Taking a stern view of non-cooperation by the audit firm and a chartered accountant (CA)-cum-engagement partner (EP) of Brightcom Group Ltd (BGL), the national financial reporting authority (NFRA) imposed a Rs80 lakh penalty while barring both from taking up audit assignments for two years and 10 years, respectively. NFRA slapped a penalty of Rs50 lakh on PCN & Associates, the audit firm, and Rs30 lakh on CA Gopala Krishna Kandula, the EP, for not submitting the requisite documents and information for Brightcom group's audit for FY19-20 to FY21-22.
In
an order last month, the NFRA bench of Dr Ajay Bhushan Prasad Pandey (chairperson), Dr Praveen Kumar Tiwari and Smita Jhingran (full-time members) said, "The auditors' professional misconduct is demonstrated by their failure to cooperate with NFRA and mislead NFRA as outlined in section D of this order. The non-cooperation displayed by the auditors is troubling since it hinders the investigation of any possible professional misconduct on their side. This substantially impedes NFRA's ability to fulfil its statutory duty of providing effective oversight. If such auditors are allowed to do statutory audits of any company or body corporate, the public interest is probably going to be jeopardised."
Securities and Exchange Board of India (SEBI) informed NFRA regarding gross violation of the Companies Act by BGL and the possible involvement of the statutory auditors. SEBI noted that BGL financed preferential issues of Rs867.78 crore through round-tripping of funds involving subsidiaries, promoters, and other conduit entities, including auditors. "One of the auditors was beneficiary of such preferential issue by Rs3.46 crore."
"BGL did not recognise impairment losses in its investments in subsidiaries of Rs126.52 crore, nor did it properly account for impairment of assets of Rs1,280.06 crore resulting in non-compliance with accounting standards. BGL wrongly capitalised research and development (R&D), leading to an understatement of expenditure and overstatement of profit by Rs504.16 crore, contravening accounting standards," SEBI says.
NFRA decided to investigate the matter and, on 15 June 2023, asked PCN & Associates to submit the requisite documents, including audit files and other information about the statutory audit of BGL for FY17-18 to FY19-20.
NFRA sent a reminder on 29 August 2023 to PCN & Associates. The audit firm requested an extension for the submission of audit files. However, despite multiple extensions, except for audit files and some information for FY19-20, the audit firm did not provide the requisite information for FY19-20 to FY21-22.
NFRA then issued a show-cause notice (SCN) to PCN & Associates for non-cooperation. Even while responding to the SCN, the audit firm and its EP sought multiple extensions. While granting one such extension on medical grounds for four weeks, NFRA asked CA Kandula to submit an affidavit stating that he would not provide professional services during the extension period. He submitted an affidavit. However, NFRA found that the statements were incorrect and that CA Kandula provided professional services to his clients from 28 March 2024 to 5 April 2024 and filed a false affidavit.
"The persistent failure of the audit firm and the EP to submit requisite information leads us to conclude that the audit firm and the EP are unwilling to cooperate with NFRA in discharging its statutory responsibility under Section 132(4) of the Companies Act. This is professional misconduct on the part of the auditors. The auditors' failure to provide the required documents and information has impeded the NFRA's ability to determine if the auditors' audit work was performed in accordance with the laws and standards and the violations committed by the auditors," NFRA says.
The authority then decided to impose a penalty of Rs50 lakh on PCN & Associates and Rs30 lakh on CA Kandula, the EP. It also debarred PCN & Associates for two years and CA Kandula for 10 years from being appointed as an auditor and from undertaking any audit assignment.
In March this year, confirming its interim directions against 20 entities in the BGL matter, SEBI suggested an examination and action, if required by the directorate of enforcement (ED) in the settlement of loans advanced to M Suresh Kumar Reddy, former chairman and managing director (CMD) and his companies abroad through allotment of shares in India.
In the order, Ashwani Bhatia, whole-time member (WTM) of SEBI, says, "The settlement of loans advanced to Mr Reddy and his companies abroad through allotment of shares in India also involved payments in forex through a web of transactions and may involve violation of laws pertaining to dealing in foreign exchanges. It would thus be proper to forward a copy of this order to the ED for their examination and appropriate action, if any." (
Read: Brightcom Group: SEBI Suggests ED Examination in Overseas Loan Settlement by Ex-CMD Suresh Kumar Reddy)
In an order, Meera Swarup (technical member) of SAT said, "...serious allegations have been made against direct involvement of M Suresh Kumar Reddy, chairman and managing director (CMD) and SL Narayan Raju, chief financial officer (CFO) especially with regard to submission of forged or fabricated bank statements to SEBI. Though investigations are ongoing, examination of transactions pertaining to 22 allottees out of 82 allottees of preferential allotments have pointed out to evidence of prima facie diversion of funds by Mr Reddy. In the absence of any evidence to the contrary being filed by the appellants before me, I do not find any lacunae in passing of the impugned order."
SEBI received two complaints on 6 October 2022 and 12 May 2023 about preferential allotments made by Brightcom group in the financial years (FY)19-20 and FY20-21, alleging that the company had raised money through preferential issue of shares to entities that were directly or indirectly connected to it and that the funds raised in the preferential issues were given as loans and advances to its subsidiaries.
SEBI's preliminary findings indicated prima facie irregularities in preferential allotments by the company, including circulation of funds to create the impression of receipt of funds, allotment of warrants or shares without receipt or partial receipt of funds, submission of fabricated bank statements to SEBI and significant misstatements and misrepresentation in the financial statement of BGL.
SEBI, in its order, says Suresh Kumar Reddy and Narayan Raju were responsible for submitting forged and fabricated bank account statements to SEBI with the intent to mislead the investigation and cover up the irregularities. "The observations and findings clearly show the manipulations carried out by BGL and other noticees, in respect of BGL's preferential allotments, which involve fictitious receipts of the share application money from allottees and siphoning of funds from BGL."
However, the market regulator says BGL has brazenly attempted to cover up its misdeeds by submitting forged and fabricated bank statements to SEBI. "The blatant acts of the company and other noticees raise serious concerns about the affairs of the company and also raise doubts as to whether the financial statements prepared by the company and various disclosures made on the stock exchange platform or in annual reports in the past are correct."
