On October 21, 2024, the National Financial Reporting Authority (NFRA) issued an order against CA Chirag Doshi, citing professional misconduct in the statutory audit of Ushdev International Limited (UIL) for the financial year 2017-18. This blog breaks down the key issues identified by NFRA and what this means for auditors and stakeholders in India.
Background of the Case
Ushdev International Limited (UIL), based in Mumbai, faced insolvency proceedings in 2018. Amidst these proceedings, NFRA investigated the statutory audit conducted by CA Chirag Doshi and found several lapses in auditing standards, particularly in relation to fraud detection, due diligence, and the quality of audit documentation.
Key Issues Found by NFRA
- Failure to Exercise Due Diligence in Fraud Detection
The NFRA found that the Engagement Partner (EP), CA Chirag Doshi, failed to perform his duties with due diligence, displaying gross negligence in relation to his obligation to report fraud under Section 143(12) of the Companies Act, 2013, and the relevant Standards on Auditing (SA 240). Despite multiple indicators of fraud—such as discrepancies in Expected Credit Loss (ECL) provisions and unusual sales transactions—the EP failed to investigate or raise concerns. - Insufficient Audit Evidence
One of the critical lapses noted was the failure to obtain sufficient appropriate audit evidence in relation to UIL’s investments in fellow subsidiaries, such as UIL Singapore Pte Ltd, UIL Hong Kong Ltd, and Uttam Galva Ferrous Ltd (UGFL). The EP relied solely on a valuation report provided by a management expert, without challenging its assumptions or independently assessing impairment requirements, even though the expert had explicitly stated that no due diligence was conducted. - Deficiencies in Audit Documentation
The NFRA also highlighted deficiencies in the audit working papers, noting that some lacked authentication by the preparer, undated signatures of the EP, and even documents prepared by someone who was not part of the audit team. This contravenes the requirements of SA 230, which mandates detailed and properly documented audit procedures to ensure transparency and accountability. - Non-compliance with Ind AS 16
The auditor failed to report non-compliances related to Ind AS 16, which mandates disclosure of the existence and amounts of restrictions on title and property, plant, and equipment pledged as security for liabilities. Such disclosures are vital for stakeholders to accurately understand the financial position of the company. - Improper Basis for Disclaimer of Opinion on Internal Financial Control
The NFRA found that the disclaimer of opinion on Internal Financial Control over Financial Reporting (ICOFR) was based solely on an NCLT order. The EP did not provide sufficient basis for disclaiming opinion, pointing to negligence in fulfilling statutory obligations.
Penalty and Outcome
After evaluating the evidence and giving the auditor an opportunity to present his defense, the NFRA found CA Chirag Doshi guilty of professional misconduct and imposed a monetary penalty of ₹5,00,000. This action underscores the seriousness of auditors failing to meet their statutory responsibilities and the potential impact on financial stability and stakeholder trust.
Lessons for Auditors
This case underscores some important lessons for auditors, especially those involved in statutory audits of public interest entities:
- Exercise Professional Skepticism
Auditors must maintain a questioning mindset, especially when confronted with red flags such as sharp increases in provisions or inconsistencies in financial data. Reliance on management experts should involve verifying their competence and the validity of their conclusions. - Ensure Proper Documentation
Proper audit documentation is fundamental. Every piece of evidence and every judgment made during the audit must be properly documented, authenticated, and dated. Failing to do so can raise questions about the integrity of the audit. - Comply with Accounting and Auditing Standards
Auditors must ensure that they comply with all applicable standards, such as Ind AS and Standards on Auditing. For instance, failure to disclose restrictions on assets or failure to properly assess the need for impairment can mislead stakeholders.
Example: Imagine you are auditing a company that reports a significant jump in provisions for credit losses and has dealings with entities that defaulted in the past. Ignoring these issues without adequate investigation or documentation can lead to severe penalties—not only financial but also reputational. In the case of CA Chirag Doshi, the NFRA imposed a penalty of ₹5,00,000, underlining the consequences of failing to uphold auditing standards.
Common Questions (Q&A)
Q1: What should auditors do when they come across potential fraud indicators?
A: Auditors should investigate the issue thoroughly, gather sufficient evidence, and apply professional skepticism. If necessary, report it under Section 143(12) of the Companies Act.
Q2: Can issuing a Disclaimer of Opinion absolve an auditor of their responsibilities?
A: No, disclaiming an opinion does not relieve auditors of their statutory responsibilities, including fraud detection and compliance with reporting standards.
Q3: What happens if audit documentation is found incomplete or unsigned?
A: Such deficiencies can lead to penalties, as seen in this NFRA order. Proper audit documentation is crucial for transparency and accountability.