While imposing a fine of Rs5 lakh, the national financial reporting authority (NFRA) has barred chartered accountant (CA) Santosh Deshmukh, an engagement partner (EP) for the statutory audit of Sanwaria Consumer Ltd (SCL), for FY17-18 for professional misconduct.
In an
order last week, the NFRA bench of Dr Ajay Bhushan Prasad Pandey (chairperson), Dr Praveen Kumar Tiwari and Smita Jhingran (full-time members) said, "...the manner in which the audit was conducted, failed to meet the requirements of the standards on auditing (SA), the Companies Act and the code of ethics in a number of significant aspects, which demonstrated gross negligence on the part of the EP. This can be gauged from the failure of the EP to critically assess the existence and valuation of inventories, failure to comment in the audit report about the non-consolidation of financial statements, failure to verify the impairment testing of the investments of SCL exhibit professional scepticism and fulfil the necessary audit procedures led to significant deficiencies in the audit."
CA Deshmukh, a partner of Khandelwal Kakani & Co, was an EP for the audit of SCL for FY17-18. Securities and Exchange Board of India (SEBI) informed NFRA about financial irregularities in Sanwaria Consumer and the failure of auditors to qualify or emphasise misstatements or irregularities in the transactions.
NFRA decided to investigate the matter. After its enquiry, the authority found that CA Deshmukh failed to verify the existence and valuation of material inventories of SCL and added an interest cost of 11% while arriving at the price considered, resulting in an overvaluation of the soya seed inventories by about Rs18.93 crore and of paddy inventories by Rs13.30 crore.
As of 31 March 2018, Sanwaria Consumer had investments of Rs36.29 crore, including investments in the unquoted shares of its subsidiary, Sanwarian Energy Ltd (SEL- Rs31.17 crore) and its associate Shreenathji Solvex Ltd (Rs4.76 crore). "The company valued these investments in unquoted shares at cost and had been holding these investments in the last three financial years at the same value."
In FY17-18, SEL incurred a loss of Rs58 lakh. Shreenathji Solvex incurred a loss of Rs83 lakh in FY17-18, had accumulated a loss of Rs32.97 crore and had a negative net worth of Rs15.97 crore as of 31 March 2018. As a result, NFRA says, the recoverable value of SCL investment in the associate was reduced to zero.
"The EP failed to verify the ownership, valuation and evaluate the impairment testing of the investment made by SCL in its loss making subsidiary and associate companies... The EP was grossly negligent in preparing sufficient audit documentation in accordance with the requirements of SA 230 (C.7)," NFRA says.
The authority then imposed a penalty of Rs5 lakh and debarred CA Deshmukh for one year from being appointed as an auditor and from undertaking any audit assignment.
