S Kumars' FY13-14 Auditor Barred for 5 Years, NFRA Slaps Rs5 Lakh Fine on CA Shyam Malpani for Serious Conflict of Interest During Audit
Moneylife Digital Team 28 December 2023
Holding a chartered account (CA), Shyam Malpani, who worked as an engagement partner (EP), responsible for professional misconduct and conflict of interest while conducting the statutory audit of S Kumars Nationwide Ltd (SKNL) for FY13-14, the national financial reporting authority (NFRA) barred the CA for five years and and imposed a penalty of Rs5 lakh. SKNL is one of the top 50 bank defaulters in the country, as per the information shared by the Union government in Parliament.
In an order, the NFRA bench of Dr Ajay Bhushan Prasad Pandey (chairperson), Smita Jhingran and Praveen Kumar Tiwari (full-time members) says, "CA Shyam Malpani - SKNL's auditor for the FY13-14 failed to meet the relevant requirements of the standards on auditing (SA), and provisions of the Companies Act. He also demonstrated serious lapses and an absence of due diligence. One of the lapses was that he accepted the audit engagement of SKNL for FY13-14 despite owning the shares of SKNL through Nabeela Finvest Pvt Ltd (NFPL), a company which was wholly owned by him and his family members and thereby violated applicable laws and standards relating to conflict of interest and independence."
"Further, he had issued qualified audit opinions on standalone financial statements (SFS) and consolidated financial statements (CFS) with eleven (SFS) and fifteen (CFS) qualifications, respectively despite the fact that the nature and effect of qualifications in the independent auditor's reports were material and pervasive to the financial statements," the bench says.
While finding CA Malpani guilty of professional misconduct, NFRA says, in light of the 1 December 2023 judgement of the national company law appellate tribunal (NCLAT), it has limited the monetary penalty to Rs5 lakh only since the violations relate to the period April 2013 to September 2014. 
"Therefore, we impose through this order a monetary penalty of Rs5 lakh on CA Shyam Malpani and also debar him for five years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate," NFRA says.
In a letter on 9 September 2022, the central economic intelligence bureau (CEIB), working under the Union ministry of finance, shared information about irregularities committed by SKNL and its auditors. After preliminary examination, NFRA initiated suo motu investigations into the professional conduct of SMMP & Company and CA Malpani, the statutory auditors of SKNL for FY13-14.
In November 2022, NFRA called CA Malpani and SMMP & Company to submit the audit files from FY13-14 to FY17-18. However, despite repeated letters and extensions, both failed to submit the audit files. They also filed a writ petition in Bombay High Court (HC) to a stay on NFRA proceedings. Since the HC gave no stay, the authority, again on 3 February 2023, asked CA Malpani and SMPP & Company to submit an audit file. Yet, the auditors did not submit the audit file.
NFRA then issued a show-cause notice (SCN) to the auditors. On 13 June 2023, the Bombay HC disposed of the writ petition and asked NFRA to hear the auditors and decide its jurisdiction to act in the matter. The HC also allowed NFRA to pass a combined order on jurisdiction and merits in case it held that it had jurisdiction in the matter. 
During the personal hearing and in the written submission, besides arguing on the jurisdiction issue, the auditors also contended that as they were not required to maintain an audit file after the mandatory period of seven years, they did not submit the audit file for SKNL.
NFRA says, "So far as the audit file was concerned, the auditors did not submit it. It was not very clear from their reply whether they had the audit file. Therefore, on 4 August 2023, we asked them to provide an affidavit about the availability of the audit file and in case it had been destroyed, then the date of destruction of the file was to be provided. On 16 August 2023, the auditors submitted a consolidated reply to SCN dated 23 May 2023 along with an affidavit by CA Malpani stating that he neither had the audit file nor had the exact date of the destruction of the audit file."
According to the bench, CA Malpani accepted the appointment as auditor of SKNL, despite having an ownership interest in the shares of the auditee company (SKNL) and failed to form audit opinions following the SA 705. 
"Since the EP compromised his independence and failed to recognise and report the pervasiveness of the deficiencies of the financial statements, his conduct undoubtedly falls into the category of lack of due diligence and gross negligence. Therefore, we hold that the charge of professional misconduct on the part of the EP on this account is proved," NFRA says.
5 months ago
Thank you very much NEFRA.
Is the ICAI is capable to produce good CA?
The entire fertinity is now in question.
You reach is just tip of iceberg
The are serving the client just and not to the national; which they are committed for.
It's right time to give financial statements attention function to other professionals like ICSI and CMA.
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