NFRA Charges Audit Firm for Non-Disclosure of Interest Costs in Vikas WSP Audit

The National Financial Reporting Authority ('NFRA' hereafter) initiated action under Section 132(4) of the Companies Act 2013 ('Act' hereafter) against M/s S. Prakash Aggarwal & Co., the Audit Firm, for professional or other misconduct in the statutory audit of Vikas WSP Limited for FY 2019-20. This was following the information received from the Securities Exchange Board of India ('SEBI' hereafter) that the company did not recognize in its financial statements for FY 2019–20 the interest expense on its borrowings from banks, which resulted in an overstatement of profits by the company. During FY 2019–20,  Vikas WSP Limited was a listed company on the Bombay Stock Exchange ('BSE' hereafter) and therefore falls under the NFRA domain.

The audit firm, which was primarily responsible for establishing and maintaining a system of quality control that

(a) The firm and its personnel comply with professional standards and regulatory and legal requirements; and

(b) The reports issued by the firm or engagement partners are appropriate in the circumstances.

NFRA took up an investigation under Section 132(4) of the Act after receiving a letter dated August 25, 2021, from SEBI about the overstatement of profits by VWL due to the non-recognition of interest costs on borrowings classified as non-performing assets by the lending banks.

Lapses in the audit

The firm was charged with the following lapses in the statutory audit of VWL for FY 2019–20: VWL had borrowings of Rs 135.65 crore for FY 2019-20 (Rs 155.29 crore for FY 2018-19), which included credit facilities from banks. There were defaults with respect to non-payment of interest and principal on the borrowings from banks. The company has, however, recognized only a part of the interest cost (Rs 4.16 crore) on financial liabilities for FY 2019–20 (Rs. 21.07 crore for FY 2018–19).

Deficiencies that were noticed in the audit documentation

1. It was noted that merely ledger copies of interest payments, bank loans (overdraft), and provision liability were documented. However, what audit procedures were applied to evaluate the appropriateness of interest costs on borrowings availed from the banks was not found in the audit file. There was no documentation of verification of interest certificates or balance confirmations from banks.
2. Several inconsistencies were noticed in the Management Representation Letter 7 (MRL), documented in the audit file. For instance,
   • The MRL was not in accordance with the requirements of Para. 13 of SA 580, as it was only for the quarter ended March 31, 2020, and not for the FY ending March 31, 2020.
   • No explanation was given for the non-consideration of interest costs on NPA loans.

The MRL was complete as the total value of investments as of March 31, 2020 was left blank. The MRL was not on the letterhead of the company, and the name and designation of the issuing authority were also not traceable.

Penalty and Sanctions

Section 132(4) of the Companies Act provides for the penalty of professional misconduct, imposing a penalty of not less than one lakh rupees,  which may extend to five times the audit fees in the case of individuals, and not less than five lakh rupees, but which may extend to ten times the fees received in the case of firms.

Debarring the member or the firm from being appointed as an internal auditor or auditor undertaking any audit in respect of financial statements.

Summary points of professional misconduct that were found in this case

1. Failure to disclose a material fact that was known to him, which is not disclosed in the financial statement, but the disclosure of which is necessary in making such a financial statement, where he is concerned with that financial statement in a professional capacity.
2. Failure to report on a material misstatement known to him to appear in a financial statement with which the EP is concerned in a professional capacity.
3. Failure to exercise due diligence and being grossly negligent in the conduct of professional duties.
4. Failure to obtain sufficient information, which is necessary for the expression of an opinion,.