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

NFRA bars CA Gulshan Jagdish Jham from taking audit assignments for one year and imposes a penalty of Rs. 1 lac, in the matter professional misconduct in audit of PSIL for FY 2019-20.

After reviewing the quality of financial reporting/ audit in the case of PSIL (a company listed on BSE) in respect of FY 2019-20, NFRA issued Order dt. 21/06/2022 imposing a Penalty of Rs. 1 Lac and barring him from taking audit assignments for one year, which resulted in confirmation of charges of professional misconduct on the part of the company’s auditor.

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

In the preparation and presentation of its financial statements, the PSIL failed to comply with the Ind AS reporting framework and applicable provisions of the Companies Act 2013. As a result, almost all of the figures and disclosures in the 2019-20 financial statements have been significantly misstated. NFRA has identified the following major violations:

a) The Ind AS requirements mandates that debtors, loans, and advances be measured for impairment loss (expected credit loss). Such assets accounted for 53.5% of total assets, totaling Rs 16 crore. As a result, the expected credit loss/impairment (which is a profit and loss charge) will have a significant impact on the Company’s profits before taxes, which are only 0.35% of total assets. The company, however, did not account for any such losses, resulting in overstated profits. The profit shown to users of the financial statements, such as the public and shareholders, was inflated because the audit firm did not verify this aspect. The public and shareholders base their investment decisions in a company, among other things, on financial statements and financial parameters. Any auditor failure that results in companies reporting inflated profits will mislead existing and potential investors and creditors.

b) The Companies Act 2013 requires a Statement of Changes in Equity as part of the financial statements; otherwise, the financial statements are not complete. This statement reconciles the opening and closing balances of shareholders’ equity and summarises the related transactions. This report discloses changes in retained earnings, reserves, and share capital, such as the issuance of new shares and the payment of dividends. Because PSIL is a publicly traded company, such information is critical to users’ understanding of the entire set of financial statements. The CA failed to verify and ensure that information on changes in equity is included in the Statement of Changes in Equity, as part of the Financial Statements.

c) PSIL was required by the Companies Act to prepare a consolidated financial statement that included all of its subsidiaries and associates. Despite the existence of a material associate company called Haryana Metals Ltd, PSIL did not prepare a consolidated financial statement. This has rendered the entire set of financial statements untrustworthy. This was not reported by the CA in his PSIL audit report.

CA Gulshan Jagadish Jham has admitted to the charges levelled by the NFRA, which are listed below along with the NFRA’s findings:

a) CA Gulshan Jagdish Jham committed professional misconduct, as defined by Section 132(4) of the Companies Act 2013, read in conjunction 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 commits 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.

This charge is proven because he failed to disclose the Company’s material non-compliances in his report.

b) CA Gulshan Jagdish Jham committed professional misconduct, as defined by Section 132(4) of the Companies Act 2013, read in conjunction 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 commits 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 proven because he failed to disclose the material misstatements made by the Company in the areas of debtors, loans and advances, property plant and equipment, inventory, and other account balances in his report.

c) CA Gulshan Jagdish Jham committed professional misconduct, as defined by Section 132(4) of the Companies Act 2013, read in conjunction 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 commits professional misconduct when he “fails to exercise due diligence or is grossly negligent in the performance of his professional duties.”

This charge is proven because he failed to conduct the audit in accordance with the SAs and applicable regulations, as well as because he failed to report the Company’s material misstatements and non-compliances in the financial statements.

d) CA Gulshan Jagdish Jham committed professional misconduct, as defined by Section 132(4) of the Companies Act 2013, read in conjunction 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 the expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion.”

This charge is proven because he failed to conduct the audit in accordance with the SAs and applicable regulations, as well as because he failed to report the Company’s material misstatements and non-compliances in the financial statements.

e) CA Gulshan Jagdish Jham committed professional misconduct, as defined by Section 132(4) of the Companies Act 2013, read in conjunction 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 commits 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 proven because he failed to conduct the audit in accordance with the SAs but falsely reported in his audit report that it was conducted in accordance with the SAs.

Source: NFRA Order dt. 21/06/2022

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