NFRA Imposes Fine and Bar on CA Santosh Deshmukh for Audit Misconduct
The National Financial Reporting Authority (NFRA) has imposed a fine of Rs 5 lakh and placed a one-year ban on Chartered Accountant (CA) Santosh Deshmukh for professional misconduct during the statutory audit of Sanwaria Consumer Ltd (SCL) for the financial year 2017-18.
In a recent order issued by the NFRA bench, chaired by Dr. Ajay Bhushan Prasad Pandey, along with Dr. Praveen Kumar Tiwari and Smita Jhingran, the authority highlighted significant deficiencies in the audit process. The order stated, “The manner in which the audit was conducted failed to meet the requirements of the standards on auditing (SA), the Companies Act, and the code of ethics in a number of significant aspects, which demonstrated gross negligence on the part of the engagement partner (EP).”
Key points of negligence included a failure to critically assess the existence and valuation of inventories, omission of comments in the audit report regarding the non-consolidation of financial statements, and inadequate verification of impairment testing of SCL investments. These oversights led to significant deficiencies in the audit.
CA Deshmukh, a partner at Khandelwal Kakani & Co, was responsible for the audit of SCL. His lack of scrutiny came to light after the Securities and Exchange Board of India (SEBI) notified the NFRA about potential financial irregularities at Sanwaria Consumer. SEBI pointed out that the auditors had not qualified or emphasized misstatements or irregularities in their transactions.
Following an investigation, the NFRA discovered that CA Deshmukh failed to validate the existence and valuation of material inventories, applying an 11% interest cost that led to an overvaluation of approximately Rs 18.93 crore in soya seed inventories and Rs 13.30 crore in paddy inventories.
As of March 31, 2018, Sanwaria Consumer had investments totaling Rs 36.29 crore, primarily in unquoted shares of its subsidiary, Sanwarian Energy Ltd (SEL), and its associate, Shreenathji Solvex Ltd. SEL reported a loss of Rs 58 lakh, while Shreenathji Solvex faced an Rs 83 lakh loss in the same financial year, contributing to accumulated losses of Rs 32.97 crore and a negative net worth of Rs 15.97 crore at the end of March 2018. Given these results, NFRA determined that the recoverable value of SCL’s investment in its associate was reduced to zero.
The NFRA’s findings emphasized that the EP grossly neglected to verify ownership, valuation, and impairment testing of SCL’s investments in these loss-making subsidiary and associate companies. Furthermore, the EP did not prepare adequate audit documentation in compliance with the requirements of SA 230 (C.7).
As a consequence of these failures, the NFRA has debarred CA Deshmukh from being appointed as an auditor and from undertaking any audit assignments for one year, alongside the financial penalty.
