NFRA Penalises CA Gulshan Jagdish Jham (PSIL Audit 2019-20)

NFRA has issued Order dt. 21/06/2022 imposing a Penalty of Rs. 1 Lac on CA Gulshan Jagdish Jham (ICAI Membership No. 408315) and debarring him from taking audit assignments for one year, after reviewing quality of financial reporting/ audit in the case of PSIL (a company listed on BSE) in respect of FY 2019-20 which resulted into confirmation of charges of professional misconduct on the part of auditor of the company.

NFRA Penalises CA Gulshan Jagdish Jham (PSIL Audit 2019-20)

NFRA observed that the PSIL had not complied with Ind AS reporting framework and applicable provisions of the Companies Act 2013 in the preparation and presentation of its financial statements. This has resulted in a significant misstatement of almost all the figures and disclosures made in the financial statements for the year 2019-20. Some of the major violations observed by NFRA are as follows:

a) The Ind AS requirements mandate measuring impairment loss (expected credit loss), on debtors, loans and advances. The debtors, loans and advances put together constitute 53.5% of the total assets of Rs 16 crore. Therefore, the impact on account of the expected credit loss/impairment (which is a charge to the profit and loss) will have a major effect on the profits before taxes of the Company which is only 0.35% of the total assets. However, the company did not provide for any such losses, thereby reporting inflated profits. Because the audit firm did not verify this aspect, it resulted in showing inflated profit to the users of the financial statements, e.g., the public and shareholders. The public and shareholders base their decision on investment in a company inter alia on financial statements and financial parameters. Any default by the auditor which results in companies showing inflated profit will be misleading to the existing as well as potential investors and creditors.

b) The Companies Act 2013 requires a Statement of Changes in Equity as part of the financial statements, without which the financial statements will not be complete as per the Companies Act. This statement gives the reconciliation between the opening balance and closing balance of shareholder’s equity and summarises the related transactions. Movement in retained earnings, reserves and changes in share capital such as the issue of new shares and payment of dividends are disclosed in this report. PSIL being a listed company such information is crucial to the understanding of the whole set of financial statements by the users. The CA has failed to verify and ensure that information pertaining to changes in equity is provided in the Statement of Changes in Equity as part of the Financial Statements.

c) As per the Companies Act, PSIL was required to prepare a consolidated financial statement including all its subsidiaries and associates. But PSIL did not prepare a consolidated financial statement despite the existence of a material associate company named Haryana Metals Ltd. This has made the whole set of financial statements unreliable. The CA failed to report this in his audit report pertaining to PSIL.

The charges framed by NFRA against CA Gulshan Jagadish Jham have been duly admitted by him, which are given here below with NFRA’s findings:

a) CA Gulshan Jagdish Jham committed professional misconduct as defined by Section 132(4) of the Companies Act 2013, read with section 22 of the Chartered Accountants Act 1949 and clause 5 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity”.

This charge is proved as he has failed to disclose in his report the material non-compliances the Company made.

b) CA Gulshan Jagdish Jham committed professional misconduct as defined by Section 132(4) of the Companies Act 2013, read with section 22 of the Chartered Accountants Act 1949 and clause 6 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to report a material mis-statement known to him to appear in a financial statement with which he is concerned in a professional capacity”.

This charge is proved as he has failed to disclose in his report the material mis-statements made by the Company in the areas of debtors, loans and advances, property plant and equipment, inventory and other account balances.

c) CA Gulshan Jagdish Jham committed professional misconduct as defined by Section 132(4) of the Companies Act 20136, read with section 22 of the Chartered Accountants Act 1949 and clause 7 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

This charge is proved as he has failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his total failure to report the material mis-statements and non-compliances made by the Company in the financial statements.

d) CA Gulshan Jagdish Jham committed professional misconduct as defined by Section 132(4) of the Companies Act 2013, read with section 22 of the Chartered Accountants Act 1949 and clause 8 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion”.

This charge is proved as he has failed to conduct the audit in accordance with the SAs and applicable regulations as well as due to his total failure to report the material misstatements and non-compliances made by the Company in the financial statements.

e) CA Gulshan Jagdish Jham committed professional misconduct as defined by Section 132(4) of the Companies Act 2013, read with section 22 of the Chartered Accountants Act 1949 and clause 9 of Part 1 of the Second Schedule to the said Act, which states that a CA is guilty of professional misconduct when he “fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances”.

This charge is proved since he has failed to conduct the audit in accordance with the SAs but falsely reported in his audit report that the audit was conducted as per SAs.

Source: NFRA Order dt. 21/06/2022

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