Order Under Section 132(4) of the Companies Act in respect of the Show Cause Notice issued to CA Shrenik Baid (Membership No 103884)

Extract from the order

D. PENALTY

199. As discussed in detail in the above paras, the charges framed against CA Shrenik Baid in the SCN have been held to have been proved. The charges that were levelled against the CA were as follows:

a. Article I: Committed professional misconduct as defined by Section 22 of the Chartered Accountants Act 1949 (no. 38 of 1949) read with clause 5 of the Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that fmancial statement in a professional capacity”.

b. Article II: Committed professional misconduct as defined by Section 22 of the Chartered Accountants Act 1949 (no. 38 of 1949) read with clause 6 of the Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity”.

c. Article III: Committed professional misconduct as defined by Section 22 of the Chartered Accountants Act 1949 (no. 38 of 1949) read with clause 7 of the Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “does not exercise due diligence, or is grossly negligent in the conduct of his professional duties”.

d. Article IV: Committed professional misconduct as defined by Section 22 of the Chartered Accountants Act 1949 (no. 38 of 1949) read with clause 8 of the Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion”.

e. Article V: Committed professional misconduct as defined by Section 22 of the Chartered Accountants Act 1949 (no. 38 of 1949) read with clause 9 of the Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”.

201. According to Sec 132(4)(c) of the Companies Act, 2013, in a case where professional or other misconduct is proved, the NFRA shall have the power to make order for:

a. Imposing penalty of not less than one lakh rupees, but which may extend to five times the fees received, in the case of individuals; and

b. Debarring the member from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate for a minimum period of six months or such higher period not exceeding ten years as may be determined by the NFRA.

202. The seriousness with which the Act views proven cases of professional misconduct is evident from the fact that a minimum punishment is laid down by the law.

203. There are several factors that go to what is the appropriate penalty in any case. These are discussed below with specific reference to the proved facts of this case.

a. Loss of Independence of the Statutory Auditor: The independence of the statutory auditor from the management of the company is the foundation of the institution of statutory audit. If this is compromised, there would be no case for a compulsory statutory audit at all. In this case, it has been clearly shown that the independence in mind and independence in appearance of the statutory auditor had been totally compromised. As Partner on the engagement, who was the de facto Engagement Partner also, and de jure as well as per the assertions of the Audit Firm, it was the duty of CA Shrenik Baid to take necessary preventive action to ensure that his, and his Firm’s, independence was not affected. He is a senior CA, with several years of experience. Notwithstanding this, he has also agreed to work as the lead on a consultancy assignment at the same time as he was doing the statutory audit of the company. As para 2.2.6 of the AQRR stated, “The Code of Ethics also requires using different partners and ETs with separate reporting lines for the provision of even permitted and duly authorised non-assurance services to an assurance client (Section 200). However, NFRA had observed two engagements in the examined list (c, f) where the team was led by CA Shrenik Baid, said to be one of the EPs, and had concluded that this was a clear violation of this requirement”. CA Shrenik Baid’s position in the Audit Firm, his standing in the profession, and his long experience, required him to be especially conscious of, and sensitive to, anything that could detract from his, and his firm’s, independence. This background makes the violation of independence that has been proved even more serious than it would have been in the case of any other partner. This was a serious lapse in the discharge of his duty by CA Shrenik Baid.

b. Compliance with SAs and Maintenance of Audit Quality: CA Shrenik Baid’s position, stature, and experience have been highlighted earlier. He has, nevertheless, sought to completely evade responsibility for the proper conduct of the audit. Given this, to insist that there could be more than one Engagement Partner for an engagement was to upend the SAs entirely. This certainly was one of the main reasons for the disastrous failure in audit quality that now stands proved.

CA Shrenik Baid has made the following statements in his replies (as pointed out earlier in paras 60 and 68 of this order).

“As stated earlier, Mr. Sen was the Engagement Partner whilst I was an additional partner on the engagement. Given that Mr. Sen served as the Engagement Partner, I worked under his direction, supervision, and guidance. Whilst I was delegated certain responsibilities with respect to the audit, the ultimate responsibility for the audit and the audit report that was issued on behalf of the firm was that of Mr. Sen, who signed the report, after review of the key audit matters, key workpapers and discussions with me and the other Engagement Team, and being satisfied that sufficient appropriate audit evidence had been obtained to support the conclusions reached in the auditor’s report. Areas of the work performed by me considered important were reviewed by Mr. Sen based on his professional judgment. These areas included adequacy of loans, advances, provisions for diminution in value of investments that is other than temporary, and for loans and advances, whistle blower’s letters, RBI matters”. (emphasis added)

“NFRA’s allegations do not address what responsibility I have, as a partner on the engagement (as opposed to the Engagement Partner) for consideration of risks of material misstatements (“ROMMs”)”. He has replied similarly to other charges.

Implicitly, CA Shrenik Baid accepts all the charges levelled against him including of loss of independence, failure to comply with the mandatory quality standards etc. His only argument seems to be that CA Udayan Sen was responsible for all this and that he did not have any responsibility whatsoever.

CA Shrenik Baid has come up with patently lame excuses to try and transfer the blame to someone else. The role of a Partner is to provide the leadership and direction necessary to the engagement team to achieve the necessary audit quality, and compliance with SAs. The charges proved have shown the colossal failure of the CA to discharge this duty. A critical, questioning attitude, an unwillingness to be satisfied by merely superficial explanations, not concluding on material matters without rigorous verification from more than one angle, diligent and methodical cross verification, proper planning and the meticulous execution of the audit plan etc are fundamental to audit quality. Not only should the Partner have exhibited these qualities in the required measure, he should also have ensured the same in the rest of the Engagement Team as well. He has totally failed to do so. On the contrary, he has desperately tried to shift the blame. This itself renders the professional misconduct extremely serious in nature.

c. Promotion of Public and Investor confidence and Effectiveness in Deterring Auditors and Audit Firms from violating the applicable Accounting and Auditing Standards.

Audited financial statements are the basic inputs for innumerable transactions in the economy. A breakdown, or severe damage, to the trust and confidence that the public and investors have in financial statements would have ramifications that go far beyond the limited activities of an auditee company. As expert professionals, auditors are expected to judge the significance of

the operations of the entity they audit for the larger fmancial and economic sectors and accordingly calibrate their approach and procedures. Where the auditors have been shown to be negligent in considering these factors, appropriately severe penalties would follow. The misconduct of the type and scale that have now been proved would be severely damaging to Public and Investor Confidence. It is, therefore, essential that the penalty imposed has a suitable deterrent effect on other auditors and, at the same time, sends out a message to the Public and the Investor Community that such misconduct will not be allowed to escape lightly.

d. Intentional Reckless Behaviour: The evidence in the above paras shows clearly that the CA was not unaware of the Requirements of the SAs. He should have reasonably foreseen that the likely or actual consequences of his actions or inaction would amount to non-compliance with the SAs. This makes the professional misconduct very serious.

e. Deterrence to Fraud and Collusive Behaviour: Professional misconduct becomes very serious when the CA has gone along with the Management of the company in agreeing to misstatements/omissions so as to commit a fraud on the users of the financial statements. In this case, it is seen clearly that the company had reported the profit that it did through such unacceptable/impermissible stratagems as the imputation of a value of Rs 184 crores to the Put Option on the TTSL shares. Besides, the fact that the company had ceased to comply with the stipulated NOF/CRAR norms was deliberately misstated. CA Shrenik Baid went along with this attempt at fraudulent presentation of the financial statements. Hence, this would necessitate the imposition of a severe penalty.

204. Considering all the above factors, NFRA makes the following order in terms of Sec 132(4)(c) of the Companies Act, 2013.

ORDER

205. Considering all the above factors, NFRA makes the following order in terms of Sec 132(4)(c) of the Companies Act, 2013.

(i) A monetary penalty of Rs Fifteen Lakhs is levied upon CA Shrenik Baid.

(ii) In addition, CA Shrenik Baid is debarred for a period of five years from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

Download Order Under Section 132(4) of the Companies Act in respect of the Show Cause Notice issued to CA Shrenik Baid (Membership No 103884)

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