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April 24, 2023

NFRA fines and suspends auditors for three years for professional negligence and other errors in the audit of SRS Ltd

NFRA fines and suspends auditors for three years for professional negligence and other errors in the audit of SRS Ltd

Due to professional negligence and other mistakes made during the audit of SRS Ltd., NFRA fines and suspends auditors for three years.

Due to professional misconduct and other mistakes made in connection with the audit of SRS Ltd in 2017–18, the National Financial Reporting Authority (NFRA) has fined and suspended two auditors for three years. In two separate orders, the NFRA fined auditors Pankaj Kumar and Naresh Kumar Rs 3 lakh each and barred them for three years from conducting any internal audit of any company’s or body corporate’s functions and activities, or auditing financial statements.

The Serious Fraud Investigation Office (SFIO), which had looked into the operations of SRS Ltd and the group entities, had written to NFRA when the order was made.

According to SFIO’s investigation, the firm and the companies in its group fabricated debtor information for financial statements and engaged in round-tripping and transaction stacking, which resulted to exaggerated sales and purchases.

In order to investigate any professional or other wrongdoing of the statutory auditors of SRS Ltd., the NFRA took legal action under the Companies Act.

SRS Ltd., one of the businesses of the SRS Group, is a publicly traded company. By order of the NCLT in August 2018, it entered the Corporate Insolvency Resolution Process (CIRP).

The joint statutory auditors of SRS Ltd for the FY 2017–18 were the audit firms SVP & Associates, with engagement partner (EP) Pankaj Kumar, and Oswal Sunil & Company, with engagement partner (EP) Naresh Kumar. They were in charge of auditing respectively 39.71% and 60.29% of the firm’s total assets.

The joint auditors of SRS for FY 2016–17 included audit firms and EPs, and they both provided a qualified opinion.

In accordance with Sebi’s disclosure guidelines, they also participated in a limited evaluation of quarterly financial reports, and they frequently provided qualified assessments of the FY 2017–18 financial performance.

The regulator discovered throughout the audit that Pankaj Kumar and Naresh Kumar both disregarded a number of warning signs of probable fraudulent activities.

They were aware of the unusually large provision of Rs 1,295.01 crore (99.85% of the total trade receivables) for bad/doubtful debts and the significant fall of Rs 207.74 crore in the carrying amount of the inventory, the statement added.

Additionally, they neglected to analyse these odd events for reporting and instead chose to alert stock exchanges just approximately 10 crore rupees worth of illegal transactions.

As of March 2018, the firm has accrued losses of Rs 1,384.69 crore and a net loss of Rs 1,460.87 crore for the fiscal years 2017–18.

Additionally, it had a negative net value of Rs 977.40 crore and Rs 1,001.28 crore in bank loan defaults, and several of its business units were dissolved.

As an assurance to the stakeholders regarding the honest and fair status of the financial statements, an audit opinion provided in the audit report has a very high value, according to NFRA. “We find that this is a serious failure of the auditors,” the organisation added.

Additionally, Pankaj and Naresh Kumar’s failure to decide who should be appointed to conduct the Engagement Quality Control Review (EQCR) during the audit of a listed firm gravely jeopardised the process’s integrity and the audit’s results.

They violated the code of ethics and shown egregious carelessness in carrying out their responsibilities in contravention of the standards by providing the regulator with incorrect and misleading information about the appointment of an EQCR, it said.

“They misled the regulator by fabricating documents, and despite being licenced professionals, they had not complied with the standards and, as a result, had not performed the essential duties of an ethical auditor charged with protecting the public interest,” the NFRA stated in the judgement.

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