The National Financial Reporting Authority (NFRA) has imposed fines totalling Rs 30 lakh on an audit firm and its partner for lapses in the audit of Burnpur Cement Ltd. The regulator has slapped a fine of Rs 25 lakh on the audit firm K Pandeya & Co and Rs 5 lakh on Manjeet Kumar Verma, a partner with the audit firm.
Besides, NFRA has restrained Verma from undertaking any audit work for five years.
In its 21-page order passed on Monday, the watchdog said the two entities failed to apply sufficient and appropriate audit procedure and professional scepticism in identifying and reporting material misstatements in the financial statements of Burnpur Cement Ltd (BCL) for 2018-19.
They were also grossly negligent in the conduct of the audit, which led to erroneous reporting and portraying a misleading picture of the company to the investors and stakeholders, the order said.
NFRA had received information from markets regulator Sebi about the company’s non-reporting of contingent liability arising out of an Income Tax (IT) department order in December 2018.
The IT department had identified additional income of Rs 63.11 crore and imposed additional tax, including interest, of Rs 17.53 crore on the company.
Sebi had also pointed to the failure of auditors to report the liability arising out of this additional income tax.
According to NFRA, the audit firm and the partner did not perform sufficient and appropriate audit despite the fact that BCL had reported loss of Rs 12.67 crore for 2018-19 and an accumulated loss of Rs 115.64 crore, reducing its net worth to Rs 13.07 crore.
Further, BCL, which had a total debt of 83.19 per cent of its total assets, had defaulted in payment of debts amounting to Rs 234.15 crore and had a negative working capital of Rs 241.46 crore.
NFRA noted that the auditors did not question the appropriateness of going concern assumptions by the BCL management and did not analyse whether a modified audit opinion was warranted.
The financial statements of BCL for 2018-19 were materially misstated due to failure of the company to recognise provision or disclose contingent liability of Rs 17.53 crore arising out of income tax dispute and to recognise interest cost on borrowings classified as Non-Performing Assets (NPAs).
This had resulted in the understatement of interest cost and current liabilities by Rs 15.66 crore and understatement of the reported loss of Rs 12.67 crore, as per NFRA.
Further, the regulator said the two entities failed to carry out appropriate audit procedures to identify such lapses.
In its order, NFRA noted that the auditors also failed to point out misstatements in the property, plant and equipment of the company, which were 84 per cent of its total assets.
Also, the auditors failed to perform their obligation as per standard on quality control, as part of which an auditor is supposed to determine that an engagement quality control reviewer is appointed for auditing listed entities, the order said.
The auditors also made an effort to hide such failures, as they provided false information, thereby misleading NFRA regarding such appointment, it added.