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  • Avantika

Auditor Liability and ‘Emphasis of Matter’ Misuse: NFRA's Vigilance in Upholding Financial Reporting

[Avantika is a student at Campus Law Centre, Faculty of Law, Delhi University.]

In a recent development, the National Financial Reporting Authority (NFRA) has taken decisive action by issuing orders that underscore the critical importance of upholding audit standards. The orders pertain to two specific cases -- matter of Bartronics India Limited and matter of Burnpur Cement Limited -- centering on instances where statutory auditors, instead of appropriately modifying their audit opinions, misused the emphasis of matter (EOM) section within audit reports to obscure misstatements in financial statements.

Significance of Financial Reporting in Combating White-Collar Crime

White-collar crimes often involve financial manipulation, misrepresentation, and fraud within corporate entities. Auditors play a pivotal role in detecting and preventing such offenses by examining financial records and providing independent assurance about their accuracy. NFRA plays a crucial role in the realm of white-collar crime law practice, particularly in the context of financial reporting, auditing, and corporate governance. Established in 2018 under the Companies Act 2013, NFRA was created to oversee and regulate the quality of financial reporting, auditing, and ethical conduct of professionals in India. Cases involving white-collar crimes often revolve around financial misconduct, fraud, and unethical practices within the corporate or financial sector. These crimes can encompass various offenses, such as, insider trading, money laundering, and securities fraud. Given the complex nature of these crimes, accurate financial information and adherence to auditing standards are crucial for both preventing and prosecuting such offenses.

NFRA's recent orders highlight the grave consequences of auditors deviating from their ethical responsibilities and standards. The misuse of the EOM section to conceal misstatements raises concerns about transparency, accountability, and the overall reliability of financial reporting. Any deviations from standards, even seemingly minor ones like misusing the EOM section, can have severe legal implications. Auditors' actions, as evidenced by NFRA orders, can be used to establish intent, negligence, or deliberate attempts to cover up financial irregularities. These NFRA's orders could set a precedent for future cases, where auditors' conduct is under scrutiny and serve as reference points and guiding principles for similar cases, contributing to shaping the contours of misstatements in financial statements.

EOM v/s Modified Opinion

In accordance with Standard on Auditing (SA) 700, an auditor is responsible for forming an opinion regarding the preparation of financial statements, ensuring they adhere to the relevant financial reporting framework and are materially accurate. After evaluating the evidence obtained during the audit process, the auditor has the discretion to express an opinion that is either unmodified (favorable) or modified (reflecting certain concerns) in the auditor's report. However, there is a scenario outlined in the standard where the auditor might include an EOM paragraph in the report. This paragraph is used to bring attention to specific matters disclosed in the financial statements that hold significant importance, as they are fundamental to users' comprehension of the financial statements. Since EOM included by the auditor for additional communication of facts acts like an opinion of the auditor, it often leads to confusion as to whether the inclusion of the EOM paragraph is a substitute for expressing a modified opinion.

NFRA's Examination of EOM Misuse in Audit Reports

In the case of Bartronics India Limited, matters such as non-provision of interest on loans, doubtful capital advances, non-repayment of Foreign Currency Convertible Bonds (FCCB), etc. were reported under EOM by the auditor. NFRA observed that certain matters, such as the provision of interest on unsecured loans, were not adequately disclosed in the financial statements, making their inclusion in the EOM paragraph inappropriate. Further, it was observed that the audit report highlighted uncertainties regarding the recoverability of capital advances and trade receivables. This contradicts with the requirement that an EOM paragraph should only be included if there is sufficient evidence that the matter is not materially misstated. It was further observed that issues related to the non-repayment of FCCB and uncertainties about a project's status as a going concern were matters that required separate evaluation and potential qualification of the audit opinion. Thus, the auditor included material information in EOM, instead of subjecting the same to appropriate audit procedures, thereby abdicating their responsibility.

In case of Burnpur Cement Limited (BCL), the company was burdened with substantial debt, defaulted on payments, and carried negative working capital. The company's financial condition suggested potential challenges to the application of the going concern assumption. BCL’s financial statements showed a loss of INR 44.49 crores for the year ending 31 March 2018, accumulating losses of INR 102.97 crores and a negative net worth of INR 0.416 crores. Despite these unfavourable circumstances, the auditor merely incorporated this matter within the EOM paragraph in the auditor's report, rather than thoroughly assessing whether a qualified or adverse opinion was warranted. NFRA observed that the auditor's judgment was influenced by inadequate disclosure by the company regarding its financial distress, including factors such as negative net worth, overall losses, high liabilities, non-operational divisions, and excessive reliance on one-time settlements, and the auditor’s failure to conduct a thorough evaluation led to an improper utilization of the EOM paragraph, which is meant to emphasize matters within the financial statements rather than to act a substitute for expressing a modified opinion.


In light of the observed discrepancies in the audit reports of Bartronics India Limited and BCL, NFRA has identified critical lapses in adhering to established auditing standards. These instances underscore the need for auditors to exercise meticulousness in their application of auditing standards, ensuring that the EOM paragraph serves its intended purpose of enhancing communication while maintaining the integrity of audit opinions. The NFRA's observations highlight the potential consequences of inadequate disclosure and incomplete analysis, which can misrepresent the financial health of the audited entities. Auditors must diligently assess and report uncertainties, material misstatements, and going concern assumptions in accordance with the applicable standards, thereby upholding transparency, accountability, and trust in financial reporting. For legal professionals dealing with white-collar crimes, these developments highlight the evolving landscape of financial accountability and the critical role auditors play in unveiling potential misconduct. Understanding these nuances is essential for effectively navigating cases involving financial irregularities.

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