Peer Review

1. The Institute of Chartered Accountants of India (ICAI) in exercise of powers conferred by Section 15(2)(a) have prescribed the Guidelines for Peer Review (“PR”) and it is called the Peer Review Guidelines 2022. It has come into force with effect from 1st October, 2022.

2. PEER REVIEW MEANING

Peer Review means an examination and review of the systems and procedures to determine whether the same have been put in place by the Practice Unit (“PU”) for ensuring the quality of assurance services as envisaged by the Technical, Professional and Ethical Standards as applicable including Audit Quality Maturity Model wherever applicable or any other regulatory requirements as may be prescribed by the Council or any Committee and whether the same were consistently applied during the period under review. In short, it is a self- regulatory mechanism to ensure that all practicing members of the Institute of Chartered Accountants of India (ICAI) rendering service adhere to the highest standards.

3. PEER REVIEW MECHANISM

Peer Review process is based on the principle of systematic monitoring of the procedures adopted and records maintained while carrying out audit & assurance services in the course of one’s professional responsibility to ensure and sustain quality. Peer Review is primarily directed towards ensuring as well as enhancing the quality of audit and assurance services of Chartered Accountants in Practice. Peer Review of a Practice Unit is conducted by an independent evaluator known as a Peer Reviewer. The aim is to review the quality control framework of the Practice Unit as well as proper and consistent application of such control frameworks across engagement samples selected for review.

4. IMPORTANCE OF PEER REVIEW

  1. The importance of Peer Review process is apparent from the fact that in India the Peer Review auditors have been recognised by the Regulators. The Securities & Exchange Board of India (SEBI) has made mandatory with effect from April 1, 2010 that the limited review/statutory audit reports submitted to the concerned stock exchanges by the listed entities shall be given only by those auditors who have subjected themselves to peer review process and holds a valid certificate issued by the ‘Peer Review Board’ of the ICAI.
  2. Further, the Comptroller & Auditor General of India (C&AG) has recognized Peer Review Board’s work as it has decided to allocate substantial points to the Peer Reviewed firms in the application form for allotment of audit for Public Sector Undertakings.

5. PEER REVIEW GUIDELINES 2022

The guidelines are divided into seven Chapters, namely:

  1. Definitions
  2. Coverage of Peer Review, Criteria of Peer Review, Procedure for initiating Peer Review
  3. Procedure for Peer Review of a New Unit
  4. Reporting by the Peer Reviewer, Issuance of Peer Review Certificate, Validity of Peer Review Certificate
  5. Peer Review Board
  6. Administration
  7. Practice Units
  8. Peer Reviewer and Panel of Reviewers, their appointment and obligations etc.
  9. Miscellaneous deals with Immunity, Confidentiality, removal of difficulties, to relax strict enforcement of these Guidelines

6. PEER REVIEW AND ITS OBJECTIVES

  1. Peer Review means an examination and review of the systems and procedures to determine whether the same have been put in place by the Practice Unit for ensuring the quality of assurance services as envisaged by the Technical, Professional and Ethical Standards as applicable including Audit Quality Maturity Model wherever applicable or any other regulatory requirements as may be prescribed by the Council or any Committee.
  2. It is a process based on the principle of systematic monitoring of the procedures adopted and records maintained while carrying out audit & assurance services in the course of one’s professional responsibility to ensure and sustain quality. Peer Review is primarily directed towards ensuring as well as enhancing the quality of audit and assurance services of Chartered Accountants in Practice.
  3. Peer Review process is intended to review the quality control framework of the Practice Unit as well as proper and consistent application of such control frameworks.
  4. The main objective of Peer Review is to ensure that in carrying out the assurance service assignments, the members of the Institute – (a) comply with Technical, Professional and Ethical Standards as applicable including other regulatory requirements thereto and (b) have in place proper systems including documentation thereof, to amply demonstrate the quality of the assurance services.

7. COVERAGE OF PEER REVIEW

  1. The Peer Review process shall apply to all the assurance engagements signed by a Practice Unit during the period under review.
  2. Practice Unit is subjected to Peer Review, its assurance engagement records pertaining to the Peer Review Period shall be subject to examination and review by the Peer Reviewer.
  3. A Practice Unit having one or more branches at various locations in India may opt to get the Peer Review of any branch or branches conducted by a Branch Peer Reviewer. The Reviewer conducting the Peer Review of the Head Office shall consider the report of the Branch Peer Review.
  4. The Peer Review shall cover the following:
    1. Compliance with Technical, Professional and Ethical Standards.
    2. Quality of reporting.
    3. Systems and procedures for carrying out assurance services.
    4. Self-evaluation under Audit Quality Maturity Model.
    5. Training programmes for staff concerned with assurance functions, including availability of appropriate infrastructure.
    6. Maintenance of Register for Assurance Engagements conducted during the year and such other related records.

8. CRITERIA OF PEER REVIEW

Criteria of Peer Review are as follows:

  1. Mandatory:Peer Review can be mandated for such Practice Units as may be decided by the Council.
  2. Voluntary:In case of voluntary, any Practice Unit may, suo motu apply to the Board for the conduct of its Peer Review.
  3. Special case:Based on specific information received by the Board and is of the opinion of that it requires a Special Peer Review of the Practice Unit, may conduct a Special Peer Review of the Practice Unit for such a period determined by the Board.

9. ISSUANCE OF PEER REVIEW CERTIFICATE

  1. The Peer Review Certificate so issued by the Board or its Sub- Committee signed by the Chairman, Vice Chairman and Secretary mentioning the validity period.
  2. The Peer Review Board shall serve the Peer Review Certificate upon the Practice Unit.
  3. The Peer Review Board Secretary shall:
    1. serve the Peer Review Certificate upon the Practice Unit.
    2. update the List of Practice Units having a valid Peer Review certificate incorporating the names of Practice Units to whom the Peer Review certificates have been issued.
  4. The validity of Peer Review Certificate which shall be valid for a period of three years or such other period as may be decided by the Board commencing from the date of receipt of Peer Review by the Board.
  5. Validity of the Certificate shall in no case be extended by the Board.
  6. Certificate shall ceased to be valid from the time it is revoked.

10. OBLIGATIONS OF THE PRACTICE UNIT

All Practice Units shall comply with the following:

  1. Produce to the Reviewer or allow access to, any record, document or prescribed register maintained by the Practice Unit;
  2. Provide to the Reviewer all assistance in connection with the Peer Review;
  3. It shall provide and present to the Reviewer an extract of any such information or further particulars or information in compliance with the requirement as the Reviewer shall specify;
  4. The Practice Unit shall provide the Reviewer all assistance in connection with the Peer Review.

11. ELIGIBILITY TO BE A PEER REVIEWER

A member in practice shall be eligible to be enrolled as a Peer Reviewer if:

  1. He is a member in practice having at least seven years of assurance practice experience, or,
  2. A member in employment who has subsequently obtained a Certificate of Practice, having at least ten years of experience in employment and at least three years audit experience in practice and is in whole time practice at the time of enrolment and appointment as Peer Reviewer.

12. PURPOSE OF PEER REVIEW:

  1. It is a quality control system in accounting and auditing practices.
  2. To impart education for practicing Chartered Accountants and Practicing Chartered Accountant Firms to further enhance the quality of their purpose of accounting and auditing work.

13. IS PEER REVIEW MANDATORY?

At present Peer Review of Firms conducting statutory audit of listed firms is already compulsory.

14. CRIMINAL LIABILITY:

The Practising Unit can be prosecuted in a Criminal Court for either or knowingly or recklessly issued and inappropriate audit opinion.

15. DISCIPLINARY ORDERS AGAINST AUDITORS

  1. Providing certain services by the auditors not permitted by Section 144 of the Companies Act, 2023 and its possible effect on the independence of the Auditors.
  2. Non-compliance with Standard on Quality Control (SQC) and its consequential effect on the quality of audit – lack of professional scepticism and not challenging the management on judgments which in some cases resulted in inflated profits.
  3. Valuation of Derivative which artificially inflated profits.
  4. Reversal of contingency provision to artificially inflated the profits.
  5. Non provision of impairment losses on investments.
  6. Incorrect computation of Capital Adequacy Ration (CAR).
  7. Non-identification of ever-greening of loans.
  8. Failure to consider number of adverse indicators and forming an erroneous judgements with regard to going concern.
  9. Gross negligence in not identifying erroneous accounting treatments (Understatement of provision for Trade Receivables and Investment in subsidiaries).
  10. Declared Profits Before Tax (PBT) being converted into a huge loss.
  11. Failure to comply with (Standards on Auditing (SA).
  12. Accounts, Service, Examination) (relating to Risk Assessment of Material Statement, Materiality Audit evidence and Documentation).
  13. Bad and doubtful debts and substantial decline in the value of the inventories and non- examination of these transactions form a fraudulent angle and consequently not reporting the same under Section 143(12) to the Government.
  14. NFRA imposed heavy penalties on the audit firms and its Partners for these professional lapses.
  15. Prior to NFRA coming into existence and even subsequent thereto, ICAI also held several members guilty of professional misconduct and were debarred for varying periods. In a few cases, members were debarred for lifetime and wherever the misconduct was not of serious nature, the members were reprimanded.
  16. Tampering of audit file and related lapses.
  17. Failure to exercise professional scepticism while performing audit of related parties transactions, particularly with Promoter group companies and consequential non- reporting of huge diversion of funds in a fraudulent manner.
  18. Non-availability of any evidence in audit files with regard to raising of any questions to the Audit Committee or communicating with those charges with governance and management about certain suspicious transactions.
  19. Failure of the Auditors to adequately respond to the risks of fraud associated with certain significant unusual transactions.
  20. Failure of Auditors to ascertain whether the huge Related Party Transactions were on Arm’s Length basis and were authorised and were approved by Audit Committees and Board of Directors in compliance with provisions of the Companies Act, 2013.
  21. Inappropriate disclosure of these Related Party Transactions as per requirements of Ind AS 24.
  22. Non exercise of due diligence by the Auditor to ascertain the reasons of an unusually high provisions.

16. Disciplinary cases against Auditors (Professional lapses / misconduct</strong >

A. Jaiprakash Associates Ltd. (JAL) – NFRA has debarred 18 Auditors for upto a year and also imposed penalties on them citing professional lapses in the audits of various branches of crisis hit DHFL.

The audit firm has failed to sufficiently evaluate the use of going concern basis of accounting by the management and thus failed to note its implications in the audit report. NFRA flagged serious lapses in the statutory audit of Jaiprakash Associates Ltd. (JAL) for F.Y. 2018 stating the transactions identified by the regulator as violative of accounting and auditing norms would have turn the reported profits before tax of Rs. 351.7 crores into a loss of atleast 3215.7 crores. The impact was both material and pervasive. Thus, there was a gross negligence and total lack of due diligence on the part of audit firm M/s. Rajendara K. Goyal & Co., Chartered Accountants.

B. I L & F S Case:

I L & F S failure was the system failure and it cannot be termed as failure of Auditors. There also appears to be a confusion between what constitutes “business failure” and financial reporting failure. Auditors being gatekeepers and not privy to every action of the management should not be fastened with the criminal charges for failure to report of management act of negligence.

The auditor is not required to perform functions of a detective. The auditor is watchdog and not bloodhound. The duty of the auditor is verification and not detection. The Company did not have long term funds to finance long question projects like roads, ports and airports and as long as infrastructure companies borrow and continuously roll over cheaper short term borrowings to build larger projects, it will remain a touch and auditors cannot be blame for this.

In this case, charge against the Respondent firm was to the effect that company is entitled to hold Certificate of Registration as NBFC despite the fact that the Company failed to meet the dual criteria as required in terms of Non-Banking financial (Non-deposit accepting or holding) companies prudential norms (Reserve Bank) Directions, 2015. Neither the income from financial assets was more than 50% of the gross income nor the financial assets more that 50% of the total assets, which are mandatorily required for an NBFC to continue holding Certificate of Registration as required under Section 45IA of RBT Act, 1934.

The Disciplinary held that the Respondent was negligent in conduct of his professional duty which resulted not only in incorrect reporting but also non-compliance of criteria laid down under Section 45IA of RBI Act 1934. The Committee held that the Respondent was guilty of professional misconduct under clause (7) of part 5 of second schedule to Chartered Accountant Act, 1949 [PPR/P/43/2016-DD/46/IMF/2016/ DC/834/2018].

C. Due diligence: Company’s annual return submitted by Respondent discloses change of shareholding pattern in Balance Sheet despite of Company Law Board’s Order to the effect to maintain status quo. The lack of due diligence on the part of the Respondent resulted into change in shareholding pattern of the said company and this in turn, caused non-compliance with the CLB order in question. On the above facts, the Disciplinary Committee held that the Respondent is Guilty of professional misconduct falling within the clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 [PR/9/14-DD/32/14-DC/544-17].

D. A Chartered Accountant sent a letter by ordinary post to the previous auditor after the acceptance of the audit assignment. Moreover, no evidence was produced to show that the said letter was either sent to or was received by the previous auditor. Held, he was guilty of professional misconduct under the clause as the same amounts to non-communicating with the previous auditor.

[L.L. Sud v. IK.N. Chandla Page 306 Vol V of Disciplinary cases decided on 27th, 28th and 29th]</em >

E. In that case, Chartered Accountant has failed to mention in the Audit Report for Financial Year 2012-13 that annual accounts for financial year 2012-13 have not been accepted and approved in AGM. In view of the above facts, the Committee held that the Respondent is guilty of professional misconduct falling within the meaning of clauses (6), (7) and (8) of the Part I of Second Schedule to the Chartered Accountants Act, 1949.

Shri Shailesh P. Ganawala v. CA Tinish R. Mody DC/1528/2021

F. Circulation of pamphlet by a Chartered Accountant:

Pamphlet containing his name on whatsapp wherein he was shown offering to the public at large his services in the area of accounts / tax / return /GST / Audit / New Carriers and said circulated message through whatsapp allegedly tantamount to solicitation of professional work through advertisement. Held that the Respondent was Guilty of professional misconduct falling within the meaning of clause (b) and (j) of Part 5 of the First Schedule to the Chartered Accountants Act, 1949 (PPR/NP/37/20-DD/30/ INF/2020-BOD/595/21]

CONCLUSION

  1. ICAI and NFRA both should coordinate with each other to spread awareness about the deficiencies in the performance of the Auditors, both in terms of technical standards and ethical code.
  2. This would improve the quality of audit. The two regulators must act in tandem, rather than in watertight compartment.
  3. Appointment of Auditors should be by Comptroller Auditor General of India to create independence of Auditor.
  4. Asset Quality Review (AQR) by NFRA should be more with a view to guide members to rectify their mistakes in a time bound manner rather than treating as a punitive measures.
  5. In case multination companies, Joint Auditors, one very reputed firm of Auditors and another Junior firm having audit experience of more than 15 years.

The above measures will protect their interest.

“Facts are facts and will not disappear on account of your likes.”

– Pandit Jawaharlal Nehru