Auditor Penalized for Disclosure Lapses: A Cautionary Tale

In a recent adjudication order, the Ministry of Corporate Affairs (MCA) has penalized the auditing firm M/S R.K. Patnia & Co. for multiple violations related to the audit of Pre-Stressed Udyog (India) Pvt Ltd. The order, issued on December 13, 2023, sheds light on the instances of non-compliance identified during an inquiry conducted by the MCA.

The Adjudication Process:

The adjudication process commenced with the appointment of A.K. Sethi as the adjudicating officer under Section 454(1) of the Companies Act, 2013. The inquiry revealed several contraventions of Section 143 of the Act, which governs the auditor's responsibilities and reporting requirements.

One of the key violations pertained to the non-disclosure of related party transactions as required by Accounting Standard 18.

The inquiry found that the shareholders, Dinesh Pradhan and Mahesh Pradhan, held more than 20% of the voting power in the company during the financial years 2016-17 to 2019-20, making them related parties. However, the auditor failed to comment on the lack of disclosure of these related party transactions in the financial statements, thereby violating Section 143 read with Section 129 of the Companies Act, 2013, and Accounting Standard 18.

Another instance of non-compliance involved the misclassification of loans. The company had shown substantial amounts as 'Unsecured Loans from Directors and Shareholders' under the head 'Short-Term Borrowings' in its financial statements for multiple years. However, the company failed to provide the aggregate amount of such loans under each head as required by Schedule III of the Companies Act, 2013, affecting the true and fair view of the company's state of affairs. The auditor did not comment on this lapse, leading to a violation of Section 143 read with Section 129 and Schedule III.

Furthermore, the auditor did not adequately disclose information related to sundry creditors, sundry debtors, and investments in various body corporates, as mandated by Schedule III of the Act. These omissions affected the transparency and accuracy of the financial statements.

The adjudication officer issued a notice under Section 454(4) and Section 143, providing the auditors an opportunity to respond. After considering the auditors' reply and conducting a hearing, the adjudication officer imposed a penalty of Rs. 2,40,000 on CA Rabindra Kumar Patnia for violations during the financial years 2016-17 to 2019-20, pursuant to Rule 3(12) and Rule 3(13) of the Companies (Adjudication of Penalties) Rules, 2014.

The auditor has been given a 90-day window to pay the penalty through e-payment on the MCA website. The order also outlines the provisions for appealing against the decision and the consequences of non-payment within the prescribed time limit.

FAQs:

Q1. What were the main violations committed by the auditor?

A1. The auditor violated Section 143 of the Companies Act, 2013, by failing to disclose related party transactions as per Accounting Standard 18, misclassifying loans, and not providing sufficient details in the financial statements as required by Schedule III.

Q2. Why is the disclosure of related party transactions important?

A2. Disclosure of related party transactions is crucial for transparency and to prevent potential conflicts of interest. It allows stakeholders to assess the fairness and appropriateness of such transactions.

Q3. What are the implications of this adjudication order for auditors?

A3. This order serves as a reminder for auditors to exercise due diligence and strictly adhere to accounting standards and statutory requirements. Failure to do so can result in penalties and damage to their professional reputation.

Q4. Can the auditor appeal against the adjudication order?

A4. Yes, the auditor has the option to file an appeal against the order with the Regional Director (ER), Ministry of Corporate Affairs, Kolkata, within 60 days of receiving the order.

Q5. What are the consequences of non-payment of the penalty within the prescribed time limit?

A5. If the auditor fails to pay the penalty within 90 days of receiving the order, the consequences outlined in Section 454(8) of the Companies Act, 2013, may apply, which could include further legal action.