NFRA Rightly Debarred Statutory Auditor From Auditing as He Ignored Joint Auditor’s Observations on Unusual Transactions | HC

Case Details: Vishal Dhiren Shah v. Union of India - [2024] 162 taxmann.com 617 (HC-Delhi)

Judiciary and Counsel Details

• • Yashwant Varma & Dharmesh Sharma, JJ.
  • Shri Venkatesh, Shryesth Ramesh Sharma, Vineet Kumar & Vedan Choudhary for the Petitioner. & Others.
  • Aakash Meena, Zoheb Hossain, Vivek Gurnani, Kartik Sabharwal, Ms Abhipriya Rai, Ms Radhika Puri & Vivek Gaurav, Advs. for the Respondent. & Others.

Facts of the Case

In the instant case, company ‘R’ was jointly audited by an audit firm ‘W’ and the petitioner firm ‘P’. ‘W’ issued a letter to ‘R’, the Audit Committee, and the petitioner regarding its observations in the audit that loans disbursed to ‘R’ were used by it to extend further loans to other group companies, which were portrayed as recoverable. It was alleged that the business rationale and recoverability of these loans were not explained.

Later, ‘W’ resigned from the audit. ‘P’ submitted an audit report which reported no irregularities in the company’s accounts. A suo moto examination of the audit file of the petitioner was undertaken by NFRA, and it was observed that observations of ‘W’ included unresolved issues regarding the recoverability, end-use, valuation, unusual mode of transactions and internal control matters.

However, the petitioner failed to perform independent audit procedures on these matters and identify and report material misstatements in the financial statements of ‘R’.

Resultantly, the NFRA vide the impugned order, debarred the petitioner for ten years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of functions and activities of any company or body corporate and a penalty was imposed on the petitioner.

High Court Held

The High Court noted that the petitioner ruled out fraud reported by another joint auditor. Further, neither liability nor assets represented by loans to other groups appeared in the audited balance sheet of ‘R’, and no Standard of Accounting permitted a loan taken from and given to separate legal entities to be netted off in the balance sheet.

The High Court held that since, charges on the petitioner of non-compliance with the standard on auditing were established, there was no ground to grant any interim relief at the instant stage and, therefore, the writ petition was to be rejected.

List of Cases Reviewed

• • Pathak H.D. & Associates, In re [2024] 162 taxmann.com 616 (NFRA) (para 11), affirmed, (see annex).