Loan re-negotiation does not free Company, Auditors from showing interest liability in financial statements - NFRA
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Ongoing negotiations with banks and non-bank lenders for restructuring loans does not absolve a company from the responsibility to recognise interest cost in financial statements and statutory auditors cannot wash their hands off their obligation to raise a redflag for such omission, National Financial Reporting Authority (NFRA) said in an order issued late on Thursday.
Rejecting an auditor's plea that there was uncertainty about the payment of dues due to discussions with lenders, NFRA said that even if the company is incapable of paying back dues and management does not acknowledge it as payable, contractual obligations like interest payments are still to be recognised as liabilities by the company.
NFRA debarred an Ahmedabad-based auditor for one year and imposed a monetary penalty of ?100,000 in the case which involved audit of a clothing company after its investigation found alleged irregularities in the financial statements of FY16.
The company had not recognised accrued interest on loans from bank and non-banking finance companies in violation of sections of the Companies Act and the auditing standards, NFRA said. "With proper accounting of interest accrued, the reported loss of the company would have increased by about eight times," the regulator said.
Such a material and pervasive misstatement in the financial statement of the company was not reported by the audit engagement partner in his auditor's report, NFRA pointed out. The various instances of non-compliance with the format of financial statements have also been noted, which have not been reported by the engagement partner in the auditor's report, NFRA said.
NFRA imposed the penalty, alleging it has found the audit engagement partner guilty of professional misconduct.
The auditor informed the regulator that the management was in negotiations with the bank for a one-time settlement of the loan and hence, in his professional judgment, no additional interest expenses were payable to clear the dues of the bank. The partner also referred to a no-dues certificate from the bank issued in 2018 showing the loan was settled through a one-time settlement. The auditor claimed that the judgment exercised by him at the time of the audit to agree with the decision of the management not to recognise further interest was neither misplaced nor without a proper basis, the regulator's order showed.
NFRA held the auditor guilty of failure to disclose material facts known to him, which are not disclosed in a financial statement, but the disclosure of which was necessary in making such a financial statement.
The audit regulator pointed out that there was no evidence of a firm commitment from the bank on waiver of interest at the time of the audit of FY16 financial statements. The settlement with the bank came into effect only in 2018, that is, 19 months after the signing of the balance sheet by the auditor in 2016.
The audit engagement partner is using subsequent developments, that took place over one and a half years to justify his actions at the time of statutory audit, NFRA pointed out.
"The accrual concept in accounting requires a company to record revenue and expenses in the period they are earned or incurred, regardless of when the related cash transactions occur. Liabilities, including contractual obligations, are recognized in the financial statements when they are incurred, even if payment is not due until a later period. This means that contractual obligations that are incapable of being fulfilled are still recognized as liabilities by a company, even if they are not acknowledged any longer by the management," NFRA said in its order. (ends)
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