Disciplinary Committee (Bench-IV) of the Institute of Chartered Accountants of India (ICAI) has ordered the removal of Chartered Accountant N Narasimhan from the Register of Members for a period of six months. The decision, dated May 16, 2024, follows a finding that CA Narasimhan was guilty of professional misconduct under Clauses (5), (7), and (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949, in his capacity as statutory auditor of Reebok India Company.
Allegations of Professional Misconduct
The case against CA N Narasimhan was brought by the Serious Fraud Investigation Office (SFIO), Ministry of Corporate Affairs, Government of India. The SFIO’s complaint centered on alleged failures in his professional duties as the statutory auditor for Reebok India Company for the financial years ending 2008, 2009, and 2010. The key allegations of misconduct included:
- Failure to report “Billed but not Dispatched” (BBND) goods: The Committee noted that physical verification of stock did not reveal BBND, and dispatch documents were unavailable to the auditor, indicating gross negligence in revenue recognition verification.
- Insufficient Balance Confirmation and Reliance on Management: CA Narasimhan allegedly failed to obtain balance confirmations from a substantial number of parties and compromised his auditor’s responsibility by accepting management explanations without resorting to indirect balance confirmations, thus failing to act independently and diligently.
- Non-reporting of Internal Control Issues in CARO: The Committee found that the auditor failed to report issues related to internal control, which should have been done as per CARO (Companies Auditor’s Report Order), 2003, for the year 2010.
- Negligence regarding “In and Out” Transactions: The Committee observed that the auditor merely relied on bank reconciliation statements to ascertain realization of amounts from debtors. It held that circuitous transactions could have been identified by examining debtors’ ledgers versus bank books. The auditor’s awareness of instances where payments were made to an arm company despite amounts being due from franchisees, without modifying audit procedures or reporting, was highlighted.
- Failure to Disclose Retrospective Price Rise: While acknowledging it was a normal company practice, the Committee found that the retrospective price increases, treated as additional revenue, should have been disclosed in the significant accounting policies due to the quantum involved.
- Misrepresentation of Franchisee Referral Program (FRP) Receipts: The Committee held that amounts received under FRP should have been disclosed as ‘advances’ rather than being ignored or adjusted as collection from debtors, deeming it a misrepresentation of facts not reported by the statutory auditor.
- Failure to Report Circuitous Intra-Group Transactions: The auditor reportedly failed to report financial irregularities concerning transactions with Shivam group entities, indicating a failure to exercise due diligence.
The Committee’s findings concluded that CA N Narasimhan failed to disclose material facts in the financial statements and omitted to report critical issues in his audit reports, including FRP, “In and Out” transactions, circuitous transactions with the Shivam group, and BBND. Such omissions, leading to material falsification of financial statements, were deemed unacceptable for a statutory auditor.
Disciplinary Proceedings and Respondent’s Defense
During the hearing on March 19, 2024, CA N Narasimhan was physically present. He requested a deferment of the hearing, citing a pending Writ Petition before the Delhi High Court against the Committee’s findings, which was adjourned to April 5, 2024. However, the Committee proceeded with the matter, noting that no stay had been granted by the High Court.
CA N Narasimhan presented both verbal and written submissions, reiterating his defense:
- CARO Reporting: He argued that CARO reporting relied on auditor judgment and that management had satisfactorily addressed his concerns.
- Non-Disclosure Issues: He stated that suggestions for an external local auditor or Foreign Investment Promotion Board (FIPB) sanctions were not CARO issues or did not affect financial accounts.
- “In and Out” Transactions & Falsified Confirmations: He claimed reliance on balance confirmations, which were later found to be fabricated due to collusion, and pointed out that relevant transactions occurred after the audit period.
- Retrospective Price Rise Disclosure: He argued that disclosure responsibility lay with management, and since revenue was correctly recognized, specific qualification was not warranted.
- FRP Non-Disclosure: He asserted no reference to FRP existed in Board minutes and that he relied on balance confirmations, unaware of subsequent falsification.
- Procedural Improprieties: He contested the Committee’s findings, alleging that proceedings were improperly concluded, natural justice principles were violated, and opportunities to establish innocence were denied. He claimed the Committee refused to allow witnesses and that he had expressed a lack of confidence in the bench.
- Fact Errors: He disputed the Committee’s assertion that he confirmed BBND practice and challenged the Committee’s observation regarding 25% balance confirmations, stating that 25% were received by him and another 25% by the component auditor, which he deemed sufficient.
- Applicability of Standards: He argued that SA 706 (Auditor’s Responsibilities Relating to Other Information) was not applicable for the relevant period (effective April 1, 2012). The Committee later clarified this was a typographical error and should have referred to AAS-28 (Engagement and Quality Control for Audits), which was applicable.
Committee’s Rebuttal and Final Decision
The Disciplinary Committee dismissed the Respondent’s claims of procedural improprieties, stating that ample opportunities were provided, and his submissions about the Committee closing proceedings and recusing were baseless. It affirmed that he withdrew from further participation.
The Committee carefully considered the Respondent’s explanations against its findings. It concluded that CA N Narasimhan was grossly negligent in his professional duties, failed to act independently and diligently, and omitted to report material falsification of financial statements. These acts of omission in discharging his professional duties were deemed to be professional misconduct.
Judicial Precedents and Regulatory Framework
The Committee’s decision is grounded in the Chartered Accountants Act, 1949, specifically Section 21B(3) (for the order of punishment) and Rule 19(1) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.
The findings of guilt relate to Clauses (5), (7), and (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949:
- Clause (5): “Does not exercise due diligence or is grossly negligent in the conduct of his professional duties.”
- Clause (7): “Does not obtain sufficient information which is necessary for expression of an opinion or his exceptions are sufficiently material to negate the expression of an opinion.”
- Clause (8): “Fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances.”
The Committee’s references to CARO, 2003, and AAS-28 (clarified from SA 706) underscore the specific auditing standards and reporting requirements applicable to statutory auditors at the time of the alleged misconduct. While the order does not cite specific external judicial precedents, the principles applied by the Disciplinary Committee are consistent with the general expectations of auditor conduct as established through various court judgments on auditor liability and professional negligence. The consistent theme in such judicial pronouncements is the requirement for auditors to act with independence, due diligence, and to report all material facts and deviations from accounting standards.
The six-month removal from the Register of Members represents a disciplinary action by the ICAI, aimed at upholding the integrity of the profession and ensuring accountability for professional misconduct.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
[DISCIPLINARY COMMITTEE [BENCH-IV (2024-2025)]
[Constituted under Section 218 of the Chartered Accountants Act, 1949]
ORDER UNDER SECTION 218(3) OF THE CHARTERED ACCOUNTANTS ACT, 1949 READ WITH RULE 19(1) OF THE CHARTERED ACCOUNTANTS (PROCEDURE OF INVESTIGATIONS OF PROFESSIONAL AND OTHER MISCONDUCT AND CONDUCT OF CASES) RULES, 2007.
[PR/111/2014/DD/122/2014/DC/610/2017]
In the matter of:
Joint Director (CL),
…..Complainant
Versus
CA. N Narasimhan
….Respondent
MEMBERS PRESENT:
1. Ranjeet Kumar Agarwal, Presiding Officer (In person)
2. Shri Jiwesh Nandan, I.A.S (Retd.), Government Nominee (In person)
3. Dakshita Das, I.R.A.S. (Retd.), Government Nominee (Through VC)
4. Abhay Chhajed, Member (In person)
DATE OF HEARING: 19th MARCH, 2024
DATE OF ORDER: 16th May, 2024
1. That vide Findings dated 05.02.2024 under Rule 18(17) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, the Disciplinary Committee was inter-alia of the opinion that CA. N Narasimhan (hereinafter referred to as the Respondent”) is GUILTY of Professional Misconduct falling within the meaning of Clauses (5), (7) and (8) of Part — I of the Second Schedule to the Chartered Accountants Act, 1949.
2. That pursuant to the said Findings, an action under Section 218(3) of the Chartered Accountants (Amendment) Act, 2006 was contemplated against the Respondent and a communication was addressed to him thereby granting an opportunity of being heard in person/ through video conferencing and to make representation before the Committee on 19th March 2024,
3. The Committee noted that on the date of hearing on 19th March 2024, the Respondent was physically present at ICAI Bhawan, New Delhi. The Respondent submitted that he has filed a Writ Petition against the Findings of the Committee before the Hon’ble High Court of Delhi. The said Petition was listed on 18th March 2024 but was not heard by the Hon’ble Court due to paucity of time and the matter was adjourned to 05th April 2024. Thereafter, the Respondent requested the Committee to defer the hearing to any day post 05th April 2024.
4. The Committee further noted that no stay has been granted by the Hon’ble Delhi High Court on the writ petition filed by the Respondent, and as such there is no bar on the Committee to consider the matter. Accordingly, the Committee decided to consider the matter.
5. The Committee noted that, apart from reiterating the written representation dated 23rd February 2024, the Respondent made verbal submissions before it, which, inter-alia, are given as under: –
(a) The Reporting under CARO related to disclosure, is based upon judgments to be exercised by the statutory auditors and it is on record that the points raised by the Respondent were satisfactorily answered by the management.
(b’) In relation to point(s) raised in the Findings in para 8.3, the suggestion to have an external local auditor by the Respondent is not an issue to be reported under CARO, and the sanction from Foreign Investment Promotion Board (FIPB) was not one affecting the financial accounts.
(c) The transaction of payment comes within the purview of ‘in and out’ transaction pointing towards complete collusion and coordination between top management, senior executives, and the franchisees. The Respondent was given balance confirmation of many of the parties concerned, which was later found to be completely fabricated by the parties concerned. The audit pertains to the year ending 31.12.2010 whereas the transactions of payments that took place in January 2011 were posted in the books of accounts only in February 2011.
(d) The retrospective price rise ought to have been disclosed in the significant accounting policies of the books of accounts. The onus of disclosure in the financial statement is clearly on the part of the management of the Company. A disclosure on sales has been made by management in the accounting policy on sales and just because the term ‘retrospective price’ has not been used in the Financial Statements, it does not mean that the auditor must qualify it. Since, the revenue has been correctly recognised, it does not merit any specific action on the part of Respondent in the audit report.
(e) As regards the matter related to not qualifying the audit report for the year 2010 regarding the existence of FRP, there was no reference to FRP in the minutes of the meetings of the Board of Directors. The Respondent had relied on balance confirmation, which were later found to be falsified as a result of widespread collusion of top management, the franchisees and other customers.
6. The Committee also noted that the written representation of the Respondent dated 23rd February 2024 on the Findings of the Committee, which, inter-alia, are given as under:
(a) The Findings cannot be sustained because on 14-09-2023 (i.e., the last date of hearing), the Hon’ble Committee had closed the proceedings after observing that the Hon’ble Members do not want to proceed with the matter and are recusing from the case following the Representation dated 12-09-2023 of the Respondent to the President of ICAI and Chairman of the Council of ICAI against the Disciplinary Committee (Bench -IV). It is grossly wrong and incorrect (as recorded by Hon’ble Committee) that the Respondent “refused” to make submissions and withdrew from the proceedings.
(b) The Findings cannot be sustained since the same have been arrived at without following the principles of natural justice as mandated under Rule 18 of CA Rules 2007. The impugned Findings have been rendered by grossly misconducting the proceedings just within four dates (hearings) from the commencement, without hearing parties at any length as would be evident from the transcripts/minutes of the daily proceedings.
(c) It was clearly evident that the Disciplinary Committee was bent upon making short-shrift of the proceedings and concluded it on the second day itself without allowing the Respondent/member any opportunity to establish his innocence through the procedure established under Rule 18.
(d) During the proceedings held on 10.08.2023, the learned Committee not only brushed aside the submissions of the Counsel for the Respondent, but also clearly directed/ordered that the list of witnesses is being rejected outrightly. The Counsel for the Respondent submitted that the Respondent has no confidence in the learned Committee that it would actually conduct a just and fair enquiry, and further that the Respondent would like to approach the Hon’ble Council for re-constitution of the DC-IV.
(e) In para 8.14 of the Findings, it is stated that there was a practice of recognizing revenue against goods billed but not dispatched and as also confirmed by the Respondent in Para 3.16 of the reply dated 05-01-2015. This is a wrong fact.
(f) The Findings of the Committee in Para 8.2 states that the Balance Confirmation has been sought in 25% of the cases in the year 2010 and that there was no reference to this issue in the Audit report of the Respondent. The Director (Discipline) as well as the Committee should have noted that confirmations to the extent of 25% were received and the Confirmations to the extent of another 25% were received by the Component auditor. Based on the aggregate confirmation received, the procedure was accepted by the Respondent.
(g) The Director (Discipline) has incorrectly held that the Respondent has simply accepted the Management explanation to complete the task by deadline and compromised his audit responsibilities. The Director (Discipline) has ignored the fact that similar exercise was carried out by ‘BSR and Co’ who received confirmation of 25% of the cases. His statement that detailed Account Receivables circularisation was undertaken and that there was no reference to the same in audit report is not warranted as there is no such requirement nor there is such a practice. The statement by the Director (Discipline) that it does not absolve his responsibility is totally misconceived.
(h) With reference to the observation of the Committee in Para 8.12 that the requirement of SA 706 should have been taken into account in the Audit reports. It is humbly submitted that SA 706 became effective/ applicable for audits of financial statements for the periods beginning on or after 1st April 2012 and hence, Committees observations requires to be deleted as these are not applicable for the year under consideration.
(i) The most striking omission on the part of the Disciplinary Committee, is to totally ignore the evidence submitted by the Respondent being the disclosures contained in the audited books of, accounts for the year ended 31-03-2012 wherein the Management had extensively dealt with the manipulations that took place in the years preceding the year 2011 .The disclosures would have raised a basic issue that how any auditor in such circumstances could have discovered the manipulations.
7. The Committee considered the reasoning as contained in Findings holding the Respondent ‘Guilty’ of Professional Misconduct vis-à-vis verbal and written representation of the Respondent The Committee noted that ample opportunities were given to the Respondent to make his submissions on merits before it at the stage of hearing under Rule 18, but the Respondent did not make any submissions/ arguments on merits of the case at the hearing stage. The Committee noted that the submission of the Respondent that the Committee had closed the proceedings on 14th September 2023 and recused from the case, are baseless and not correct. The Committee further noted that it had communicated during the hearing its intent, to consider and conclude the case on merits on 14th September 2023; however the Respondent withdrew from further proceedings and did not participate therein.
8. Thus, keeping in view the facts and circumstances of the case and material on record including verbal and written representations of the Respondent on the Findings, the Committee noted that the Respondent has submitted that the Company had a proper system of physical verification of stock. Such physical verification did not at any time reveal or include any stock termed as “billed but not dispatched” (BBND). In view of this and the fact that dispatch documents were not available with auditor to verify the process of recognizing revenue, the Committee was of the view that the Respondent has been grossly negligent while performing his professional duties. The Committee held that the Respondent failed to obtain balance confirmation from the substantial number of parties; and the Respondent has accepted the Management’s explanation thereby, compromising with auditor’s responsibility without resorting to indirect balance confirmation. Thus, the Respondent failed to act independently and diligently. The Committee held that the issues related to internal control were not reported by the Respondent while reporting for CARO, 2003 for the Year 2010 which ought to have been done.
9. As regards the matter related to ‘in and out’ transactions, the Committee noted that the Respondent had merely relied upon the bank reconciliation statements verified to ascertain that the amounts due from debtors had been realised. The Committee was of the view that the circuitous transactions can be ascertained by the examination of debtors ledger vis-à-vis bank book. The Committee held that the Respondent as auditor had not modified the audit procedures in view of the prevailing circumstances and his audit observation for the year 2010 clearly indicated that the Respondent was aware of instances when the amount was due from the franchisee but still the amount is being paid to its arm Company, although the amount due was stated in financial statements on a net basis. As regards the matter of not qualifying his report with respect to retrospective price rise, the Committee noted that it was a normal practice for the Company to carry out the retrospective price rise and the same was acceptable to its franchises also. The Committee was of the view that such a practice signifies that revenue was being recognized on provisional values and based on contractual arrangements between the Company and franchisees, a retrospective price increase was treated as a part of additional revenue earned. The Committee held that considering the nature of the adjustment that used to be made, it ought to have been disclosed in the significant accounting policies followed by Reebok, specially in view of the quantum of the amount involved.
10. The Committee noted that the amounts observed to be received under Franchisee Referral Program (FRP) should have also been disclosed as ‘advances’ received instead of showing to be completely ignorant of such agreement. The Committee held that adjustment of such receipt as collection from debtors is misrepresentation of facts which has not been reported by the Respondent as the statutory auditor of the Company. As regards the matter related to not qualifying the report for circuitous intra-group transactions, the Committee noted that the Respondent failed to report financial irregularities taking place in relation to transactions held with Shivam group of entities. Thus, the Committee held that the Respondent failed to exercise due diligence, while certifying the financial statements of the Company as a Statutory Auditor.
11. The Committee held that the Respondent had failed to act independently and diligently while conducting audit of the Reebok India Company for the years ended 2008, 2009 and 2010. He had failed to disclose material facts in the financial statements. The Committee was of the view that the Respondent had failed to bring on record the evidence to show that he had exercised due diligence, and adequate checks have been applied to uncover wrongdoings if any during the statutory audit of the said Company.
12. The Committee held that the Respondent being Statutory Auditor of the Company has omitted to report/ highlight a number of important issues, such as, Franchisee Referral Programme (FRP), In and Out transactions, Circuitous transactions with Shivam group and goods Billed but not dispatched (BBND) which should have been reported in his audit reports. The Committee was of the view that the Respondent has failed to report material falsification of financial statements, and such acts of omission in discharge of his professional duties are not expected of a statutory auditor. Hence, the Professional Misconduct on the part of the Respondent is clearly established as spelt out in the Committee’s Findings dated 05th February 2024, which is to be read in consonance with the instant Order being passed in the case.
12. The Committee also emphasized that reference to ‘SA-706’ as contained in pare 8.12 of the Findings dated 05.02.2024 was a typographical error and the same should be read as ‘AAS-28’ in the Findings, which was applicable at the relevant time.
13. Accordingly, the Committee was of the view that the ends of justice would be met if punishment is given to him in commensurate with his Professional Misconduct.
14. Thus, the Committee ordered that the name of the Respondent i.e., CA. N Narasimhan be removed from the register of members for a period of 06 (Six) months.
Sd/-
(CA. RANJEET KUMAR AGARWAL)
PRESIDING OFFICER
Sd/-
(SHRI JIWESH NANDAN, I.A.S. {RETD.})
GOVERNMENT NOMINEE
Sd/-
(MS. DAKSHITA DAS, I.R.A.S.{RETD.})
GOVERNMENT NOMINEE
Sd/-
(CA. ABHAY CHHAJED)
MEMBER
