Fixing Auditors' Accountability

Fixing Auditors' Accountability InfraLIVE September 15, 2022 44 www.infralive.com and enhance transparency and accountability in the sector, the Parliament passed the Real Estate (Regulation and Development) Act 2016 in March 2016 leading to establishment of Real Estate Regulatory Authority (RERA) in the states. As thousands of consumers have also thronged to the RERAs across the country for redressal of their grievances, an attempt wasmade to examine the audited accounts of the real estate promoter compa- nies/ firms in the state of Bihar in terms of Section 34 (a) & (f) of the Act to find out whether there are systemic issues that need to be addressed in the sector. It is observed that the auditing of real estate companies has not improved to the desired level as mandated in the auditing standards in the last five years since passage of the RERA Act in 2016. Some of the auditing firms continue to conduct audit in the pre-RERAways though the section 143 (9) of the Compa- nies Act 2013 mandates each statutory auditor to comply with the Auditing standards, as pre- scribed in the section 143(10) of the Act. In this connection, Auditing Standards - SA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements) and SA 315 (Identifying and assessing the risks of material misstatement through understanding the entity and its environment) prescribed by the Institute of Chartered Accoun- tants of India (ICAI) are of particu- lar significance. Consequent upon the passage of RERA Act, the statutory Auditors were required to keep the provisions of the RERA Act in mind while conducting the audit of the financial statements of real estate companies w.e.f. the financial years 2016-17 in terms of SA 250 and SA 315. However, no such compliance was observed in the audit reports of the statutory auditors inmost cases. In course of examination of financial statements of real estate companies, following issues of significant importance have been observed: 1. A vast majority of Real Estate C o m p a n i e s w i t h R E R A registered projects until June 30, 2021, have equity capital of less than Rs 5 lakhs and have two directors or less. In most cases, both directors are closely related. A majority of them have equity of Rs 2 lakhs or less, with usually husband and wife as directors. The inherent risk in investing in the projects of such promoters needs to be d e p i c t e d i n t h e a ud i t e d accounts of such companies appropriately. Such cases are also prevalent in other neigh- bouring states includingNCR. Registered Development Agreements 2. More than 90 per cent real estate construction/ promoter companies in the state develop their real estate projects ith a series of real W estate developers l i k e S u p e r t e c h , Jaypee Associates & Jaypee Infratech, several Logix group and Three C (3C) group companies etc located in Delhi NCR making a beeline for insol- vency proceedings under Insol- vency and Bankruptcy Code (IBC) 2016 before National Company Law Tribunals (NCLT) across the country because of default in the delivery of flats to homebuyers as well as repayment of bank loans, attention is getting drawn to the role of statutory auditors in audit of real estate companies and their qualifications of the accounts. As per the website of Real Estate Regulatory Authority (RERA) UP, as on September 30, 2022 there are 99 projects of 41 real estate compa- nies under Corporate Insolvency Resolution Process (CIRP) under IBC 2016 in the state. Some of the companies are under insolvency proceedings for more than three years now. As a result, tens of thousands of homebuyers are facing uncertain future. They have no idea as to how many more months or years they would have to wait for getting their dreamhouses. While CIRP takes care of those companies who have already been declared insolvent/ bankrupt, it is necessary that effective action is taken at the earliest so as to prevent the developers/builders from reaching the stage of insolvency/ bankruptcy. As the sector is marred with a number of scams and scandals in the last decade, affecting the lives of hundreds of thousands of families adversely across the country, the central and state governments have come out with several initiatives to strengthen the governance in the sector in recent past. In order to protect the interests of consumers, Fixing Auditors' Accountability Non-Compliant Statutory Audit of Real Estate Developers By R B Sinha