pastes the previous year reports or the report of other client and edit those reports as per the current year or current client. It is and it is not a clerical error. It is a clerical error on the part of the staff who don’t even have an idea of the end consequences to the partner and the firm, and it is not a clerical error on the part of signing partner as these things require a detailed review before submission. In the case under discussion, the partner submitted the cash flow statement later, but NFRA didn’t accept it and they mentioned, there was a suspicion that the cash flow statement was prepared subsequently after the show cause notice was issued to him. NFRA even proved their grounds of suspicion in the report.

Violation 3: Lack of Testing – CARO: Most points in CARO starts with, “Whether the company………” which means the auditor is required to certify the statement with yes or no which needs to be further substantiated by the evidence of auditing procedures performed by the auditor. In the case under discussion, the auditor has mentioned that “Yes, the company is registered with the RBI” (as the company is under banking business) and when asked regarding the background testing, Auditor couldn’t produce any document to justify his ground of reporting. The auditor further said, it is a typographical error to mention that the company is registered.  NFRA didn’t accept this statement and hence the auditor was found guilty.

Violation 4: Document Retention: SQC-1 and SA-230 talks about keeping the audit documentation for 7 years from the date of audit report. In the case under discussion, NFRA asked certain questions regarding the communication between management and auditor to which auditor responded that most of the communication was done via email and that communication couldn’t be produced because there was a system failure in the office of the auditor and all the emails were lost. It was a pure lie which was caught by the NFRA because emails can be retrieved in any system and there is no link between the system failure and emails. This is a clear case of non-retention of audit file by auditor for the stipulated period. Hence, auditor was held guilty.

Violation 5: Fraud Possibilities: SA-240 talks about the audit responsibilities relating to fraud in the audit of financial statements. In the case under discussion, there were huge expenses which wasn’t enquired by the auditor. Auditor said, he didn’t find any reason to enquire the management specifically on this point and he was satisfied with the figures. There is something called as “variance analysis” under which the comparison of prior year figures is done with the current year figures and if the difference between both is found significant, the reasons are enquired from the management that why there is a significant increase or decrease in the amount. Interestingly, when NFRA did the variance analysis, it was found that there was 3041% increase in the expenses as compared to the prior year. This clearly proved that variance analysis wasn’t done by the auditor and professional scepticism was missing on the part of the auditor. Auditor couldn’t give any satisfactory response and hence held guilty.

Violation 6: Basics of Documentation: SA-230 talks about the nature, timing and extent of the audit which needs to be fully documented in the audit documentation. While going through the audit files, NFRA pointed that they couldn’t get the clear image of scopes and strategies behind the audit of the company in discussion. To this, the auditor replied that they have pre-defined set of scope of audit to which they fully abide. Further, the auditor responded that it is not possible to make copies of each and everything which is done under innocence. NFRA was very clear in this point and even quote the reference of a judgement passed by US regulator i.e. Public Company Accounting Oversight Board (PCAOB) according to which, “Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement to (a) understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, and (b) determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review……the documentation for each of those audits was insufficient to demonstrate the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, including in those areas of the audits involving significant risks.”

Although, NFRA could gave the reference of Indian Standard of Auditing, SA-230 instead of PCAOB judgement as SA-230 exactly says the same.

In the case under discussion, auditor couldn’t justify its point of not documenting the scope, nature etc. clearly and hence held guilty.

Violation 7: The Ambiguous Report:  SA-700 says, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. In the case under discussion, auditor performed the procedures to find the misstatements and interestingly, auditor not only detect the misstatements but also documented in the annexure to the audit report. So, what went wrong here is ignoring the standard of auditing and surpassing the provision without abiding by it. The auditor in the case under discussion issued an unqualified report which clearly mentioned that the financial statements give a true and fair view and on the other side, an annexure was attached describing the misstatements in the financials. To this, the auditor further responded that he didn’t receive required files from the management despite of various reminders due to which further testing of misstatements couldn’t be done. NFRA found that non-testing of significant misstatements due to any reason hampered the credibility of audit report and further, the reason behind giving a clean report by the auditor was not at all satisfactory and hence the auditor was held guilty.

Conclusion: Auditors are delegated with the responsibility of delivering trust to the society. There is no way to justify the stand behind ignorance as there is no scope for mistakes when the task is itself concerned with finding the mistakes.

Recent NFRA Judgment