MAN Industries Audit: NFRA Bans CA Nilesh Chheda for 5 Years, Slaps Rs5 Lakh Penalty for Professional Misconduct
Moneylife Digital Team 29 November 2023
Holding chartered accountant (CA) Nilesh Chheda responsible for professional misconduct as engagement partner (EP) for the fiscal year (FY)16-17 statutory audit (SA) of MAN Industries (India) Ltd (MIIL), the National Financial Reporting Authority (NFRA) has banned the CA for five years from being appointed as an auditor or internal auditor or from undertaking any audit and imposed a penalty of Rs5 lakh.
In an order last week, the NFRA bench of Ajay Bhushan Pandey (chairperson), Dr Praveen Kumar Tiwari and Smita Jhingran (full-time members) says, "The auditor in the present case was required to ensure compliance with SAs to achieve the necessary audit quality and lend credibility to financial statements to facilitate its users... substantial deficiencies in audit, abdication of responsibility, failure to act with due diligence and inappropriate conclusions on the part of CA Chheda establish his professional misconduct. Despite being a qualified professional, CA Chheda has not adhered to the Standards and has thus not discharged the duty cast upon him." 
In June 2022, market regulator Securities and Exchange Board of India (SEBI) informed NFRA about financial irregularities committed by MIIL. After that, NFRA initiated action under Section 132(4) of the Companies Act (the Act) to investigate the professional or other misconduct of the statutory auditor of MIIL, a listed company.
For FY16-17, Rohira Mehta & Associates was the statutory auditor of MIIL and CA Chheda was the EP. 
Finding a prima facie case for investigation following the SEBI information, NFRA called for MIIL's audit file which revealed several significant failures on the part of the EP. 
"The examination of the audit file revealed that the audit had been conducted in disregard of most of the SAs and the requirements of the Act, but the EP had issued an unmodified opinion in the independent auditor's report for the standalone financial statements (SFS) and a qualified opinion on the consolidated financial statements (CFS) certifying that the financial statements of MIIL reflected true and fair view in conformity with the accounting principles generally accepted in India," it added.
NFRA then issued a show-cause notice (SCN) identifying the EP's professional misconduct.
The Authority says, "The EP 'qualified' his opinion on CFS, stating that the financial statements reflected 'true and fair view' except for the effect of non-consolidation of a subsidiary, Merino Shelters Pvt Ltd (MSPL). This was not correct as the impact of the grounds for qualification was both material and pervasive since the assets and liabilities of MSPL constituted about 19.20% and 28.96 %, respectively, of the assets and liabilities of MIIL. As per Para 8 of the standard on auditing (SA) 705, the EP was required to give an adverse opinion where the effect is material and pervasive."
Further, it says the EP did not obtain sufficient appropriate audit evidence (SAAE) in many critical areas of audit like non-consolidation of a material subsidiary, credit risk evaluation of trade receivables and failure to perform risk assessment procedures and response to such risks.
"The EP failed to demonstrate sufficiency and appropriateness of audit work in virtually every critical building block of an audit of financial statements i.e., audit strategy, planning, analytical procedures, determining materiality, identification and assessment of risks of material misstatement (RoMM) through an understanding of the entity's environment and internal control resulting in non-compliance with standards on auditing, notified under Section of 143 (10) and made mandatory under section 143 (9) of the Act," NFRA says.
According to the Authority, CA Chheda, as EP, was required to obtain independent external confirmations according to the requirements of SA 505 in respect of trade receivables which constituted a material (25.09%) percentage of total assets of MIIL to ascertain the accuracy, existence, genuineness, and recoverability of these balances. 
However, on perusal of the audit file, NFRA did not find any documentation evidencing that EP had performed the critical, generally accepted audit procedure of obtaining independent external confirmation of trade receivables balances, which violates SA 505. "The EP's reasoning that the majority of transactions were with foreign parties is not convincing as the international trade transactions are also prone to risk of fraudulent or spurious transactions."
NFRA observed that during the previous fiscal year (FY15-16), MIIL had written off substantial amounts of trade receivables (Rs28.12 crore), a significant class of account balance constituting a material percentage (30.43 %) of the profit before tax (PBT) for FY15-16.
Responding to this charge, CA Chheda stated that the determination of credit risk exposure as low, medium, or high is based on indicators as on the date of the balance sheet, past record, and professional judgement of the auditor.
The EP told NFRA that the trade receivables of Rs341 crore as of 31 March 2017 consisted of secured trade receivables of Rs172 crore (50.4%) and unsecured trade receivables of Rs169 crore (49.6%), out of which Rs121 crore (72%) were from one major customer, Tecnimont, from which there was regular inflow and, at the time of closure of the audit file, only Rs42 crore was outstanding against Tecnimont. 
Of the remaining amount of Rs48 crore of unsecured trade receivables, he says, the disputed trade receivables amounted to Rs17 crore or 5% of the total trade receivables as of 31 March 2017 which was not material. The EP also stated that he had obtained a management representation letter dated 30 May 2017, which stated that there was a strong chance of recoverability of the total trade receivables, including the disputed ones. 
NFRA observed no evidence in the audit file of the letter of credit (LoC) stated as security for the secured trade receivables. "There is no evidence of receipts from Tecnimont after 31 March 2017 and no ageing analysis of the trade receivables performed by the EP. In the absence of such evidence, the reply of the EP seems an afterthought and is not acceptable." 
"It is evident that the EP's conclusion about the credit risk being low was not based on sound documented analysis. In light of the above, we find that the EP was negligent in not reporting the non-disclosure of trade receivables in accordance with para 35M and 35N of Ind AS 107, not obtaining external confirmation as per SA 505 and not exercising due care in the audit of trade receivables," it added.
MITL which is into manufacturing and selling carbon-lined steel tubes, however, is not without its chequered past. In fact, it failed to disclose SEBI's order for a forensic audit to the exchanges and investors for nearly six months. On 22 November 2021, SEBI wrote to the company asking to appoint a forensic auditor to investigate the accounts of MIIL for seven years from the accounting year ended 31 March 2015 till 31 March 2021. 
However, this letter came to the investors' knowledge only on 10 May 2022 when the company disclosed its existence to the stock exchanges. 
It is more shocking that the regulator, which has issued a directive for a forensic audit because investor money had allegedly been wrongfully diverted by the promoters, chose not to disclose the matter on its own nor specifically direct the company to disclose the matter to the stock exchanges forthwith. (Read: Man Industries: Shocking Lapse by SEBI and Some Questionable Details in 2020-21 Annual Accounts)
3 months ago
under Namo govt,many many Chartered accountants in India involved in illegal transactions which are anti-India activities are going to jail .Under 70 yrs of congress this never happened.
Replied to suketu comment 3 months ago
due to various pro-india changes Namo has introduced,many CA's(atleast 5-10%,not all) are not able to carry out wrong activities which earned them good money for 70 yrs and hence they are involved in illegal activites.Every few days one reads of CA's being arrested in serious crimes.High times.Thank you India's best PM Mr Narendra Modi.
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