Ca Som Prakash Aggarwal vs National Financial Reporting ...

(Arising out of the Order dated 12.09.2022 passed by the National Financial Reporting Authority bearing no. NF-23/46/2021, Under Section 132(4) of Companies Act, 2013.

IN THE MATTER OF: CA Som Prakash Aggarwal ICAI Membership No. 74813 At: 4-A-6, Jawahar Nagar, Sri Ganga Nagar-335001 Rajasthan Mail: somprakashaggarwal@yahoo.com ...Appellant Versus National Financial Reporting Authority (NFRA) Office At:- 7th - 8th Floor, Hindustan Times House, 18-20, Kasturba Gandhi Marg, New Delhi- 110001 Mail: review@nfra.gov.in ...Respondent With Comp. App. (AT) No. 177 of 2024 & I.A. No. 4179 of 2024

(Arising out of the Order dated 23.04.2024 passed by the National Financial Reporting Authority bearing no. 009 /2024, Under Section 132(4) of Companies Act, 2013,

IN THE MATTER OF:

M/s S. Prakash Aggarwal & Co Registration No. 06105C At: 4-A-6, Jawahar Nagar, Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Sri Ganga Nagar-335001 Rajasthan Mail: somprakashaggarwal@yahoo.com ...Appellant Versus National Financial Reporting Authority (NFRA) Office At:- 7th - 8th Floor, Hindustan Times House, 18-20, Kasturba Gandhi Marg, New Delhi- 110001 Mail: review@nfra.gov.in ...Respondent Present

For Appellant: Mr. CV Sajan & Mr. Dhanesh M. Nair, Adv.

For Respondents: Mr. Zoheb Hossain & Mr. Satyam, Adv.

JUDGEMENT

( 13.07. 2026)

NARESH SALECHA, MEMBER (TECHNICAL)

1. The present Company Appeal (AT) No. 200 of 2022 and Company Appeal

(AT) No. 177 of 2024 have been filed by the Appellants i.e. CA Som Prakash

Aggarwal and M/s S. Prakash Aggarwal & Co. Chartered Accountants, through

its authorized partner CA Som Prakash Aggarwal, respectively, under Section

132(5) of the Companies Act, 2013 ("the Act"), challenging the Impugned Order

no. NF-23/46/2021 in Company Appeal (AT) No. 200 of 2022 dated 12.09.2022

and Impugned Order no. 009/2024 in Company Appeal (AT) No. 177 of 2024

dated 23.04.2024, passed by the National Financial Reporting Authority, New

Delhi (NFRA).

Page 2 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

2. National Financial Reporting Authority ("NFRA") is the Respondent

herein.

Appeal in Company Appeal (AT) No. 200 of 2022

3. The Appellant, CA Som Prakash, submitted that by way of the impugned

order, the Respondent has proceeded to hold the Appellant guilty of professional

misconduct and has imposed severe civil and professional consequences upon

him, namely, (i) imposition of a monetary penalty of Rs. 3,00,000/-, (ii)

debarment for a period of three years from being appointed as an auditor or

internal auditor or undertaking audit assignments in relation to financial

statements or internal audit of any company or body corporate, and (iii) direction

to undergo training on Standards on Auditing and Indian Accounting Standards

and submit proof thereof within 180 days from the order becoming effective.

4. The Appellant submitted that he is a practicing Chartered Accountant of

long standing and is a partner in the firm M/s S. Prakash Aggarwal & Co., which

renders professional services in accordance with the framework prescribed under

the Companies Act, 2013, Chartered Accountants Act, 1949, Standards on

Auditing (SAs) and other regulatory requirements. The Appellant submitted that

M/s S. Prakash Aggarwal & Co. acted as the statutory auditor of Vikas WSP

Limited ("VWL Company") for the Financial Year 2019-2020, and the

Appellant acted as the Engagement Partner ("EP") for the audit assignment. The

Appellant was responsible for planning, supervision and conclusion of the audit

Page 3 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

engagement and conducted the audit in accordance with the information and

records made available by the Company and in compliance with professional

practices recognized by the Institute of Chartered Accountants of India (ICAI).

5. The Appellant submitted that the statutory audit was conducted on the basis

of books of accounts, records, explanations, representations, financial data and

supporting materials supplied by the management and key personnel of VWL.

The audit process was carried out by adopting procedures considered appropriate

in the facts and circumstances of the engagement and in accordance with the

Standards on Auditing as applicable. The Appellant submitted that auditing

standards are intended to provide objectives, guiding principles and procedures

to enable an auditor to obtain reasonable assurance and do not eliminate

professional judgment in evaluating facts and accounting positions.

6. The Appellant submitted that during Financial Year 2019-20, VWL did

not provide for interest expense in respect of borrowings which had already been

classified by Bank of India and Union Bank of India as Non-Performing

Advances (NPAs) on 31.12.2015 and 31.03.2016 respectively. The Appellant

submitted that this accounting treatment subsequently became the sole

substantive issue forming the basis of regulatory scrutiny against him by the

Respondent.

7. The Appellant submitted that there was no concealment or omission

regarding such accounting treatment. The fact of non-provisioning of interest and

the relevant background were expressly disclosed in the audited financial

Page 4 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

statements under Notes to Accounts, Paragraph 33(a)(i). it is the case of the

Appellant that, all stakeholders examining the financial statements, including

regulators, lenders and investors, had access to the relevant disclosures and no

material information was withheld.

8. The Appellant submitted that nonrecognition of interest was not a matter

of non-compliance of Ind AS 109 to fall with section 129(1) of the Companies

Act, 2013 nor noncompliance to be treated as aberration under Section 129(5) of

the Companies Act, 2013. This being a very technical matter, was within the

decision-making ability of the company management, and hence was not a

significant matter that required any discussion with the management and

recording as per Para 10 of SA 230, particularly because the company had duly

disclosed the facts of non-recognition of interest Note 33(i)(a) of the Annual

Financial Statement of 2019-20.

9. The Appellant submitted that the Annual Financial Statements of VWL

were thereafter examined by SEBI, and clarification was sought from the

Appellant regarding non-provisioning of interest. The Appellant, by

communication dated 13.07.2021, furnished detailed explanations clarifying that

the Company had not removed or extinguished the underlying borrowing

obligations and that the accounting treatment adopted did not violate Para 3.3.1

of Ind AS 109.

Page 5 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

10. The Appellant submitted that the explanation furnished before SEBI was

founded upon professional understanding of the principles governing

measurement of financial liabilities and expected future cash flows under Ind AS

109. The Appellant maintained that the accounting treatment adopted was not an

exercise of concealment but involved professional assessment of measurement

principles in circumstances where borrowings had already been classified as

NPAs.

11. The Appellant submitted that subsequently, based upon information

forwarded by SEBI dated 25.08.2021, proceedings came to be initiated by NFRA.

However, the notice dated 11.11.2021 issued under Section 132(2) of Company

Act, 2013 read with Rules 3, 4, 7 and 8 of the NFRA Rules, 2019 called upon

the Appellant to submit audit records and SQC policy without disclosing the

complete factual foundation and material forming the basis of initiation. The

Appellant submitted that despite such circumstances, complete cooperation was

extended at every stage and complete audit records along with affidavit were

submitted by 19.04.2022.

12. The Appellant submitted that the Respondent was therefore placed in

possession of extensive records, explanations and clarifications. At no stage did

the Appellant evade inquiry, suppress information or refuse compliance. The

conduct of the Appellant throughout remained transparent and cooperative. The

Appellant submitted that notwithstanding full cooperation, the Respondent issued

a Show Cause Notice dated 29.06.2022 alleging professional misconduct. The

Page 6 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Appellant filed a detailed written reply on 27.07.2022, dealing comprehensively

with allegations concerning Ind AS 109, audit documentation, Standards on

Auditing and audit procedures, and further requested an opportunity of hearing

through an Authorized Representative.

13. The Appellant submitted that although hearing was ultimately conducted

through video conferencing on 25.08.2022, the explanations furnished by the

Appellant were not examined in their proper context. Material submissions

explaining accounting principles, professional judgment and audit procedures

were either selectively reproduced or incorrectly interpreted in the impugned

order. The Appellant submitted that the first charge under Clause (5), Part I of

the Second Schedule to the CA Act, 1949, namely failure to disclose material

facts in financial statements, is fundamentally unsustainable. The Respondent

has failed to identify any specific material fact which was required to be disclosed

but remained omitted. The Appellant submitted that if the allegation concerns

non-provisioning of interest on borrowings classified as NPAs, the same already

stood disclosed in Notes to Accounts. In fact, the Show Cause Notice itself drew

information and figures from the audited financial statements and cross-

referenced disclosures already available therein. Therefore, the allegation of non-

disclosure becomes self-contradictory and unsupported.

14. The Appellant submits that the second charge under Clause (6) of Part I

alleging failure to report material misstatements proceeds entirely upon

NFRA's disagreement with the accounting interpretation adopted by the

Page 7 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Appellant and not upon identification of any false entry, fabricated disclosure or

concealed financial fact. The Appellant submitted that his understanding of Ind

AS 109 was that where borrowers are unlikely to settle liabilities strictly in

accordance with original contractual terms due to financial distress, expected

future cash flows may require evaluation in accordance with actual settlement

expectations and measurement principles. Whether such interpretation is

accepted or rejected is ultimately a matter of accounting judgment and cannot

automatically attract disciplinary consequences. The Appellant submitted that

NFRA, while rejecting the Appellant's position, introduced considerations

relating to legal liability of borrowers to repay debt, whereas accounting

recognition principles under Ind AS 109 and enforceability of debt obligations

are distinct concepts operating in separate fields.

15. The Appellant submitted that the third charge under Clause (7) alleging

absence of due diligence is equally unsupported. The Respondent has not

identified any specific audit procedure required under any Standard on Auditing

which was omitted by the Appellant or any mandatory requirement which

remained unperformed.

16. As regard nonrecognition of interest on bank loans by Vikas WSP Ltd

during FY 2019-20 of approximately Rs 14 Crores by the Appellant justified

based on the principles at para 2.16 of the Conceptual Framework for Financial

Reporting under Ind-AS which requires application of Neutrality when prudence

is exercised. "The exercise of prudence does not allow for the understatement of

Page 8 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

assets or income or the overstatement of liabilities or expenses. Such

misstatements can lead to the overstatement or understatement of income or

expenses in future periods". The Appellant elaborated that where the company

was not in any position to meet any further interest liability due to financial crisis,

non-providing interest liability of FY 19-20 did not amount to understatement of

liability and as its consequence there was no overstatement of profits either.

17. The Appellant also refuted Respondent's contention that the liability exists

and must be measured using the Effective Interest Method (EIM) which

according to the Appellant is contrary to the provisions regarding EIM defined in

Appendix A to Ind AS 109 for which the criterion is estimated future cash

outflows, and not the existence of the financial liability. The Appellant stated that

Para 3.3.1 and Para B 3.3.1 of Ind AS 109 have no relevance in the accounting of

interest liabilities as apparent from the definition of EIM. There was no

derecognition or removal of liability in terms of Para 3.3.1 and Para B 3.3.1 of

Ind AS 109 in the instant case, as the liability that was in the books in the previous

year, reduced by the payments towards interest and loans made during the year,

was continuing in the books of accounts of the company and in the financial

statements. The Appellant also stated that a proposed One- Time Settlement

(OTS) was relevant for determination of interest is not the provisions regarding

extinguishment of liability as wrongly perceived by NFRA and on the contrary

the interest is to be recognized based on the estimated future cashflows towards

Page 9 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

interest in the circumstances of the case of OTS in the anvil, for which the

company had remitted Rs 2.15 Crores to the Banks.

18. The Appellant submitted that reliance upon alleged deficiency in audit

documentation cannot substitute proof of deficient audit performance. Audit

working papers are evidentiary instruments supporting audit conclusions and are

not themselves the sole measure of audit quality. The Appellant submitted that

the Standards on Auditing do not require every professional discussion,

judgment, clarification, reconciliation or evaluation to be separately documented

in exhaustive detail. Matters resolved through professional engagement and

reflected in final audit outputs cannot be treated as absent merely because every

deliberative step was not independently preserved.

19. The Appellant submitted that the observations in the impugned order

appear to equate professional explanations with disregard of auditing standards.

The Appellant never disputed applicability of Standards on Auditing and

consistently maintained compliance with applicable standards in both letter and

spirit. The Appellant submitted that the fourth and fifth charges under Clauses

(8) and (9) of Second Schedule to the CA Act, 1949 are merely repetitive

extensions of earlier allegations and do not independently establish absence of

sufficient information or departure from accepted audit procedures. No specific

information allegedly omitted nor any specific audit procedure allegedly violated

has been identified.

Page 10 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

20. The Appellant submitted that the Respondent has failed to point out any

evidence from the audit file demonstrating fraud, concealment, gross negligence,

recklessness, intentional omission, lack of independence or deliberate disregard

of professional obligations. The Appellant submitted that disagreement with an

auditor's professional judgment cannot, by itself, become a basis for disciplinary

sanctions unless accompanied by demonstrable misconduct supported by cogent

evidence. Professional regulation cannot convert every accounting disagreement

into punitive action.

21. The Appellant submitted that regardless of the mandatory applicability of

SAs and Accounting Standards (ASs) there is room for choices, alternative

procedures and adaptations based on professional judgment of the auditor. This

position of the Appellant as far as Accounting Standards are concerned, was

based on the provisions of (a) Section 129(5) of the Companies Act, 2013 and

based on the flexibility provided in Ind AS 1-Para 15,18 and 19. Similarly for

Auditing Standards SA 200-Para 7 provides that " the SAs contain objectives,

requirements and application and other explanatory material that are designed to

support the auditor in obtaining reasonable assurance". SA 200-Para 18 also

provides that "the auditor shall comply with all SAs relevant to the audit. A SA

is relevant to the audit when the SA is in effect and the circumstances addressed

by the SA exist". The Appellant further elaborated that SA 500- Para 6 stipulates

that "The auditor shall design and perform audit procedures that are appropriate

in the circumstances for the purpose of obtaining sufficient appropriate audit

Page 11 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

evidence" and SA 500-Para A2 state that "Audit procedures to obtain audit

evidence can include inspection, observation, confirmation, recalculation,

reperformance and analytical procedures, often in some combination, in addition

to inquiry". The Appellant also explained that

SA 500- Para A 6 mention "Whether sufficient appropriate audit evidence has

been obtained to reduce audit risk to an acceptably low level, and thereby enable

the auditor to draw reasonable conclusions on which to base the auditor's opinion,

is a matter of professional judgment". In view of these, the Appellant emphasized

that despite the mandatory applicability of SAs, application of all SAs and all

provisions cannot be mandatory in every audit, and the judgment of an auditor

plays a vital role.

22. The Appellant submitted that the only issue relevant here is whether not

recognizing interest in the circumstances of the case was compliance of Ind AS

109 or not, which was a technical matter that was not to be addressed or to be

discussed with the management, or not to be recorded as in a "minute" because it

was a technical interpretation of the EIM in terms of Ind AS 109. The Appellant

elaborated that there was no mandatory requirement of obtaining confirmations

from banks, nor any case of consequence was made by the Respondent. There is

no regulatory provision that make non-documenting of a technical interpretation

on Ind AS 109 by the auditor or instance of not to seek confirmation from bank,

as breaches of SA 230 or SA500.

Page 12 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

23. The Appellant reasoned that Engagement Quality Control Review

(EQCR) is integral part of audit procedure but the same can't be considered as

an absolute condition, instead it is subject to the provisions of Para 19 of SA 220,

meaning thereby EQCR applies to audits of all listed entities and to those other

entities falling within the category of audits for which EQCR is made mandatory

according to the Quality Control Policy established by the respective audit firms.

The Appellant conceded that the essentiality of carrying out Engagement Quality

Control Review in the instant case is not disputed. The Appellant acknowledged

that not engaging an EQCR was a lapse on the part of the Appellant, however,

every lapse of an audit procedure cannot qualify as professional misconduct, for

which applicability of the relevant clause i.e. Clause (9) of Part I of the Second

Schedule viz, material departure from generally accepted audit procedures.

24. The Appellant submitted that the Respondent has not made out any

concrete case of material noncompliance of Auditing Standard or other

professional Standards against the Appellant. The Appellant explained that the

standard of proof applicable to quasi criminal charges was not tested and the

charges of Clauses (5), (6), (7), (8), (9) of Schedule II of the Chartered

Accountant, 1949 and were arbitrarily invoked by the Respondent without

respecting the relevant law on standard of proof in Para 4(i), (ii) and (iii) of the

judicial decisions of the Hon'ble Supreme Court in An Advocate Vs Bar Council

of India [1989 Supp (2) Supreme Court Cases 25] and that in para 26, 27 and 31

of the judicial decision of the Hon'ble Delhi High Court in Shadilal Batra, in re,

Page 13 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

[1967 SCC OnLine DEL 44]. Standard of proof on the question of gross

negligence of an audit professional, as covered in the Hon High Court of

Hyderabad in the ICAI Vs Mukesh Gang, Chartered Accountant [2016 SCC

Online Hyd 327] was also not tested by the Respondent. The Appellant castigated

the Respondent who has held the Appellant guilty of professional misconduct

without sufficient reason or proof of the listed offences and without testing

whether these were grave enough to be treated as professional misconduct, and

hence the punishments were travesty of justice.

25. The Appellant further submitted that the impugned order contains

observations which appear to interpret candid professional defence as resistance

to regulatory authority. Such approach has resulted in conclusions unsupported

by objective assessment of audit work undertaken. The Appellant submitted that

the sanctions imposed are manifestly excessive and disproportionate. The

combined effect of Rs. 3,00,000/- monetary penalty, three-year debarment, and

mandatory retraining substantially affects the Appellant's professional standing,

livelihood and right to continue practice.

26. The Appellant submitted that findings carrying such severe professional

and reputational consequences shall have been supported by clear evidence,

reasoned analysis and strict demonstration of statutory misconduct by the NFRA.

In the absence of such findings, the impugned order fails to satisfy settled

standards of fairness, proportionality and regulatory adjudication.

Page 14 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

27. Concluding the arguments, the Appellant requested this Appellate Tribunal

to allow his appeal in Company Appeal (AT) No. 200 of 2022 and set aside the

Impugned Order 12.09.2022 against the Appellant CA Som Prakash.

Appeal in Company Appeal (AT) No. 177 of 2024

28. The Appellant submitted that it is a chartered accountancy firm, under

name M/s S. Prakash Aggarwal Co., and that it had served as the statutory auditor

of VWL for the financial year 2019-20. The Appellant stated that CA Som

Prakash Aggarwal, being the engagement partner, conducted the audit on the

basis of the information, documents, and explanations provided by the

management and other key personnel of the company, in accordance with the

audit procedures prescribed by ICAI.

29. The Appellant submitted that it responded to NFRA's notices by furnishing

part of the audit file, the SQC-1 policy, further portions of the audit file, responses

to questionnaires, and an affidavit stating that the complete audit file had been

submitted. The Appellant contended that despite full cooperation, NFRA issued

a show cause notice on 29 June 2022, treated the matter as one of professional

misconduct, and ultimately passed an order on 12 September 2022 against the

engagement partner, debarring him from undertaking corporate audits for three

years and imposing a monetary penalty.

30. The Appellant contended that the same allegations were thereafter revived

against the Appellant firm through a fresh show cause notice dated 4 December

Page 15 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

2023, even though those very issues had already been examined in the earlier

proceeding against the EP. The Appellant submitted that this amounted to

repetition of the same charges and that too after lapse of period and an abuse of

process by NFRA.

31. The Appellant submitted that the impugned order dated 23 April 2024

wrongly interpreted SA 220 and SQC 1 by fastening audit responsibility on the

firm as if the firm itself were directly accountable for the performance of the audit

in the same manner as the EP. The Appellant contended that the firm's role under

SQC 1 was only to establish a system of quality control, whereas the actual

implementation responsibilities, according to the firm's own policy, rested with

the EP.

32. The Appellant explained the provisions in Para 59 of SQC 1 which

provides that that a firm "establishes procedures to resolve" differences of opinion

where "firm using a suitably qualified external person(s) to conduct an

engagement quality control review" is about establishing policy and procedure by

the firm in this respect, as apparent from the other relevant paragraphs No 57-58

of SQC 1 and it does not cast any responsibility on the firm to appoint EQCR.

Similarly, Para 71 of SQC 1 also is for addressing a policy matter that a "firm's

policies provide for the replacement of the engagement quality control reviewer

where the ability to perform an objective review may be impaired to address

situations where maintaining objectivity by EQCR gets affected. Provisions in

Para 92 of SQC 1 that small firms and sole practitioners may wish to use a suitably

Page 16 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

qualified external person to carry out Engagement Quality Control Review, is

also a matter of policy.

33. The Appellant further contended that the NFRA misread the reference to

SQC 1 and auditing standards such as SA 200, SA 220, SA 230, SA 260, SA 620,

and SA 700 as though those references created direct substantive liability on the

firm for audit performance. The Appellant submitted that, under SA 200,

responsibility for the engagement and its performance lies with the engagement

partner, and the footnote in SQC 1 concerning signatures on reports did not alter

the allocation of responsibility.

34. The Appellant submitted that the impugned order wrongly held that the

firm could not dissociate itself from audit responsibilities and could not absolve

itself of non-compliances in the audit of VWL. The Appellant contended that the

firm's quality control policy placed the responsibility for implementation on the

engagement partner, and therefore the firm could not be made liable for alleged

audit lapses committed in the course of audit execution.

35. The Appellant contended that the findings in paragraphs 19 to 22 of the

impugned order were also unsustainable because they related to alleged

deficiencies in audit documentation, non-recognition of interest on non-

performing bank limits, and non-appointment of EQCR, all of which had

already formed the basis of proceedings against the EP in the earlier order dated

12 September 2022 in CA (AT) No. 200 of 2022. The Appellant submitted that

these charges were repeated and could not legally be used again against the firm,

Page 17 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

as the firm was not the directly responsible for those audit acts of the EP i.e. CA

Som Prakash.

36. The Appellant submitted that the charges under Clauses 5, 6, 7, 8, and 9

of Part I of the Second Schedule to the Chartered Accountants Act, 1949

were not legally sustainable against an audit firm and could only be directed

against the concerned chartered accountant or engagement partner.

37. The Appellant contended that there are no relevant provisions in Section

22 of the Chartered Accountants Act, 1949 that convert the alleged audit lapses

into professional misconduct against the firm under Section 132(4) of the

Companies Act, 2013. The Appellant further submitted that the fresh proceedings

against the firm were contrary to Rule 11(1) of the NFRA Rules, 2018, since

identical allegations had already been proceeded with earlier against the EP. The

Appellant submitted that the proceedings were arbitrary, amounted to double

jeopardy in substance, and reflected misuse of NFRA's powers by reopening a

concluded or already-subjected-to-appeal matter.

38. The Appellant submitted that the impugned order suffers from errors of

law and fact, proceeds on a misreading of SQC 1 and the auditing standards,

improperly fastens liability on the firm for acts attributable to the engagement

partner, and repeats charges already raised in earlier proceedings against the EP.

The Appellant contended that, for these reasons, the impugned order deserves to

be quashed.

Page 18 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

39. Concluding arguments, the Appellant requested this Appellate Tribunal to

allow the appeal and set aside the impugned order dated 23.04.2024 against the

firm.

40. On the other hand, the Respondent, NFRA, denied the averments of the

Appellants, in both appeals as misleading and baseless.

Company Appeal (AT) No. 200 of 2022

41. The Respondent submitted that M/s S. Prakash Aggarwal & Co. acted as

the statutory auditor of VWL, a listed company having and the Appellant CA

Som Prakash Aggarwal acted as the EP for the audit assignment. Since VWL was

listed on both BSE and NSE, preparation and presentation of its annual financial

statements were mandatorily governed by Rule 4 of the Companies (Indian

Accounting Standards) Rules, 2015 requiring compliance with notified Indian

Accounting Standards including Ind AS 109 relating to Financial Instruments.

Consequently, the Appellant was under heightened statutory and professional

obligations while conducting the audit and expressing audit opinion.

42. The Respondent, NFRA, further submitted that information dated

25.08.2021 was received from SEBI indicating serious concerns in the financial

reporting practices adopted by VWL for FY 2019-2020. It was specifically

observed that the Company had not recognised interest expenses on borrowings

from banks in its Statement of Profit and Loss despite continuing financial

obligations, resulting in distortion of the financial position and overstatement of Page 19 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

profits. Considering the seriousness of the allegations and their implications upon

investor protection, financial reporting integrity and public confidence, the

Respondent NFRA initiated examination under powers conferred under Section

132 of the Companies Act, 2013.

43. The Respondent submitted that, in furtherance of such examination, a

notice dated 11.11.2021 was issued requiring the Appellant, CA Som Prakash in

CA (AT) No. 200 of 2022 to produce the Audit File and SQC 1 Policy of the

Firm. However, despite repeated opportunities, the Appellant CA Som Prakash

failed to submit a complete and coherent audit record within the prescribed

timeline. Initially, on 08.12.2021, only partial audit documentation and broad

references to SQC practices were submitted. Subsequently, on 21.12.2021, a

reminder was issued by the Respondent requiring complete production of audit

records and quality control documentation by the Appellant. Although extension

till 20.01.2022 was granted upon request, even thereafter the Appellant CA Som

Prakash furnished only portions of the audit file and indicated that several audit

documents were unavailable in proper digital form.

44. The Respondent submitted that in order to ensure procedural fairness and

complete understanding of the audit approach adopted by the Appellant, a

detailed questionnaire dated 04.02.2022 was issued seeking clarifications relating

to statutory audit procedures undertaken for VWL. The Appellant submitted

replies on 23.02.2022, however, deficiencies persisted and therefore another

communication dated 29.03.2022 was issued requiring submission of complete

Page 20 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

audit records supported by affidavit. Eventually, on 19.04.2022, the Appellant

submitted additional material and affirmed that the audit file stood completed.

However, upon examination, the documents were found fragmented, incomplete

and incapable of establishing compliance with mandatory auditing requirements.

45. The Respondent submitted that after detailed scrutiny of the audit file,

correspondence, explanations and underlying financial statements, an apparent

case of professional misconduct emerged against the Appellant CA Som Prakash

and accordingly Show cause Notice dated 29.06.2022 was issued under Rule

11(1) of the NFRA Rules, 2018. Sufficient opportunities were granted to the

Appellant to respond and participate in proceedings. The Appellant submitted

written responses dated 27.07.2022 and sought personal hearing. Such request

was accepted and hearing was initially scheduled through Video Conferencing

and thereafter rescheduled upon the Appellant's own request. The hearing was

ultimately conducted on 25.08.2022 wherein the Appellant reiterated his written

submissions. Thus, principles of natural justice were fully complied with and no

procedural prejudice whatsoever was caused.

46. The Respondent NFRA submitted that upon comprehensive consideration

of all records including audit files, written explanations, oral submissions and

applicable legal framework, serious violations were established against the

Appellant. The Respondent found that the Appellant failed to report

understatement of Interest Costs pertaining to borrowings classified as NPA by

lender banks, failed to report understatement of Current Liabilities, failed to

Page 21 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

detect and disclose overstatement of Profit Before Tax, accepted inadequate and

unsupported disclosures in the financial statements and failed to maintain audit

documentation and audit evidence as required under Standards on Auditing.

These lapses were not isolated procedural irregularities but directly affected the

reliability of audited financial statements.

47. The Respondent submitted that the principal issue related to non-

recognition of interest expenses by VWL despite continuing obligations under

outstanding borrowings. The Company had borrowings amounting to

approximately Rs.135.65 crore as on 31.03.2020 as against Rs.155.29 crore as on

31.03.2019. While the Company recognised interest cost of approximately

Rs.21.08 crore in FY 2018-2019, but only Rs.4.16 crore was recognised in FY

2019-2020. Upon examination of Note 33(a)(i) of the financial statement of

VWL and related financial disclosures, it was observed that complete interest

liability had not been recognised in the financial statements. The Respondent

submitted that such accounting treatment materially impacted profit reporting and

financial presentation.

48. The Respondent specifically contended that the Appellant attempted to

justify such non-recognition of interest expenses by relying upon anticipated OTS

discussions and Management Representation Letter (MRL) dated 24.06.2020.

However, the audit record contained no contemporaneous evidence of any

concluded settlement arrangement, lender approval, audit verification or

independent corroboration. The Management Representation Letter itself

Page 22 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

suffered from multiple inconsistencies, including absence of proper identification

of signatory authority, absence of company letterhead and internal

inconsistencies in dates and factual references. The Respondent submitted that

anticipated future concessions by lenders cannot extinguish an existing financial

liability unless legally crystallised and recognised under applicable accounting

standards. Therefore, the assumption adopted by the Appellant that future waiver

possibilities justified non-recognition of interest costs was fundamentally

inconsistent with Ind AS 109 and contrary to accepted accounting principles.

49. The Respondent further submitted that the Appellant's interpretation of the

principles governing measurement of financial liabilities under Ind AS 109 was

fundamentally erroneous and contrary to the statutory accounting framework

applicable to listed entities. It is submitted that Ind AS 109 requires financial

liabilities to continue to be recognised and measured until extinguishment in

accordance with the prescribed standards and does not permit assumptions of

reduced future cash outflows merely because negotiations for waiver or

settlement may have commenced. The Respondent contended that the Effective

Interest Method ("EIM") under Appendix A of Ind AS 109 expressly requires

estimation of expected cash flows by considering contractual terms of the

financial instrument while excluding assumptions based upon expected credit

losses or speculative waivers. Therefore, unless and until the liability stood

legally modified, discharged or extinguished, interest obligations continued to

subsist and were required to be recognised in the financial statements.

Page 23 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

50. The Respondent submitted that the accounting treatment accepted by the

Appellant resulted in a material misstatement in the audited financial statements

of VWL. Even assuming that interest cost for FY 2019-2020 ought to have

remained broadly aligned with the interest cost recognised in FY 2018-2019,

namely approximately Rs.21.07 crore, the recognition of only Rs.4.16 crore led

to understatement of interest cost and current liabilities by at least Rs.16.91 crore.

The Respondent contended that such understatement had a direct and substantial

impact upon profitability. The Company reported Profit Before Tax of

approximately Rs.19.20 crore and the understatement of expenditure by Rs.16.91

crore constituted nearly 88% of the reported PBT, thereby making the

misstatement manifestly material, significant and capable of misleading users of

financial statements.

51. The Respondent submitted that the Appellant, as EP and statutory auditor,

was under an independent professional obligation to critically evaluate

management assumptions, obtain sufficient appropriate audit evidence and

modify the audit opinion wherever material departures from accounting standards

were noticed. Instead of exercising professional scepticism, the Appellant

accepted the Company's treatment of interest costs without adequate

corroboration and issued an unmodified audit opinion. The Respondent

contended that statutory audit is not a mechanical endorsement of management

representations but an independent assurance function governed by legal

standards and professional judgment supported by evidence.

Page 24 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

52. The Respondent submitted that the deficiencies identified were not limited

to accounting treatment alone but extended to serious failures in audit execution

and documentation. The audit file examined by NFRA did not contain

contemporaneous documentation demonstrating examination of interest

computations, challenge to management assumptions, communication with

lender banks, evaluation of settlement proposals or rationale for accepting

departure from ordinary accounting treatment. There was no evidence showing

that the Appellant had independently assessed the impact of non-recognition of

interest costs upon financial statements before certifying them.

53. The Respondent contended that the Appellant's defence based upon oral

discussions, professional understanding and undocumented deliberations was

legally untenable and contrary to Standards on Auditing, particularly SA 230.

Audit documentation is not a procedural formality but constitutes the

foundational evidence of work performed, conclusions reached and professional

judgments exercised during the audit process. Paragraph 7 of SA 230 mandates

timely preparation of audit documentation and Paragraph 8 specifically requires

documentation of significant matters, conclusions reached and significant

professional judgments made during audit. The Respondent submitted that these

requirements acquire greater importance in matters involving listed entities and

material accounting assumptions.

54. The Respondent submitted that the Appellant's position that oral

explanations or internal discussions could substitute formal audit documentation

Page 25 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

stands expressly contradicted by the Standards on Auditing. SA 230 recognises

that oral explanations may only supplement documentation already existing in

audit records and cannot independently establish performance of audit

procedures. Audit files must speak for themselves and permit an experienced

auditor, without prior involvement in the engagement, to understand the

procedures performed, evidence obtained and basis of conclusions. In the present

case, such standard was not satisfied and the audit record was found materially

deficient.

55. The Respondent further submitted that the audit documentation lacked

several categories of essential evidence ordinarily expected in a statutory audit of

this nature. There was absence of direct confirmations from lender banks

regarding outstanding liabilities; absence of loan agreements and corresponding

communications; absence of evidence supporting the alleged OTS discussions;

absence of records establishing identification and communication with Those

Charged with Governance (TCWG); absence of documentation explaining

acceptance of management assumptions; and absence of documented challenge

to material accounting treatment adopted by management. Such deficiencies

collectively demonstrated failure to obtain sufficient and appropriate audit

evidence.

56. The Respondent submitted that the Appellant also failed to comply with

mandatory quality control requirements applicable to listed company audits. In

particular, the Respondent found that no Engagement Quality Control Reviewer

Page 26 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

("EQCR") had been appointed despite the clear requirement under Paragraph

19(a) of SA 220 applicable to audits of listed entities. The Appellant's position

that appointment of EQCR was not mandatory demonstrated a serious

misunderstanding of applicable auditing standards. The Respondent submitted

that compliance with engagement quality control is not discretionary and forms

an integral component of audit reliability, especially in listed company audits

involving public interest considerations.

57. The Respondent therefore contended that the conduct of the Appellant

attracted multiple categories of professional misconduct under the applicable

statutory framework. The Appellant failed to disclose material facts necessary for

understanding the financial statements; failed to report material misstatements

known to him; failed to exercise due diligence in discharge of professional duties;

failed to obtain sufficient information necessary for expression of audit opinion;

and failed to invite attention to departures from accepted audit procedures. Such

conduct attracted Section 132(4) of the Companies Act, 2013 read with Section

22 and Clauses (5), (6), (7), (8) and (9) of Part I of the Second Schedule to the

Chartered Accountants Act, 1949.

58. The Respondent submitted that each charge recorded in the impugned

order was independently examined and supported by findings derived from audit

files, financial records, responses furnished by the Appellant and applicable

statutory standards. The conclusions reached by NFRA were neither presumptive

nor punitive in nature but flowed from objective evaluation of evidence and legal

Page 27 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

obligations cast upon auditors of public interest entities. The Respondent

contended that the Appellant's attempt to portray the proceedings as mere

disagreement over professional interpretation is misconceived since the findings

arose from demonstrable failures in accounting evaluation, audit execution,

documentation, quality control and regulatory compliance, all of which directly

impacted the truthfulness and fairness of audited financial statements.

59. The Respondent further submitted that the Appellant's challenge to the

findings under Clause (5) of Part I of the Second Schedule to the Chartered

Accountants Act, 1949 is wholly unsustainable. The Respondent contended that

the Appellant was under a clear professional obligation to disclose all material

facts necessary for proper understanding of the financial statements where

he was associated in a professional capacity. In the present case, the financial

statements did not adequately disclose the basis, rationale, assumptions and

accounting consequences arising from the non-recognition of interest costs on

borrowings classified as NPAs.

60. The Respondent submitted that the Appellant's challenge to findings under

Clause (6) of Schedule to of ICAI Act, 1949 relating to failure to report

material misstatements is equally devoid of merit. It was contended that the

materiality threshold stood clearly crossed in the present case, considering the

substantial impact upon reported profitability and liabilities. The understatement

of interest expenditure and corresponding overstatement of profits was not trivial

or technical in nature but materially altered the financial presentation of VWL.

Page 28 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

The Respondent submitted that once such material departure existed and

remained unreported despite knowledge and audit involvement of the Appellant,

the ingredients constituting professional misconduct stood fully established.

61. The Respondent submitted that the Appellant's contention that standards

on auditing merely lay down broad principles and permit unrestricted auditor

discretion is legally incorrect and contrary to the statutory scheme. Standards on

Auditing prescribed under Section 143(10) of the Companies Act, 2013 carry

mandatory force and establish minimum requirements that must be demonstrably

complied with. While professional judgment remains part of audit execution,

such judgment must be capable of verification through contemporaneous records

and documented evidence. The Respondent contended that audit standards are

intended precisely to eliminate subjective and retrospective justification

unsupported by audit records.

62. The Respondent further submitted that the Appellant's argument that

quality of audit ought to be judged only through financial outputs and not

through working papers is fundamentally misconceived. Audit documentation

constitutes the legal evidence of audit performance and forms the basis upon

which regulators, peer reviewers and courts assess whether statutory duties were

discharged. The absence of adequate working papers, especially in matters

involving material accounting estimates and departures from ordinary accounting

treatment, directly undermines the credibility of audit conclusions. The

Respondent therefore submitted that deficiencies in audit documentation cannot

Page 29 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

be dismissed as administrative imperfections but constitute substantive violations

affecting the audit process itself.

63. The Respondent submitted that the challenge to the findings under Clause

(7) Schedule to of ICAI Act, 1949, namely lack of due diligence and gross

negligence, deserves rejection. The Appellant relied substantially upon

management assertions and alleged settlement expectations without independent

verification from lending institutions and without preserving documentary

evidence supporting such reliance. The Respondent contended that professional

diligence requires active verification, corroboration and challenge, particularly

where financial liabilities materially affect profitability and solvency indicators.

The Appellant's conduct revealed absence of professional scepticism expected of

an independent statutory auditor.

64. The Respondent further submitted that findings under Clause (8) Schedule

to of ICAI Act, 1949, namely failure to obtain sufficient information

necessary for expression of audit opinion, are fully supported by the record. It

is submitted that the Appellant did not obtain adequate evidence regarding

borrowings, interest obligations, correspondence with banks, settlement

arrangements, governance communications and accounting rationale adopted by

management. The absence of such evidence could not be cured through

subsequent explanations furnished during disciplinary proceedings. The

Respondent contended that sufficiency and appropriateness of audit evidence

Page 30 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

must exist at the time of issuance of audit report and cannot be reconstructed after

commencement of regulatory scrutiny.

65. The Respondent submitted that the findings under Clause (9) Schedule to

of ICAI Act, 1949 concerning failure to invite attention to departures from

accepted audit procedures, are also justified and supported by statutory

provisions. Despite serious deficiencies in accounting treatment and absence of

supporting audit evidence, the Appellant issued an audit report representing

compliance with Standards on Auditing. The Respondent submitted that such

representation created an impression of regulatory and professional compliance

which was not borne out from the audit records. Therefore, the Appellant's

conduct amounted to failure to report material departures and constituted

actionable professional misconduct.

66. The Respondent reiterated that in view of the foregoing facts, statutory

provisions, accounting standards, auditing requirements and evidence available

on record, the impugned order dated 12.09.2022 has been passed after due

application of mind, proper appreciation of facts and strict adherence to law. The

findings of professional misconduct recorded against the Appellant CA Som

Prakash under Section 132(4) of the Companies Act, 2013 read with the relevant

provisions of the Chartered Accountants Act, 1949 are fully justified and

supported by evidence. The sanctions imposed, namely monetary penalty of

Rs.3,00,000/-, debarment for three years from undertaking audit assignments and

requirement to complete prescribed professional training within 180 days from

Page 31 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

the order becoming effective, are proportionate to the seriousness of misconduct

established.

Company Appeal (AT) No. 177 of 2024

67. The Respondent stated that upon detailed examination of the audit file and

other materials available on record, while deciding against the EP in CA (AT)

200 of 2022, NFRA came to know that a prima facie case of professional

misconduct also existed against the Appellant Firm. Accordingly, a Show Cause

Notice (SCN) dated 04.12.2023 was issued to the Firm under Rule 11(1) of the

NFRA Rules, 2018, granting it reasonable opportunity to respond. The Firm

sought multiple extensions of time and was granted sufficient opportunities, and

the Appellant eventually submitted on 14.02.2024.

68. The Respondent contended that after careful perusal of the entire record,

including the audit file, the Firm's reply to the SCN, and all supporting

documents, it was established that the Appellant Firm failed to discharge its

statutory responsibilities. The Firm, being primarily responsible for establishing

and maintaining a robust system of quality control, failed to ensure that the firm

and its personnel complied with professional standards, regulatory and legal

requirements, and that the audit reports issued were not appropriate in the

circumstances. This failure constitutes professional misconduct on the part of the

Firm.

Page 32 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

69. The Respondent submitted that the scheme of the Companies Act, 2013,

the Standards on Auditing (SAs), and the NFRA Rules, 2018 explicitly impose

independent obligations upon the audit firm itself, apart from the individual

auditor/Engagement Partner. The Act also provides for specific penalties upon

the firm in cases of non-compliance or professional misconduct. The Respondent

contended that under Section 139 of the Companies Act, 2013, a firm can be

appointed as statutory auditor. Once appointed, the firm is accountable for the

duties and responsibilities under Section 143, including mandatory compliance

with auditing standards as per Section 143(9) and 143(10) of Companies Act,

2013.

70. The Respondent stated that SA 220 - "Quality Control for an Audit of

Financial Statements" categorically provides that quality control systems,

policies, and procedures are the responsibility of the audit firm. Para 2 of SA 220,

read with SQC 1, obligates the firm to establish and maintain a system of quality

control to provide reasonable assurance that the firm and its personnel comply

with professional standards, regulatory and legal requirements, & the reports

issued by the firm or engagement partners are appropriate in the circumstances.

71. The Respondent further elaborated that Para 3 of SQC-1 mandates the

firm to establish such a system designed to provide reasonable assurance

regarding compliance and quality of reports. This responsibility is not limited

to merely formulating policies but extends to ensuring their effective

implementation and monitoring.

Page 33 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

72. The Respondent submitted that while the EP is responsible for the conduct

and performance of a specific audit engagement (as per SA 220), the Firm retains

overarching responsibility for the quality control framework. The Firm cannot

shift or abdicate its liability by merely pointing towards the EP. Both the Firm

and the EP have distinct yet overlapping responsibilities, and both can be held

accountable.

73. The Respondent contended that Section 132(4)(c) of the Companies Act,

2013 expressly empowers NFRA to impose monetary penalties on firms (up to

ten times the fees received) and to debar them in cases of proven professional

misconduct. The Appellant Firm's plea of "double jeopardy" is entirely

misplaced and without any legal basis, as the proceedings against the EP and the

Firm are independent and arise from the Firm's separate statutory obligations.

74. The Respondent contended that the Appellant firm's interpretation of

SQC-1, various SAs, and Section 143(9) of the Companies Act denying any

responsibility on the firm is grossly erroneous and, if accepted, would severely

undermine the integrity of the auditing profession and financial reporting in the

country. The Respondent submitted that the Firm, having been appointed under

Section 139, is fully accountable for compliance with Section 143 of Companies

Act, 2013. The argument that the Firm's role is confined only to "establishing" a

system is misconceived. SA 220 read with SQC-1 requires the Firm to

"reasonably assure" compliance and quality of reports, which was not done in

this case.

Page 34 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

The Respondent stated that non-compliance with mandatory auditing

standards amounts to professional misconduct under the Chartered

Accountants Act, 1949, particularly Clauses 5, 7, and 9 of Part I of the

Second Schedule. The Firm, as the appointed auditor, remains vicariously and

directly responsible for misconduct committed by its partners/employees in

the course of the audit and cited judgement of Hon'ble Delhi High Court in case

of Deloitte Haskins & Sells LLP Versus Union of India and Another [2025 SCC

OnLine Del 641] establishing these principles.

75. The Respondent contended that the Firm, the EP and the EQCR are

jointly and severally liable. The Firm has a continuing duty to maintain and

enforce quality control systems. It cannot evade responsibility for deficiencies in

its quality control mechanisms or failure to ensure compliance with auditing

standards. The Respondent submitted that all charges levelled against the Firm

are fully sustainable. The reference to the PCAOB Order against

PricewaterhouseCoopers (PwC) was cited only to highlight that leading

international regulators also hold audit firms accountable for systemic failures in

quality control.

76. The Respondent stated that no substantial questions of law arise in this

appeal, as the Appellant has not challenged the constitutional validity of the

relevant statutory provisions. All grounds raised regarding double jeopardy,

applicability of clauses, and procedural fairness have been thoroughly addressed

in the impugned order. The Respondent further submitted that the procedure

Page 35 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

adopted by NFRA has been upheld by this Appellate Tribunal in Harish Kumar

T.K. vs. NFRA passed in Company Appeal (AT) No. 68 of 2023 and confirmed

by the Hon'ble Supreme Court in related appeals.

77. Concluding arguments, the Respondent prayed that the present appeal be

dismissed with exemplary costs, as it is an abuse of the process of law and an

attempt to evade statutory accountability.

Findings

78. Both these appeals arise from two orders passed by the NFRA under

Section 132(4)(c) of the Companies Act, 2013, both arising from the statutory

audit of VWL for the Financial Year 2019-20.

79. The first Impugned Order (Order No. NF-23/46/2021 dated 12.09.2022)

was passed against CA Som Prakash Aggarwal, who was the Engagement Partner

('EP') for the said statutory audit, imposing a monetary penalty of Rs. 3 Lakhs

and a debarment of three years from being appointed as auditor or internal auditor

of any company or body corporate. He was also directed to undergo training in

Standards on Auditing and Ind AS within 180 days.

Page 36 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

80. The second impugned order no. 177 of 2024 (order dated 23rd April 2024)

was passed against M/s S. Prakash Aggarwal & Co. ('the Firm'), imposing a

monetary penalty of Rs. 5 Lakhs.

81. Both appeals have been heard together since they arise from a common set

of facts and involve overlapping legal questions which related to VWL Financial

statement of 2019-20. We also consulted both parties, who also agreed for

common judgment on both appeals. After detailed consideration of the impugned

orders, the grounds of appeal, the pleadings and the written submissions filed by

the parties. We now proceed to pass this common judgment in following part.

Company Appeal (AT) No.200 of 2022

82. Looking to the background of the case, we are of the opinion that issues

are required to be framed the issues framed for determination focus on critical

accounting and auditing standards in case of CA Som Prakash in Company

Appeal (AT) No. 200 of 2022 are as under: -

Issue No. I: RBI IRACP Norms vs. Borrower's obligations: Whether RBI's

prudential norms (IRACP Norms) that stop banks from recognizing income on

NPA accounts also extinguish the borrower's legal obligation to recognize and

accrue interest expense in its own financial statements.

Page 37 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Issue No. II: Ind AS 109 & Interest recognition: Whether the Effective Interest

Rate (EIR) method under Ind AS 109 allows a borrower to substitute expected

One-Time Settlement (OTS) cash flows for contractual cash flows when

computing interest expense on NPA-classified borrowings.

Issue No. III: Violation of SAs, Companies Act, 2013 and Chartered Accountant

Act, 1949.

Issue No. IV : Modified V/s Unmodified Audit Report:-

(a): Whether an unaccepted and undocumented OTS proposal constitutes a

sufficient basis for an auditor to accept the non-recognition of a financial liability

and issue an unmodified audit report.

(b): Whether, and in what circumstances, an auditor of a PIE is required to issue

a modified opinion under SA 705 (Revised) -- specifically, whether the instant

facts required at minimum a Qualified Opinion or an Adverse Opinion?

Issue No. V: Appointment of EQCR; Whether appointing an Engagement

Quality Control Reviewer (EQCR) is mandatory for the audit of a listed entity

under SA 220.

Issue No. VI: Authority of Standards on Auditing (SAs)Whether SAs issued by

the ICAI are mandatory requirements binding on every statutory auditor or if they

are merely "guiding principles" allowing unlimited professional discretion.

Page 38 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Issue No. VII Proportionate of Penalty: Whether the sanctions imposed Rs.

3,00,000/- penalty and 3-year debarment are proportionate to the gravity of the

proved misconduct?

Background

83. To understand the factual matrix of the case, we note that VWL is a

company listed on both the BSE and the NSE. VWL is engaged in the

manufacture and export of guar gum powder and is headquartered at RIICO

Industrial Area, Sri Ganganagar, Rajasthan. VWL had taken various credit

facilities from a consortium of three lenders: Punjab National Bank ('PNB') as

lead bank, Union Bank of India ('UBI'), and Bank of India ('BOI'), primarily

comprising export credit facilities including pre-shipment packing credit, Pre-

Shipment Credit in Foreign Currency ('PCFC'), Foreign Bills

Purchased/Collected ('FBP/FCBP'), and related working capital facilities.

84. Being a listed company, VWL is a Public Interest Entity ('PIE') and is

mandatorily required to comply with Indian Accounting Standards (Ind AS) as

per Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015. We

may state that PIE refer to a category of high profile or high-risk business like

publicly traded companies, banks, insurance companies, since their financial

health directly impacts public at large and market stability. PIE, are subject to

Page 39 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

stricter independence regulations including accounting (Ind AS) and Auditing

Standard (SAs).

85. It is an admitted and established fact that as at the balance sheet date of 31

March 2020, all three consortium lenders had already classified the Company's

accounts as Non- Performing Assets (NPA). The Company continued to hold

total borrowings of approximately Rs. 135.65 crores as on 31.03.2020.

86. We further note that on 25.08.2021, the Respondent NFRA received

information from the SEBI in the case of VWL, alleging that the Company had

not recognised interest expense on its borrowings from banks in its Statement of

Profit and Loss for FY 2019-20, resulting in overstatement of profits. This

information set off the chain of disciplinary proceedings that culminated in the

impugned orders against EP & the Firm in Company Appeal (AT) No. 200 of

2022 & Company Appeal (AT) No. 177 of 2024 respectively.

87. We have already noticed that the firm i.e., M/s S. Prakash Aggarwal & Co.

was the statutory auditor of VWL for FY 2019-20. CA Som Prakash Aggarwal

was the sole proprietor of M/s S. Prakash Aggarwal & Co. and was the

Engagement Partner for this audit of VWL.

Issue Wise Discussion

88. Now, we will discuss various issues framed by us in para 82

Page 40 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

89. Issue No. I: RBI IRACP Norms vs. Borrower's obligations: Whether

RBI's prudential norms (IRACP Norms) that stop banks from recognizing

income on NPA accounts also extinguish the borrower's legal obligation to

recognize and accrue interest expense in its own financial statements.

Issue No. II: Ind AS 109 & Interest recognition: Whether the Effective

Interest Rate (EIR) method under Ind AS 109 allows a borrower to

substitute expected One-Time Settlement (OTS) cash flows for contractual

cash flows when computing interest expense on NPA-classified borrowings.

90. Since both these issues are inter-connected and inter-dependent in the

present appeal, we should deal both these issues together.

91. A comparison of the published financial data of VWL for FY 2019-20 vis-

a-vis the previous year reveals the reduction in Finance Cost from Rs. 21.08

Crores in FY 2018-19 to only Rs. 4.16 Crores in FY 2019-20 i.e. a collapse of

80.25% which is the single most significant indicator in this case. It is worth

noting that this occurred despite total borrowings remaining substantial at Rs.

135.65 crores and all three consortium banks having classified the account of

VWL as NPA and no formal debt waiver having been executed by Banks. In this

background, the Respondent/ NFRA treated this is interest suppression, which

compromised Audit Report.

92. For our initial understanding, doing back of envelope calculation, indicates

prima facie, even using the FY 2018-19 finance cost figure as a baseline, the

Page 41 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

understatement of interest expense in FY 2019-20 of at least Rs. 16.91 crores.

Against a reported PBT of Rs. 19.20 crores, this understatement represents 88%

of the reported PBT. Thus, we find that had interest been properly accounted for,

VWL would have reported a net loss, not a profit. It seems to have become

foundational distortion of the financial statements that goes to the very core of

the Company's reported performance i.e. converting what would have been a loss-

making year into an apparently profitable one. One may assume and also legally

argue that the investing public, banks, creditors, and regulators might have been

allegedly misled. This aspect of alleged suppression of interest liability can also

be view from another perspective. The ultimate confirmation of the alleged

suppressed interest liability came when the Corporate Insolvency Resolution

Process ('CIRP') commenced against VWL on 02.02.2022, and the Resolution

Professional admitted total interest claims of Rs. 124.28 Crores including prior

period interest of Rs. 87.07 Crores from the consortium banks. Prima facie it

indicates that the obligation on part of VWL was never waived by Bank and

always existed for VWL.

93. We would now examine this aspect from Appellant's view point who

pointed out that the Company's accounting treatment rested on few assumptions.

Assumption I - Since RBI's prudential norms (IRACP Norms) required the banks

to stop recognising interest as income in their books once the account was

classified as NPA, the Company was similarly not required to recognise or

provide for interest in its books.

Page 42 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

94. At the outset, we will put to test validity of the arguments of the Appellant

vis-à-vis finding of the NFRA in order to determine Issue No. I. The Assumption

I by the Appellant (as stated above) is built on a fundamental confusion between

lender- side income recognition rules and borrower-side liability recognition

obligations. It is the case of Appellant that both operate in conjoint manner and

in fact are two sides of the same coin. However, we observe that the two operate

under entirely different legal and regulatory frameworks and serve entirely

different purposes.

95. We take into consideration that the applicable RBI framework is the Master

Circular on Prudential Norms on Income Recognition, Asset Classification and

Provisioning Pertaining to Advances (IRACP Norms), consolidated as RBI/2015-

16/101 (DBR.No.BP.BC.2/21.04.048/2015-16) dated 1st July 2015 ('RBI Master

Circular') (as applicable in the case of VWL at relevant time).

"Paragraph 4.2.1 of the RBI Master Circular provides:

Banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also.

The RBI Master Circular, at Paragraph 4.2.3, goes further and explicitly provides:

In case of NPAs, as a prudential norm, there is no use in debiting the said account by interest accrued in subsequent months and taking this accrued interest amount as income of

Page 43 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

the bank as the said interest is not being received. It is simultaneously desirable to show such accrued interest separately or park in a separate account so that interest receivable on such NPA account is computed and shown as such, though not accounted as income of the bank."

(Emphasis Supplied)

96. We find this provision is of cardinal importance. The RBI not only permits

but directs banks to maintain a memorandum record of accrued interest on NPA

accounts precisely because the RBI itself recognises that the borrower's

contractual obligation subsists. The memorandum record is the bank's internal

evidence of what the borrower owes. If the RBI considered the interest to be

non-existent upon NPA classification, there would be no need to track it at all.

The direction to track it is the RBI's own affirmation that the liability continues.

97. It is very significant for us to take into consideration that the RBI Master

Circular is a regulation under the Banking Regulation Act, 1949. It operates

exclusively within the domain of banking regulation. It creates rights and

obligations only between the bank (as a regulated entity) and the Reserve Bank

of India (as its regulator). It creates no rights, obligations, or exemptions for the

bank's borrowers. A borrower is not a regulated entity under the Banking

Regulation Act, 1949, in respect of these norms.

98. The borrower's obligations are governed by the loan/facility agreement

executed between the parties, the applicable Accounting Standards and the

Page 44 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Companies Act, 2013. We hold that none of these are affected by the RBI's

IRACP norms.

99. During pleading, it was brought to our notice that the Respondent NFRA

issued Circular dated 20.10.2022, in the wake of this very case, for bringing

clarity to others. This reads as under :-

"It has come to the attention of the NFRA during a disciplinary action under Section 132(4) of the Act for professional misconduct of the statutory auditor of a listed company (Vikas WSP Limited), that the company in the Financial Statements of 2019-20, had discontinued accrual/recognition of interest expense on its bank borrowings, which had been reportedly classified as Non- Performing Asset (NPA) by the lender banks and for which the company was negotiating One Time Settlement with the banks. This accounting treatment was in contravention of the provisions of applicable accounting standard, as these borrowings as well the interest payable thereon continued to be the financial liabilities of the company and were required to be accounted for as amortised cost in accordance with the requirements of Indian Accounting Standard (Ind AS) 109, Financial Instruments.

100. On this issue, it is the case of the Appellants that since this was not

existing earlier, their audit was in order and Impugned Orders are perverse.

On the other hand, the Respondent NFRA Argued that it was only way of

clarification as these principles always existed. We also find that NFRA had

Page 45 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

not stipulated any new requirement and only reiterated the then existing

correct interpretation.

101. In view of above, we do not agree with first assumption of the

Appellant. We hold that the RBI Prudential Norms argument of the Appellant

is legally untenable, factually misconceived, and is rejected in its entirety.

102. Assumption II - Since the Company was negotiating One Time

Settlement ('OTS') with the banks and expected that interest would be waived,

there was no obligation to provide for same.

103. The assumption of the Appellant on the issue of non-disclosure of

interest is that since the Company was negotiating OTS and anticipated that

the banks would waive the interest, there was no need to provide for it. We

find that this argument and assumption fail on multiple grounds, which we

are elaborating now, as detailed under:-

(i) A proposal is not a contract. An OTS negotiation is an opening of

discussions, not a concluded agreement. As at 26.06.2020 i.e. the date the

audit report was signed no legally binding OTS had been concluded. None of

the three banks had issued any formal sanction letter, waiver deed, or legally

enforceable commitment to waive interest. The same fact was confirmed by

the Appellant also during the pleadings before us.

(ii) Under Section 37 and 62 of the Indian Contract Act, 1872, a contractual

obligation subsists until it is performed or it is specifically waived in writing

by the obligee; or the contract is novated or rescinded by mutual agreement.

Page 46 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

A unilateral expectation of waiver by the obligor does not constitute

extinguishment of the obligation.

(iii) Under Ind AS 109, Paragraph 3.3.1, a financial liability is derecognised

when, and only when, 'it is extinguished i.e., when the obligation specified in

the contract is discharged or cancelled or expires.' A proposal or expectation

of OTS is none of these.

(iv) Under Ind AS 8 (Accounting Policies, Changes in Accounting Estimates

and Errors) and Ind AS 10 (Events after the Reporting Period), only events

occurring after the balance sheet date that provide evidence of conditions

existing at the balance sheet date may be reflected in the financial statements.

An alleged OTS concluded after 31.03.2020 cannot be used to extinguish a

liability that undeniably existed on 31.03.2020.

(v) The Respondent NFRA found, and we also noticed that the EP himself

admitted during the personal hearing that while he had seen the OTS

proposal, he had never documented it. We are of the firm view that OTS

proposal that was never documented, never sanctioned by the bank's and

never legally executed cannot serve as the basis for de-recognising a financial

liability of interest.

(vi) The CIRP proceedings proved this argument wrong in the most

conclusive manner possible. The banks filed claims for the interest in CIRP

before the IRP. If the interest had been waived even indirectly, the banks

would not have filed claims. The admission of claims of Rs. 124.28 Crores

Page 47 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

by the Resolution Professional is the final and definitive rebuttal of the OTS

expectation argument.

Thus, assumption of the Appellant's also stands rejected by us in view

of above detailed reasoning.

104. We note that the Indian Accounting Standard 109 -- Financial Instruments

('Ind AS 109') corresponds to International Financial Reporting Standard 9 ('IFRS

9'). It is the comprehensive standard governing the recognition, classification,

measurement, impairment, and derecognition of financial instruments. It became

mandatorily applicable to listed companies from FY 2016- 17 onwards.

105. In this background, it is reiterated that the borrowings of VWL from its

consortium banks are 'financial liabilities' within the meaning of Ind AS 32

(Financial Instruments: Presentation) -- specifically, they are contractual

obligations to deliver cash (repayment of principal and interest) to the lending

banks. There is no dispute on this classification. Under Ind AS 109, Paragraph

4.2.1, the default and mandatory classification for financial liabilities

measurement at amortised cost using the Effective Interest Method ('EIM') has

been stipulated. We find that this is not optional as it applies to all unless the

liability falls within specific exempted categories Fair Value through Profit or

Loss (FVTPL) designation, derivatives, financial guarantees, contracts etc. (in all

five clauses 4.2.1 (a) to (e) in Ind AS 109), none of which apply to VWL's term

borrowings and working capital facilities as reflected in Auditing Financial

Page 48 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Statement for FY 2019-20 of VWL. Accordingly, measurement at amortised cost

using EIM was not discretionary rather it was the only permissible accounting

treatment.

106. At this stage, we will also look into the concept of 'Amortised cost', which

is defined in Appendix A of Ind AS 109 as:

"The amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance."

(Emphasis Supplied)

In other words, we can say that the amortised cost of a borrowing at

any point in time equals: the initial loan amount, minus repayments made,

plus accrued interest calculated at the EIR that has not yet been paid. Thus,

we find that in present case the accrued interest component is precisely what

VWL failed to recognise in FY 2019-20 and was overlooked or ignored by

the Appellants during audit.

107. Similarly, the Effective Interest Rate ('EIR') is defined in Appendix

A of Ind AS 109 as:

"The rate that exactly discounts estimated future cash

Page 49 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability. When calculating the effective interest rate, an entity shall estimate the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) but shall not consider the expected credit losses...."

(Emphasis Supplied)

108. The above definition r/w other points of Ind AS 109 clarify that the EIR is

calculated considering the contractual terms of the financial instrument and not

the expectations of the borrower about future settlements. The definition

explicitly states that 'expected credit losses' shall NOT be considered when

calculating the EIR. This is critical as the risk that a borrower may not repay is

irrelevant to the EIR calculation. The EIR is determined by contract, not by credit

risk especially expected credit losses. We also need to appreciate that the EIR is

fixed at the time of initial recognition. It does not change because the borrower's

financial condition deteriorates or because the bank classifies the loan as NPA.

109. Thus, we hold that the arguments of the Appellant for non-reporting of

interest liability, on the basis of expected credit losses is not sustainable and

therefore, we are not in a position to support the Appellant on this issue.

110. We will also take efforts to understand and elaborate the Effective Interest

Page 50 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Method and try to see how it works and what impact it, would have made in

present appeals before us. The Effective Interest Method ('EIM') has been

discussed in Ind AS 109, Paragraph B5.4.1. The effective interest method is a

method of calculating the amortised cost of a financial asset or a financial liability

and of allocating the interest income or interest expense over the relevant period.

Under EIM, interest expense is recognised period by period by applying the EIR

to the carrying amount (amortised cost) of the liability at the beginning of each

period. This interest expense accrues by operation of the mathematical formula it

does not require any action by the lender. We may also try to understand by

simulating, in present case by way of simple illustration, that supposing, if VWL

has a borrowing of Rs. 100 crores at a contractual rate of 12% per annum, the EIR

would be approximately 12%. Each quarter, Rs. 3 crores of interest expense

accrue as a financial liability in VWL's books by operation of Ind AS 109

regardless of whether the bank has sent a statement, regardless of whether the

account is NPA, and regardless of whether VWL intends to pay it.

111. Thus, in accordance with Ind AS 109, the VWL was required to provide

for full accrued interest liability and was not given choice for non-providing

simply by providing Note No. 33(a)(i) in Audited Financial Statement for 2019-

20. At this stage, we take into account exact wording of Note No. 33(a)(i), which

reads as under:-

"The Company has been availing various export credit facilities amounting Rs.12,151.28 lacs (previous year

Page 51 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Rs.14128.18 lars) for Export from Punjab National Bank, Union Bank of India and Bank of India under consortium. The aforementioned credit facilities of the Company were classified as Non-Performing Assets (NPA) in June 2016. However, during the current year, The Company has repaid loan Rs. 19.76 lacs to Punjab National Bank.

In accordance with the prudential norms for banks by the Reserve Bank of India, the lender banks have not charged interest on aforementioned export credit facilities extended to the Company upon the classification of the export credit facilities of the Company as NPA. Accordingly, the Company is not making provision for interest on bank borrowings."

(Emphasis Supplied)

112. Based on our earlier discussion, we find above Note No. 33(a)(i) does not

allow the company to avoid reporting accrued interest. Similarly, the Appellants

were also required to emphasise same in Audit report rather than only depending

on Note No. 33(a)(i). Thus, we reject the arguments of the Appellant on these

aspects.

113. It has been case of the Appellant that when a borrower like VWL is

unlikely to settle his loan obligations at contractual terms, because of financial

problems, expected future cash flows associated with the loan will not be

according to contractual terms, but should be based on the amount at which it will

be settled. The Appellant also gave reference to alleged OTS proposal of VWL to

Banks. We are not inclined to accept these pleadings of the Appellant as it reveals

Page 52 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

a fundamental and disqualifying misreading of Ind AS 109 for reasons. The EP

conflates the EIR calculation methodology with the ECL (Expected Credit Loss)

impairment methodology. These are two entirely separate frameworks within Ind

AS 109. The EIR governs interest expense recognition. ECL governs impairment

of financial assets (in the lender's books) and it has no application whatsoever to

the borrower's recognition of interest expense. Further, Ind AS 109, Appendix A

explicitly states that when calculating EIR, an entity 'shall not consider the

expected credit losses.' The Appellant's argument that future expected settlement

amounts should be substituted for contractual cash flows in EIR calculation is

directly contradicted by the text of the standard. We also find that the Appellants

argue that since VWL was unlikely to settle at contractual terms, the EIR were

recalculated based on expected settlement amounts (OTS values). However, we

hold that this is not a principle recognised anywhere in Ind AS 109. The standard

provides for modification accounting only when a legal modification of the terms

of the liability has been agreed and not when a borrower unilaterally expects

modification or consensus by the bank.

114. We will capture relevant portion of Ind AS 109 for present issue. Under Ind

AS 109, Paragraph 3.3.2, a substantial modification of an existing liability is

treated as extinguishment of the old liability and recognition of a new one. For

this to apply, there must be: (a) a legally concluded agreement; (b) between the

debtor and creditor; (c) substantially modifying the terms. A unilateral OTS

Page 53 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

proposal meets none of these criteria.

The exact wording of Para "3.3, 3.3.1 and 3.3.2 of Ind AS 109 reads as

under :-

"3.3. Derecognition of financial liabilities

3.3.1 An entity shall remove a financial liability (or a part of a financial liability) from its balance sheet when, and only when, it is extinguished--i.e. when the obligation specified in the contract is discharged or cancelled or expires.

3.3.2 An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability."

(Emphasis Supplied)

115. We will also refer to Appendix B, Para 3.3.1of Ind AS 109 which further

clarifies that a financial liability is extinguished when the debtor either discharges

the liability by paying the creditor, normally with cash, other financial assets,

goods or services; or is legally released from primary responsibility for the

liability either by process of law or by the creditor.

Page 54 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

116. Thus, it is crystal clear that only when legal liability of company is

extinguished then only financial liability can be decognised, which is not the case.

hence, we do not accept the logic of the Appellant on this issue also.

117. The Respondent's response to the argument was unequivocal and correct,

and the NFRA correctly held that the Assumption of no future cash outflow on

account of interest costs on the Borrowings classified as NPAs merely on the basis

of a proposal for One Time Settlement is a flawed assumption. If such a rationale

is accepted, then by analogy, the companies will resort to de-recognizing

liabilities at will, which would lead to a systemic failure of accrual-based

accounting.

This Appellate Tribunal endorses the views of the Respondent NFRA. To

accept the Appellants interpretation would be to introduce a back door through

which any financially distressed company could eliminate its liabilities from its

balance sheet simply by proposing OTS negotiations -- without ever concluding

them. This would render the entire framework of financial reporting meaningless.

118. We must understand categorically that "legally released" requires an actual

legal release i.e., a formally executed agreement, court order, or statutory

operation. An ongoing OTS negotiation is none of these. The Appellants

arguments that anticipated future OTS justifies non-recognition of current interest

is, therefore, not only factually unsupported but legally impermissible under the

standards of auditing.

Conclusion on Issue No. I Page 55 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

119. RBI's prudential norms (IRACP Norms) that stop banks from recognizing

income on NPA accounts does not extinguish the borrower's legal obligation to

recognize and accrue interest expense in its own financial statements.

Conclusion on Issue No. II

120. The Effective Interest Rate (EIR) method under Ind AS 109 does not allow

a borrower to substitute expected One-Time Settlement (OTS) cash flows for

contractual cash flows when computing interest expense on NPA-classified

borrowings.

121. Issue No. III : Violation of SAs, Companies Act,2013 and Chartered

Accountant Act,1949

122. At the outset, it is noted that SA 200 (Overall Objectives of the Independent

Auditor and the Conduct of an Audit in Accordance with Standards on Auditing)

establishes the foundational framework of every audit. Paragraph 15 of SA 200

requires the auditor to adopt a fundamental principle called "Professional

Scepticism" which reads as under :-

"The auditor shall plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated."

(Emphasis Supplied)

123. The 80.25% collapse in Finance Cost year on year was precisely the kind Page 56 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

of anomaly that should have triggered the highest level of professional

scepticism on the part of the Appellant's. Any auditor using basic scepticism in

financial analysis during audit would have identified this variance as a major red

flag and demanded satisfactory explanation supported by documentation. The

EP CA Som Prakash did not do so in case of audit of VWL.

124. Another bone of contentions between parties is regarding Audit

Documentations. We observe that SA 230 (Audit Documentation) governs the

auditor's responsibility to prepare audit documentation that provides a sufficient

and appropriate record of the basis for the auditor's report. Paragraph 8 of SA

230 requires the auditor to prepare documentation that enables 'an experienced

auditor, having no previous connection with the audit, to understand: (a) The

nature, timing, and extent of the audit procedures performed; (b) The results of

the audit procedures performed, and the audit evidence obtained; (c) Significant

matters arising during the audit, the conclusions reached thereon, and significant

professional judgments made in reaching those conclusions.' Similarly,

Paragraph 10 of SA 230 requires the auditor to 'document discussions of

significant matters with management, those charged with governance, and

others, including the nature of the significant matters discussed and when and

with whom the discussions took place.'

125. The audit file submitted by the EP CA Som Prakash was found to be

devoid of: (a) any documentation of the NPA interest issue; (b) any challenge to

Page 57 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

management's accounting treatment; (c) any record of discussions with

management about the OTS; (d) any revised loan agreements; (e) any bank

confirmation letters; for reducing and waiving interest liability and (f) any

minutes of meetings of OTS discussion.

126. In this background of the case, we find that the EP's defence that 'audit

documentation is one of the means to the process of audit' and that the 'job of an

auditor must be judged on the basis of outputs, not on the basis of quality of his

noting' is a complete inversion of the purpose of audit documentation. Audit

documentation is not a mere formality but it is the foundation of accountability,

reviewability, and reproducibility of audit conclusions. Without documentation,

there is no audit and at best there is only assertion.

127. The EP also argued that his analogy between an auditor and a civil servant

or judge entitled to immunity. At the outset, it is wrong to assume by the

Appellant that civil servants having complete immunity. In fact civil servants are

always governed by large set of rules and subject to disciplinary action and

vigilance scrutiny, in any case of violations. We find the logic of the Appellant

for immunity to be completely flawed and misplaced. Auditors of PIEs (already

discussed earlier) owe a duty of the highest order of the investing public.

Auditors are professional service providers who have accepted a responsibility

to verify and certify financial information for public reliance.

128. Now, we will also issue of risk of material Misstatement as stipulate in

SA 315 (Identifying and Assessing the Risks of Material Misstatement through

Page 58 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Understanding the Entity and Its Environment) which requires the auditor to

identify and assess the risks of material misstatement at the financial statement

level and the assertion level The key assertions relevant to Finance Cost in

VWL's financial statements are: Completeness i.e., all finance costs that should

have been recognised have been recognised; and Accuracy i.e., finance costs

have been correctly calculated and further that Occurrence recording finance

costs actually occurred. The 80% year-on-year collapse in Finance Cost directly

implicated all three assertions. An auditor having Scepticism (discussed earlier

while discussing SA 200) while assessing risks under SA 315 would have

identified Finance Cost as a 'significant risk' defined in SA 315, as a risk of

material misstatement that, in the auditor's judgment, requires special audit

consideration. The EP CA Som Prakash either, did not assess this risk at all, or

assessed it and then failed to respond to it. We find both of which constitute

professional misconduct.

129. We also examine SA 500 (Audit Evidence) which requires the auditor to

design and perform audit procedures to obtain sufficient appropriate audit

evidence on which to base the auditor's opinion. 'Sufficiency' is the measure of

the quantity of audit evidence. 'Appropriateness' is the measure of quality. For

the specific assertion of completeness of finance costs in a situation where the

auditor knows the borrower has outstanding NPA classified loans, the minimum

audit procedures would include inter-alia, bank confirmation letters from all

three consortium banks confirming outstanding principal, accrued interest, and

Page 59 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

interest charged; along with review of loan agreements specifying interest rates.

Further, independent calculation of interest using the contractual rate/EIR

(discussed earlier), with review of bank statements and review of NPA

communication letters from banks would have expected from the Auditors. None

of these basic procedures were documented in the audit file. The only 'evidence'

the EP relied upon was an alleged Management Representation Letter

24.06.2020 from the very management who had a direct financial interest in

suppressing the interest expense to show a profit.

130. It is the case of the Appellant that the EIR calculation is an accounting

estimate. The decision about whether and how much interest to accrue is an

accounting estimate. The assessment of whether the OTS expectation justifies

non-recognition is a critical area of management judgment and the Appellant has

given due respect while auditor of VWL. However, we find that the EP did not

document any of these procedures. The unilateral change from recognising Rs.

21.08 crores in interest (FY 2018-19) to recognising only Rs. 4.16 crores (FY

2019-20) should have triggered an intensive SA 540 review, none was

performed.

131. We have examined other SAs as discussed by the Appellant and the

Respondent before us and find that these are also proved sufficiently.

132. Thus, we find that the Appellant to have violated various SAs as discussed

above in addition to going through pleadings of both the Appellant and the

Respondent earlier.

Page 60 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Companies Act, 2013

133. We will also devote some time to provisions of the Companies Act. Section

129(1) provides that Financial statements shall give a true and fair view of the

state of affairs of the company, comply with accounting standards notified under

section 133, and shall be in the form(s) provided in Schedule III. VWL's FY 2019-

20 financial statements violated this provision by failing to present a true and fair

view due to the suppression of interest liability. Section 133 stipulates that the

Central Government shall prescribe the accounting standards or any addendum

thereto as recommended by the ICAI in consultation with NFRA. The Indian

Accounting Standards (Ind AS) are prescribed under this section via the

Companies (Indian Accounting Standards) Rules, 2015. Compliance with Ind AS

is accordingly statutory compliance not mere professional best practice. Similarly,

Section 143(3)(e) stipulate that the auditor's report shall state whether the financial

statements comply with accounting standards under Section 133. The EP's report

stated compliance when there was none. Section 143(9) stipulated that every

auditor shall comply with the auditing standards. This statutory obligation was

violated across multiple standards as detailed above. Section 132(4)(c) mention

that where professional or other misconduct is proved, NFRA shall have the

power to make an order imposing monetary penalty and/or debarring the member

from being appointed as an auditor or internal auditor. This is the provision under

which both impugned orders were passed.

Page 61 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Chartered Accountant Act,1949

134. We will take into consideration the Schedule II of Chartered Accountants

Act, 1949 which describe Professional Misconduct of the Chartered Accountant

with respect to present appeal. The relevant clause reads as under: -

135. Clause (5) fails to disclose a material fact: A Chartered Accountant in

practice shall be deemed to be guilty of professional misconduct if he fails to

disclose a material fact known to him which is not disclosed in a financial

statement, but disclosure of which is necessary to make the financial statement

not misleading. The non-disclosure of the NPA interest liability was precisely

such a material fact.

Clause (6) fails to report a material misstatement: A Chartered Accountant in

practice shall be deemed to be guilty of professional misconduct if he fails to

report a material misstatement known to him to appear in a financial statement

with which he is concerned in a professional capacity. The EP knew of the interest

non-provision and knew it was a material misstatement.

Clause (7) does not exercise due diligence, or is grossly negligent in the conduct

of his professional duties; A Chartered Accountant shall be guilty of misconduct

if he fails to exercise due diligence, and is grossly negligent in the conduct of

professional duties. The comprehensive failure across SA 200, SA 220, SA 230,

SA 315, SA 500, SA 540, SA 570, SA 580, SA 700, SA 701, and SA 705

constitutes gross negligence in the most fundamental sense. Page 62 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Clause (8) fails to obtain sufficient information which is necessary for expression

of an opinion or its exceptions are sufficiently material to negate the expression

of an opinion;

Clause (9) fails to invite attention to any material departure from the generally

accepted procedure of audit applicable to the circumstances;

Both above clauses 8 and 9 also stand proved in view of our detailed discussion

on non provision of interest by failing to take sufficient information and not

bringing out this material departure.

Conclusion on Issue No. III

136. Based on preceding discussion, we concur with NFRA that the Appellant

have violated SAs falling under ambit of Professional Misconduct as per

Schedule II of Chartered Accounts Act, 1949 as well as provision of the

Companies Act, 2013.

137. Issue No. IV : Modified V/s Unmodified Audit Report :-

(a): Whether an unaccepted and undocumented OTS proposal constitutes a

sufficient basis for an auditor to accept the non-recognition of a financial

liability and issue an unmodified audit report.

(b): Whether, and in what circumstances, an auditor of a PIE is required to

issue a modified opinion under SA 705 (Revised) -- specifically, whether the

Page 63 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

instant facts required at minimum a Qualified Opinion or an Adverse

Opinion?

138. As per SAs, Audit Report can be issued by Auditors in various

classification.

TYPE 1-UNQUALIFIED (CLEAN) OPINION

SA 700 (Revised) (Forming an Opinion and Reporting on Financial Statements)

requires the auditor to form an opinion on whether the financial statements are

prepared, in all material respects, in accordance with the applicable financial

reporting framework, and to express an unmodified opinion only when so

satisfied.

It means the auditor found the financial statements to be true and fair in all

material respects, with no significant issues, are financial statement clean with

no concerns. Everything is properly stated.

TYPE 2-QUALIFIED OPINION

As per para 7(a) of SA 705 (Revised), the auditor shall express a qualified

opinion when: (a) the auditor, having obtained sufficient appropriate audit

evidence, concludes that misstatements, individually or in the aggregate, are

material, but not pervasive, to the financial statements; or (b) the auditor is

unable to obtain sufficient appropriate audit evidence on which to base the

opinion, but the auditor concludes that the possible effects on the financial

Page 64 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

statements of undetected misstatements, if any, could be material but not

pervasive. In other words, the accounts are broadly fine, but there are specific

areas where there are problems. That problems are significant but limited in

scope and assent report to be read with that caveat mind.

TYPE 3- ADVERSE OPINION

As per SA 705 (Revised), Paragraph 8, the auditor shall express an adverse

opinion when the auditor, having obtained sufficient appropriate audit evidence,

concludes that misstatements, individually or in the aggregate, are both material

and pervasive to the financial statements. 'Pervasive' effects are effects that, in

the auditor's judgment are not confined to specific elements, accounts, or items

of the financial statements; and if so confined, represent or could represent a

substantial proportion of the financial statements; or in relation to disclosures,

are fundamental to users' understanding of the financial statements.

An adverse opinion is an opinion by the auditor that the financial reports contain

gross misstatements and these can have material impact on the financials of the

company. This indicates that these accounts do not show a true and fair picture

and the problems are so widespread and fundamental that the auditor cannot

simply flag one area as the entire set of financial statements is unreliable.

TYPE 4- DISCLAIMER OF OPINION

In terms of Para 9 of SA 705 (Revised), the auditor shall disclaim an opinion

when the possible effect of inability to obtain sufficient appropriate audit Page 65 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

evidence is so material and pervasive that the auditor is unable to obtain

sufficient appropriate audit evidence and accordingly is unable to express an

opinion on the financial statements. A disclaimer of opinion should be expressed

when the possible effect of a limitation on scope is so material and pervasive that

the auditor is unable to obtain sufficient appropriate audit evidence and is hence

unable to express an opinion on the financial statements. It indicates that the

Auditor cannot form any opinion at all. The management has not given adequate

information, or the situation is so uncertain, that the Auditor unable to say

anything useful about the financial statements.

TYPE 5- EMPHASIS OF MATTER PARAGRAPH (EOM)

The SA 706 (Revised) gives flexibility to the auditor to add supplementary

paragraphs within an otherwise unmodified (clean) report, used to draw the

reader's attention to something already disclosed in the financial statements that

fundamental to understanding them. The inclusion of an Emphasis of Matter

paragraph in the auditor's report does not affect the auditor's opinion. An

Emphasis of Matter paragraph is not a substitute for: (a) a modified opinion in

accordance with SA 705 (Revised) when required by the circumstances; (b)

disclosures in the financial statements that the applicable financial reporting

framework requires management to make; or (c) reporting in accordance with

SA 570 (Revised) when a material uncertainty exists relating to events or

Page 66 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

conditions that may cast significant doubt on an entity's ability to continue as a

going concern.

139. It is the case of the NFRA that EP should have given modified opinion.

We have noted the Appellant's reliance on Management Representation Letter

dated 24.06.2020. We note that SA 580 (Written Representations) requires

written representations from management as part of the audit evidence.

Paragraph 6 requires such representations to be in the form of a representation

letter addressed to the auditor. We find the Management Representation Letter

('MRL') dated 24.06.2020 relied upon by the EP was found to be fatally

defective: (a) it was not on the letterhead of VWL; (b) the name and designation

of the signing authority were not mentioned; (c) it contained a provision referring

to inventory records as on 30.09.2020 -- three months after the date of the MRL.

This chronological impossibility means the MRL was either back-dated after

30.09.2020 or was prepared in haste and contained errors. Either way, it is

unreliable. The EP's complete silence on the MRL anomaly in his reply to the

SCN was treated by NFRA correctly.

Looking from other perspective, it can be said that a defective, unreliable,

and chronologically impossible MRL is worse than no MRL at all -- it actively

misleads the auditor into a false sense of security. An auditor who relies on such

an MRL as the primary basis for not qualifying a material misstatement has

fundamentally failed in his professional duty.

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Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

140. It is noted that the EP formed and expressed an unmodified opinion in the

following terms in the Audit Financial Statement of VWL for FY 2019-20:-

"In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements give the information required by the Companies Act, 2013 ('the Act') in the manner so required and give a true and fair view in conformity with the Indian Accounting Standards prescribed under section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015, as amended, ('Ind AS') and other accounting principles generally accepted in India, of the state of affairs of the Company as at March 31, 2020, and its profit, total comprehensive income, its cash flows and the changes in equity for the year ended on that date."

(Emphasis Supplied)

141. In the present case, the auditor certified that the financial statements gave

a 'true and fair view.' In this regard, it is reiterated that Financial statements that

overstate PBT by 88% through omission of a contractually accruing financial

liability cannot give a 'true and fair' certificate by any stretch of any professional

standard and potential hidden misstatement could be both material and

pervasive.

142. We have already examined and noted earlier that the NPA interest

misstatement affected: (a) Finance Costs in the P&L -- understated by at least

Rs. 16.91 crores; (b) Current Liabilities in the Balance Sheet -- understated by Page 68 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

the same amount; (c) Profit Before Tax -- overstated by 88%; (d) Profit After

Tax -- correspondingly overstated; (e) Retained Earnings -- overstated; (f) Net

Worth -- overstated. The misstatement was not confined to a single line item. It

permeated the profit and loss account, the balance sheet, and the statement of

changes in equity simultaneously.

Conclusion on Issue No. IV

143. Thus, in given circumstances, the EP could have considered modified

opinion like an Adverse Opinion or a Qualified Opinion but the EP issued neither

and rather issued unmodified opinion which was not correct on the part of the

Appellant.

144. Issue No. V: Appointment of EQCR; Whether appointing an

Engagement Quality Control Reviewer (EQCR) is mandatory for the audit

of a listed entity under SA 220.

145. Now we will review aspect of EQCR as Mandatory for listed entities.

146. We note that the Appellant has submitted that EP's failure to appoint an

EQCR, though noncompliance of Para 19 of SA 220, did not constitute

professional misconduct, because it was not a "material departure from generally

accepted audit procedures", as no case of serious omissions or quality issue on

the true and fair view of the financial statements was brought up.

147. On the other hand, NFRA submitted that as per the standards on auditing,

which are statutory in nature, the firm and the engagement partner were makers

Page 69 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

of the audit report and the EQCR was the reviewer. Both the maker and the

reviewer would have to be in tandem for the audit report to be finalized. NFRA

further stated that the Standard on Auditing (SA) 220 paras 19 to 21 requires the

EQCR to evaluate the significant judgments made by the engagement team and

conduct review of the financial statements and the proposed auditor's report, thus

the EQCR is involved in the audit process and without a review and green signal

by the EQCR, the audit cannot be concluded/completed.

148. We note that SA 220 (Quality Control for an Audit of Financial

Statements) addresses the specific responsibilities of auditors in relation to

quality control procedures for audits of financial statements. Paragraph 19(a) of

SA 220 clearly stipulated that for audits of financial statements of listed entities,

and those other audit engagements, if any, for which the firm has determined

that an engagement quality control review is required, the engagement partner

shall not sign the audit report until the engagement quality control reviewer has

completed the review. This provision is unambiguous. For a listed entity which

VWL undeniably is an Engagement Quality Control Review ('EQCR') is

mandatory before the audit report could have been signed by the EP CA Som

Prakash. There is no exception, no carve-out, and no discretion.

149. We are of the view that the purpose of EQCR is precisely to prevent the

kind of failure by way of a second qualified professional reviewing the key

judgments of the engagement partner before the report is signed. In present

Page 70 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

case we observe that if EQCR would have been there, perhaps he would likely

have identified the material issue continued of NPA, interest non-recognition

and required it to be addressed. The absence of EQCR removed this vital

safeguard.

Conclusion on Issue No. V

150. The Appellant was required to have appointed EQCR, which is mandatory

requirement for listed companies like VWL in terms of SA 220.

151. Issue No. VI: Authority of Standards on Auditing (SAs)Whether SAs

issued by the ICAI are mandatory requirements binding on every statutory

auditor or if they are merely "guiding principles" allowing unlimited

professional discretion.

152. It is the case of the Respondent/ NFRA that Ind AS & SAs are binding on

all companies and Auditor respectively and carry legal force in Companies Act,

2013. On the other hand, the Appellant's fairly conceded that, Ind AS & SAs are

mandatory but submitted that these Ind AS & SAs also provide reasonable

flexibilities for companies and Auditors to exercise their discretion in accordance

with Ind AS and SA. The Appellant particularly argued that as Auditor, they have

been given choice of adopt particular line in given circumstances.

153. The Appellants contend that Standards on Auditing represent a set of

principles affording discretion to auditors, and that an auditor cannot be faulted

for adopting alternative approaches consistent with the underlying principles.

Page 71 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

This seems to be non-convincing as Section 143(9) of the Companies Act, 2013

provides in unambiguous terms that 'Every auditor shall comply with the

auditing standards.' The word 'shall' is a term of mandate, not permission. It has

been brought out during pleadings by NFRA that the present-day standard setting

has undergone a paradigm shift wherein sufficient application guidance and

other explanatory material is available in SAs and Ind AS apart from the

principles of the standards, which are required to be mandatorily followed.

154. We note that paragraph 18 of SA 200 provides: 'The auditor shall comply

with all SAs relevant to the audit.' The Appellants position that SAs are

'principles' and not 'thumb rules' was rejected by NFRA and is rejected by this

Appellate Tribunal also. Section 143(9) of the Companies Act, 2013 imposes a

statutory obligation in absolute terms: 'Every auditor shall comply with the

auditing standards.' The word 'shall' in legal drafting signifies a mandatory

requirement admitting no discretion. This was settled by us in case of Harish

Kumar TK (Supra) which has been upheld by the Hon'ble Supreme Court in

Appeal No. 2024 SCC OnLine SC 3687.

Conclusion on Issue No. VI

155. SAs are binding and mandatory and every auditor is required to follow the

same.

Page 72 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

156. Issue No. VII:-Proportionate of Penalty: Whether the sanctions

imposed -- Rs. 3,00,000/- penalty and 3-year debarment -- are

proportionate to the gravity of the proved misconduct?

157. On proportionality, we find that NFRA has the power under Section

132(4)(c) of the Companies Act, 2013 to impose penalties up to Rs. 10,00,000/-

on an individual auditor and to debar for up to 10 years. The penalties actually

imposed is Rs. 3,00,000/- and 3 years debarment for the individual and Rs.

5,00,000/- for the firm are at the lower end of the spectrum. They are

proportionate to the gravity of misconduct and the signalling value required to

deter similar conduct by other auditors of listed companies. We find the

penalties imposed are at the lower-to-middle range of what NFRA could have

imposed. NFRA explicitly applied the principles of deterrence, proportionality,

and signalling value. We find that the sanctions are proportionate to the gravity

of the misconduct i.e. issuing an unmodified opinion on statements that

overstated PBT by 88% and the public interest dimension as VWL is a listed

company whose investors relied on the audited financial statements. It is also a

fact that this the systemic impact which made the NFRA Circular in consequence

of this case has set a standard for all stakeholders and finally the need for

deterrence that the auditors of listed companies must need to be more careful

else professional misconduct may result in consequence of penalties. For all the

Page 73 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

foregoing reasons, this Appellate Tribunal finds no merit in either of the appeals

filed by the Appellants on the issue of quantum of penalty.

Conclusion on Issue No. VII

158. We find penalty imposed on the Appellant as reasonable and proportionate

to professional misconduct.

Company Appeal (AT) No. 177 of 2024

159. Now we will deal with the Firm's Obligations for which separate impugned

order was issued on 23.04.2024. We frame following issues for determination

focus on critical accounting and auditing standards in case of the firm in Company

Appeal (AT) No. 177 of 2024.

Issue No. I: Whether an audit firm is independently and primarily liable for

quality control failures under SQC 1, separate and distinct from the EP's

individual liability under Standards on Auditing?

Issue No. II: Whether having an SQC 1 policy document in place is sufficient to

discharge the Firm's quality control obligations, or whether the Firm must also

ensure the policy is actually implemented?

Issue No. III: Whether the Firm's contention that only the EP is accountable for

audit non-compliance -- and that the Firm is only responsible for formulating the

SQC 1 policy -- is legally correct?

Page 74 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Issue No. IV: Whether non-compliance with SA 220 (EQCR), SA 230

(documentation), SA 260 (TCWG communication) and SA 315 (risk assessment)

by the EP attracts liability on the Firm under SQC 1?

Issue No. V: Whether proceeding against the Firm after already penalising the

EP for the same underlying audit deficiencies constitutes double jeopardy

prohibited under law? Whether NFRA could have issued SCN and impugned

order to firm at later stage?

Issue No. VI Whether the penalty of Rs. 5,00,000/- on the Firm is proportionate

and whether a higher penalty in firm than the individual EP penalty is justified?

160. Now we will deal these issues in the following discussion.

161. Issue No. I: Whether an audit firm is independently and primarily

liable for quality control failures under SQC 1, separate and distinct from

the EP's individual liability under Standards on Auditing?

Issue No. II: Whether having an SQC 1 policy document in place is sufficient

to discharge the Firm's quality control obligations, or whether the Firm

must also ensure the policy is actually implemented?

Issue No. III: Whether the Firm's contention that only the EP is accountable

for audit non-compliance -- and that the Firm is only responsible for

formulating the SQC 1 policy -- is legally correct?

Page 75 of 92

Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

Issue No. IV: Whether non-compliance with SA 220 (EQCR), SA 230

(documentation), SA 260 (TCWG communication) and SA 315 (risk

assessment) by the EP attracts liability on the Firm under SQC 1?

162. Since all above issues are inter-linked, inter-connected and inter

dependent, we shall deal all these issues in conjoint manner in the following

discussions.

163. We note that Standards on Quality Control 1 (SQC 1) (Quality Control for

Firms that Perform Audits and Reviews of Historical Financial Information, and

Other Assurance and Related Services Engagements) establishes standards and

provides guidance on a firm's responsibilities for its system of quality control for

audits and reviews. Paragraphs 7 and 8 of SQC 1 require a firm to establish and

maintain a system of quality control that provides reasonable assurance that the

firm and its personnel comply with professional standards and applicable legal

and regulatory requirements and reports issued by the firm or engagement

partners are appropriate in the circumstances.

164. We find from Impugned Order that the Respondent NFRA's order against

the Firm found the systemic failures like failure to ensure EQCR was conducted

for a listed entity audit, a failure at the 'Engagement Performance' quality control

level, failure to ensure adequate audit documentation, failure at the 'Engagement

Performance' level, Failure to ensure the EP had adequate competence in Ind AS

and failure to observe SAs applicable to listed entities. Failure to maintain and

Page 76 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

implement firm-wide quality control policies that would have prevented an

unmodified opinion by EP on materially misstated financial statements of a listed

company, as already discussed in detail while discussion in Company Appeal

(AT) No. 200 of 2022.

165. It needs to be appreciated that the audit Firm was primarily responsible

for establishing and maintaining a system of quality control to ensure that the

firm and its personnel comply with professional standards and regulatory and

legal requirements; and the reports issued by the firm or engagement partners

are appropriate in the circumstances.

166. We consciously note that the scheme of the Companies Act, 2013, SAs as

well as NFRA Rules, 2018 imposes obligation upon the firm to undertake audit

in compliance with the relevant statutes. It is significant to take note that

Companies Act, 2013 stipulates penalty upon the firm also in case of any non-

compliance/professional misconduct.

167. We note that the firm named S Prakash Aggarwal & Co., was appointed

as the statutory auditor of VWL under section 139 of the Act and it is the firm

which is overall accountable for EP's duties and responsibilities under section

143 of the Act, including compliance with SAs. The Appellant firms contentions

that the firm's responsibility is only limited to establish a system of quality

control is not correct because Para 2 of SA 220 read with Para 3 of SQC1 requires

the Firm to not only have an SQC-1 policy but also to 'reasonably assure' that

the firm and its personnel comply with professional standards, legal and

Page 77 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

regulatory requirements and that the reports issued by the firm or the EP are

appropriate in the circumstances.

168. The contentions of the Appellant firm that non-compliance of SAs would

not constitute professional misconduct is flawed. In the instant case, it was the

audit firm that was appointed as auditor of the company u/s 139 of the

Companies Act, 2013. Further, Section 143(9) of the Companies Act, 2013

mandates that every auditor shall comply with auditing standards. As already

noted these auditing standards provide essential guidelines and principles for

conducting audits, ensuring reliability and integrity of the financial statements.

Non-compliance with auditing standards undermines the fundamental principles

of professional misconduct and the integrity of financial reporting. Such

breaches can directly impact the quality and reliability of audit reports,

potentially misleading stakeholders and damaging public trust, thereby

warranting disciplinary actions. The firm, as the appointed auditor, remains

responsible for any professional misconduct committed by the individuals who

perform the audits on behalf of the firm.

Conclusion on Issue No. I

169. We hold that an audit firm is independently and primarily liable for quality

control failures under SQC 1, separate and distinct from the EP's individual

liability under Standards on Auditing.

Conclusion on Issue No. II

Page 78 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

170. We hold that the firm having an SQC 1 policy document in place is not

sufficient to discharge the Firm's quality control obligations, and the Firm must

also ensure the policy is actually implemented.

Conclusion on Issue No. III

171. We find that the Firm's contention that only the EP is accountable for audit

non-compliance and that the Firm is only responsible for formulating the SQC 1

policy is legally not correct and impermissible.

Conclusion on Issue No. IV

172. We are of view that non-compliance with SA 220 (EQCR), SA 230

(documentation), SA 260 (TCWG communication) and SA 315 (risk assessment)

by the EP attracts liability on the Firm under SQC 1.

Issue No. V: Whether proceeding against the Firm after already penalising

the EP for the same underlying audit deficiencies constitutes double

jeopardy prohibited under law? Whether NFRA could have issued SCN and

impugned order to firm at later stage.

173. Now we will examine the contentions of the Appellant that there is no

provision in law for punishing both the EP and the Appellant as audit firm on

the same allegations of professional misconduct and that it is a case of double

jeopardy. At the outset, we hold that the firm, as a legal entity, has a continuous

Page 79 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

obligation to establish and maintain quality control systems, as mandated by

auditing standards and regulatory requirements. These quality control systems

are designed to ensure that the firm and its personnel comply with professional

standards and regulatory obligations. Therefore, the firm cannot evade

responsibility for any deficiencies in its quality control systems or failure to

enforce compliance with auditing standards. The Firm, the EP and the EQCR are

jointly and severally responsible for professional misconduct observed during an

audit. The scheme of Companies Act, 2013, SAs, Ind AS read with NFRA rules

specifically impose obligations on individual auditors as well as the firm.

174. The obligations of the Firm which can be exercised with reference to the

SAs. Prima facie for an audit assigned, both the auditor as well as the firm shall

be made responsible, even though there may be an overlap. As per SA 220, the

responsibility of each engagement is assigned to the EP and who carries out the

audit following the relevant SAs applicable and also in line with the quality

policies of the Firm. Similarly, Para A1 of SA 220, SQC 1 deals with the firm's

responsibilities to establish and maintain its system of quality control for audit

engagements. The system of quality control includes policies and procedures that

address each of the elements like Leadership responsibilities for quality within the

firm; relevant ethical requirements; Acceptance and continuance of client

relationships and specific engagements; Human resources; Engagement

performance; and Monitoring. Further, Standard on Quality Control (SQC) 1

delineates the responsibilities of the Firm regarding audit quality. Audit quality is

Page 80 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

the foundation of any statutory audit. SQC - 1 lays down these core principles a

Firm must adhere to ensure minimum required quality in any audits undertaken at

the firm level. Further, SAs, such as SA 200, SA 220, SA 230, SA 260 (Revised),

SA 610(Revised), SA 620 and SA 700(Revised) refer to SQC-1 when it comes to

specific aspects of audit such as documentation, communication with those

charged with governance, engagement of Auditor's expert, evaluating the

adequacy of internal audit function of the Company, and general quality aspects.

Para 3 of SQC-1 reads as under:

"3. The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances".

(Emphasis supplied)

175. We find the issue whether the firms are vicariously liable for the

misconduct by its partners or not and whether the NFRA can penalise both the

firm and its partner, is no longer res integra.

176. We would like to refer to two supportive judgements in case of Deloitte

i.e. one by Hon'ble Supreme Court and one by Delhi High Court, which are

relevant to present appeals. These judgements reads as under:

A.) 2025 SCC OnLine Del 641 - Deloitte Haskins & Sells LLP Versus Union of India and Another

Page 81 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

132. We thus find ourselves unable to construe Section 132 of the Companies Act creating a vicarious liability which is otherwise not envisaged in cognate statutes and which are neither assailed nor asserted to be invalid. This quite apart from the audit firm being enabled to act through its designated members, engagement partners to undertake the actual audit. We thus find ourselves unable to comprehend how that audit firm could disavow, disclaim or disown their acts.

135. We also find ourselves unable to countenance the submission of persons disconnected with the actual audit coming to be impacted as a consequence of the audit firm suffering disciplinary action. This submission again firstly proceeds on the premise of a member having a standing distinct from that of the firm and which we have already negated in the preceding parts of this decision. Secondly, such a contingency is neither unknown nor unique. It cannot possibly be viewed as a fallout peculiar to Section 132 alone. A penal action against a corporate entity would invariably have a repercussion upon an individual in that firm's employment or engagement.

136. However, that disqualification or adverse consequence could occur even in a situation where a firm were to be debarred under any other law. Such a consequence could, for instance, occur if an entity were to be blacklisted. What thus must be borne in mind is that a person disconnected with the actual audit suffers the consequences of punishment imposed upon its employer only as long as the individual remains

Page 82 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

associated with that entity and proposes to practise the profession under its aegis only. A punishment that may come to be imposed upon a firm by virtue of Section 132(4), therefore, cannot possibly be said to be violative of Article 19 of the Constitution.

137. We thus find no merit in the contention that Section 132 of the Companies Act is liable to be held as unconstitutional basis the audit firm or its individual partners and members becoming vicariously liable. In light of the above, the challenge to the constitutionality of Section 132 on the grounds of vicarious liability is without merit. The provision aligns with the fundamental principles of accountability and collective responsibility that governs the auditing profession. The firm's role as an auditor, coupled with its reliance on its partners and members to execute its obligations, makes it inevitable that liability whether arising from negligence, misconduct, or breach of statutory duties must extend to both the entity and the individuals involved. This structure not only ensures accountability but also upholds the integrity and trust essential to the auditing profession.

142. By virtue of the firm being appointed as an auditor, the firm and its members willingly undertake responsibilities that come with a clear expectation of compliance with accounting standards and the assurance of professional diligence. The alignment between the firm and its members, particularly in the discharge of auditing services, is integral and inseparable. Liability arising from statutory breaches, including those regulated by the NFRA, is both reasonable

Page 83 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

and necessary to ensure the firm's adherence to professional obligations.

B.) Union of India v. Deloitte Haskins & Sells LLP, (2023) 8 SCC 56

113. Now so far as another submission that Section 140(5) is violative of Article 14 of the Constitution of India and discriminates against the auditors unfairly in comparison to similarly placed alleged perpetrators, such as Directors, management, etc. It is required to be noted that the role of auditors cannot be equated with Directors and/or management. Auditors play very important role in the affairs of the company and therefore they have to act in the larger public interest and all other stakeholders including investors, etc. Chapter X of the Act is specifically for the "Audit and Auditors" looking to the importance of the auditors.

Therefore, Section 140(5) cannot be said to be discriminatory and/or violative of Article 14 of the Constitution of India.

114. Now so far as the submission that the penalty in the form of automatic disqualification of auditors and of the entire firm including partners and that too for a period of five years to become the auditor of any other company is highly disproportionate is concerned, it is ultimately for the legislature/Parliament to provide the debarment. On the principle of joint and several liability, the auditors and the entire firm including partners shall be liable and therefore can be subjected to Section 140(5) and the consequences mentioned in Section 140(5) of the 2013 Act. So far as the

Page 84 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

submission that the disqualification is akin to civil death and Section 140(5) impinges upon BSR and its partners' fundamental right to carry on its profession, as guaranteed under Article 19(1)(g) of the Constitution is concerned, nobody can be permitted to say that despite acting fraudulently, directly or indirectly, they had a right to continue and/or carrying on their profession. Acting in a fraudulent manner, directly or indirectly, by an auditor is a very serious misconduct and therefore the necessary consequence of indulging into such fraudulent act shall follow.

(Emphasis supplied)

177. We find above conclusions very relevant to settle the principle of

vicarious liability of the EP and the firm. We are of very clear opinion and

considered view that it is the firm which has to take higher responsibility and

consequently higher obligations and consequences including penalties. By no

stretch of imagination, the Appellant firm in present case, can separate itself

from the conduct of the EP. Thus, we firmly conclude that the firm and the EP

both were responsible and rightly dealt by NFRA by two different Impugned

Orders, holding them guilty of professional misconduct.

178. In this connection we have taken into consideration the Appellants

arguments that the Firm's liability under SQC 1 is independent of and not co-

extensive with the EP's individual liability under the SAs. On the other hand, it

is the case of the Respondent that the Firm is not merely vicariously liable for

Page 85 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

the EP's failures -- it bears primary, independent liability for failing to establish

and implement the institutional safeguards that would have prevented those

failures. The Respondent explained that penalty of Rs. 5,00,000/- against the

Firm -- higher than the penalty of Rs. 3,00,000/- against the individual EP --

correctly reflects this principle. We also find the Firm as an institution bears a

heavier responsibility for systemic quality control than the individual

engagement partner for engagement-level failures.

179. The Appellant firm alleged that the show cause notice to the firm was

issued after 15 months as an afterthought, by NFRA. We note that the

Respondent-NFRA issued a Show Cause Notice (SCN) under Rule 11(1) of the

NFRA Rules, to the Engagement Partner on 29.06.2022. We also note that post

giving opportunity of hearing to the EP, on 12.09.2022 NFRA passed an order

under Section 132(4) of Companies Act, 2013 imposing a penalty of Rs. 3 Lakhs

and 3-year debarment against the Engagement Partner. We also take into

consideration the arguments of NFRA that, nowhere in the Companies Act,2013

or NFRA Rules, limitation period has been provided for the issuance of show

cause notice. NFRA referred to observation by the Hon'ble Supreme Court in

the judgement in the case of M/S North Eastern Chemicals Industries (P) Ltd.&

Anr Vs M/S Ashok Paper Mill (Assam) Ltd. & Anr. Civil Appeal No. 2669 of

2013, where it was held that in cases where no limitation is given in any statute

for an act to be done as such, as the present one, any such urgency may be absent

Page 86 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

and statutory remedies if availed in a reasonable time will uphold the purport of

the act. Relevant portion of the judgement is reads as under:

"27. When a statute, either general or specific in application, provides for a limitation within which to file an appeal, the parties interested in doing so are put to notice of the requirement to act with expedition. However, opposite thereto, in cases such as the present one where neither statute provides for an explicit limitation, such urgency may be absent. While it is still true that, as held in Ajaib (supra), this does not entitle parties to litigate issues decades later, however shorter delays, in such circumstances, would not attract delay and laches."

180. NFRA further submitted that initially, the proceedings focused solely on

the EP, based on his individual responsibilities under the Standards on

Auditing, however, as the proceedings progressed, it became evident to NFRA

that the Firm had also failed to discharge its responsibilities under SQC 1,

particularly in ensuring that audits of listed companies were subject to EQCR,

indicating systemic failure of the Firm's quality control mechanisms, not just

an isolated lapse by the EP. As per SQC 1, it is the responsibility of the Audit

Firm to establish policies and procedures that provide reasonable assurance that

both the Firm and its personnel comply with professional standards and

applicable regulatory requirements.

181. To examine the issue, we take into consideration, Paragraph 70 of SQC 1

which clarifies that the EQCR is not to be selected by the EP. The appointment Page 87 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

of the EQCR is a responsibility the Audit Firm, as part of its obligation to

maintain an independent and effective system of quality control. Paragraph 70

of SQC 1 reads as under:

"70. The firm's policies and procedures are designed to maintain the objectivity of the engagement quality control reviewer. For example, the engagement quality control reviewer:

(a) Is not selected by the engagement partner;

(b) Does not otherwise participate in the engagement during the period of review;

(c) Does not make decisions for the engagement team; and

(d) Is not subject to other considerations that would threaten the reviewer's objectivity"

(Emphasis supplied)

182. We note contention of NFRA that the alleged delay in issuing the SCN to

the Firm did not arise from the EP's response, nor was it a reactive measure. It

was a result of the sequential and evolving evaluation of responsibilities arising

during the course of the proceedings. NFRA further elaborated that at the time

of issuance of the Penalty Order against the EP on 12.09.2022, the Executive

Body of NFRA had not yet made a legal determination regarding the Firm's

systemic role under SQC 1. It was further the case of NFRA that it was only

upon further scrutiny of the same underlying facts, it became necessary to initiate

Page 88 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

proceedings against the Firm, albeit at a later stage. The NFRA further argued

that the regulator's obligation is continuing and dynamic and submitted that

during the course of proceedings, it becomes apparent that further parties

including the Firm bear regulatory responsibility. The Respondent stated that it

is incumbent upon NFRA to take action, even if some delay occurs in the process

was failure to do so would amount to abdication of statutory responsibilities.

183. We observe that logically, NFRA should have issued SCN, both to EP and

the firm, simultaneously. It does not make sense for NFRA to issue SCN and

subsequently impugned order to the firm at such later stage. Having noted this,

we do find merit in the contentions of NFRA that being New Regulatory Body,

it is also evolving. We also find logic in NFRA's submission that the whole

process is dynamic. We also take into consideration that charges against the EP

and the firm are proved beyond doubt. Moreover, we do not find any prejudice

caused to the Appellant firm on account of this gap of SCN and impugned order

between EP and the firm. In view of this, we are not inclined to accept arguments

of the Appellant firm on this account. However, we would like to advise NFRA,

without prejudice, to consider that in future such gap is avoided. We rest at this

stage on this issue.

Conclusion on Issue No. V

184. We hold that the proceeding against the firm after already penalising the

EP for the same underlying audit deficiencies does not constitutes double

jeopardy and is not prohibited under law. We further hold that NFRA could have

Page 89 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

issued SCN and Impugned Order to firm, even at later stage although it is

advisable for the NFRA to avoid such gap in future.

185. Issue No. VI Whether the penalty of Rs. 5,00,000/- on the Firm is

proportionate -- and whether a higher penalty in firm than the individual

EP penalty is justified?

186. On proportionality, we find that NFRA has the power under Section

132(4)(c) of the Companies Act, 2013 to impose penalties up to Rs. 10,00,000/-

on an individual auditor and to debar for up to 10 years. The penalties actually

imposed is Rs. 3,00,000/- and 3 years debarment for the individual and Rs.

5,00,000/- for the firm are at the lower end of the spectrum. They are

proportionate to the gravity of misconduct and the signalling value required to

deter similar conduct by other auditors of listed companies. We note that section

132(4)(c) of Companies Act empowers NFRA to decide quantum of penalties.

We find the penalties imposed are at the lower-to-middle range of what NFRA

could have imposed. NFRA explicitly applied the principles of deterrence,

proportionality, and signalling value. We find that the sanctions are

proportionate to the gravity of the misconduct i.e. issuing an unmodified opinion

on statements that overstated PBT by 88% and the public interest dimension as

VWL is a listed company whose investors relied on the audited financial

statements. It is also a fact that this the systemic impact which made the NFRA

Circular in consequence of this case has set a standard for all stakeholders and

Page 90 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

finally the need for deterrence that the auditors of listed companies must need to

be more careful else professional misconduct may result in consequence of

penalties.

Conclusion on Issue No. VI

187. We hold that the penalty of Rs. 5,00,000/- on the Firm is proportionate and

higher penalty on the Appellant firm than the individual EP penalty is justified.

Final Conclusions

188. For all the foregoing reasons, this Appellate Tribunal finds no merit in

either of the appeals filed by the Appellants.

189. Before parting the case, we would like to emphasize that the statutory

audit is not a ceremonial exercise. For a listed company with thousands of public

shareholders, institutional investors, and bank creditors relying on the audited

financial statements, the audit is the primary safeguard against financial

misrepresentation. When that safeguard fails, as it did here, the consequences

extend far the company itself as it undermine public confidence in financial

markets. In this backdrop, the Engagement Partner and the Firm bear a

heightened responsibility to discharge their duties with utmost diligence and

integrity so as to preserve and reinforce public confidence.

190. Both appeals are accordingly dismissed. Any penalty amounts deposited

Page 91 of 92 Comp. App. (AT) No. 200 of 2022 & Comp. App. (AT) No. 177 of 2024

by the Appellants pursuant to the Appeals, shall be adjusted against the

outstanding penalty amounts. No order as to the cost. Pending, I.A. if any, stand

closed.

191. Finally, this Tribunal records its appreciation, for valuable assistance

provided to us during hearing by CA CV Sajan for the Appellants and Shri Zoheb

Hossain, ably assisted by Shri Satyam, for their painstakingly efforts in

expanding their arguments necessary for our judgment.

[Justice Mohammad Faiz Alam Khan] Member (Judicial)

[Mr. Naresh Salecha] Member (Technical)

Sim

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