Loan re-negotiation does not free company, auditors from showing interest liability in financial statements: NFRA

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₹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