MAN Industries case: NFRA imposes 5-year ban on auditor for lapses

The National Financial Reporting Authority (NFRA) has slapped a Rs 5 lakh fine and a five-year ban on an auditor for professional misconduct in the audit of MAN Industries for 2016-17.

The regulator slapped a fine of Rs 5 lakh on Nilesh Chheda, who was the Engagement Partner (EP) for the statutory audit of MAN Industries (India) Ltd (MIIL) for FY17.

It also barred Chheda for five years from undertaking any audit in respect of financial statements or internal audit and activities of any company or corporate.

The order came after NFRA received a letter from Sebi regarding the financial irregularities committed by the company. Thereafter, the regulator initiated action to investigate into professional or other misconduct of the statutory auditor of MIIL.

In its 30-page order passed on Wednesday, NFRA found the auditor, incorrectly 'Qualified' his opinion on consolidated financial statements, stating that they reflected a 'true and fair view' except for the non-consolidation of its subsidiary Merino Shelters Pvt Ltd (MSPL).

NFRA contends that this was inaccurate, as the impact of non-consolidation was material and pervasive, with MSPL's assets and liabilities constituting about 19.20 per cent and 28.96 per cent, respectively, of MIIL's total assets and liabilities.

In such cases, an adverse opinion was required, but it wasn't provided by the auditor.

NFRA also found the financial statements of the company were deficient in mandated disclosures as per the Indian Accounting Standards (IndAS).

Critical and sensitive information regarding related party transactions was not adequately disclosed by the auditor, and full particulars of loans, etc, were not disclosed as required by the audit regulator.

The regulator noted that the disclosures related to the credit risk profile of trade receivables were found to be erroneous and not in compliance with the norms.

Chheda fell short in obtaining sufficient appropriate audit evidence (SAAE) in critical areas, including non-consolidation of a significant subsidiary, credit risk assessment of trade receivables, and neglecting risk assessment procedures and corresponding responses, the order said.

In addition, NFRA observed that Chheda's audit work lacked sufficiency and appropriateness in key aspects like audit strategy, planning, analytical procedures, materiality determination, and assessing the risk of material misstatement (ROMM) through understanding the entity's environment and internal control.

This led to non-compliance with standards on auditing, it added.