The Disciplinary Committee of the Institute of Chartered Accountants of India (ICAI) found CA. Sanjay Mehra guilty of professional misconduct. The case stemmed from a complaint by Shri Anurag Agarwal, Karta of Anurag Agarwal (HUF). The misconduct was related to the auditor’s failure to properly disclose related-party transactions in the financial statements of the auditee company for the financial years 2018-2019 and 2019-2020. The committee concluded that Mehra did not exercise due diligence and relied solely on management explanations, rather than applying professional judgment, specifically regarding the application of Accounting Standard 18 (AS 18).
Mehra argued that he acted in good faith, believing the case fell under an exception in AS 18, and that his interpretation of the standard’s paragraphs was a matter of professional judgment. He also emphasized his long career without prior irregularities and that no financial loss was caused to the company. However, the committee disagreed with his interpretation, stating that once a related-party relationship is established, disclosures are mandatory. The committee also noted that the audit report contained a disclaimer that auditors relied on information provided by the company, which demonstrated a lack of independent judgment. The committee ultimately ordered that CA. Sanjay Mehra be reprimanded.
THE INSUTE OF CHARTERED ACCOUNTANTS OF NDIA
(Set up by an Act of Parliament)
[DISCIPLINARY COMMITTEE [BENCH-IV (2024-2025)]
[Constituted under Section 21B of the Chartered Accountants Act, 1949]
ORDER UNDER SECTION 213(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-413/21/DD/12/2022/DC/1745/2023]
In the matter of:
Shri Anurag Agarwal,
Karta, Anurag Agarwal (HUI)
22/44, Old Vijay Nagar Colony,
Agra- 282004.
Versus
CA. Sanjay Mehra (M.No.075182)
Members Present On person): –
CA. Ranjeet Kumar Agarwal, Presiding Officer
Smt. Rani S. Nair, Government Nominee
Shri Arun Kumar, Government Nominee
CA. Sanjay Kumar Agarwal, Member
CA. Cotha S Srinivas, Member
Date of Hearing 18th December 2024
Date of Order 08th January 2025
1. I hat vide Findings under Rule 18(17) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 dated 19th November 2024, the Disciplinary Committee was, inter-alia, of the opinion that CA. Sanjay Mehra (M.No.075182), Agra (hereinafter referred to as the ‘Respondent’) is GUILTY of Professional Misconduct falling within the meaning of Item (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
2. That pursuant to the said Findings, an action under Section 21B (3) of the Chartered Accountants (Amendment) Act. 2006 was contemplated against the Respondent and a communication was addressed to him thereby granting opportunity of being heard in person / through video conferencing and to make representation before the Committee on 161h December 2024.
3. The Committee noted that on the date of the hearing held on 161- December 2024, the Respondent was present in person. He relied upon his written representation dated 05th December 2024 on the Findings of the Committee. Further, in his verbal representation before it, the Respondent stated that he has duly disclosed the Related Party transaction in the Auditee Company Balance Sheet at all places except where the Auditee Company is a provider of finance as he was under a bona-fide belief that this case squarely falls under the exception of Para 4(c)(i) of AS-18, because Auditee Company is an NBFC registered with RBI and has provided the Loans under its normal course of business. He also stated that no loss was caused to the Company on account of his non-reporting. All loans of the Company were recovered in due time. Ninety percent of the loans advanced during the years 2018-2019 and 2019-2020 are already squared up. No loan account of the Company ever turned into NPA. He also informed the Committee that in his 33 years of professional career, he has not done any irregularity. His professional practice is his only source of income. The Respondent requested the Committee to treat this matter as a difference in professional judgement and not as a professional misconduct and take a lenient view for his bonafide interpretation in the instant case.
3.1 The Committee also noted that the Respondent in his Written Representation dated 5111 December 2024 on the Findings of the Committee, inter-alia, stated as under: –
(a) The Balance Sheets of M/s Shivarn Traders’ and Hire Purchase Pvt. Ltd. (hereinafter referred to as ‘STHP’) for the F.Y..2018-2019 and 2019-2020, the. entities to which bane were disbursed; even though they were acceptably related parties (a fact which was clearly disclosed in the Balance Sheets of the related parties and recipients of loans) were not disclosed as related parties due to the exception under paragraph 4(c)(i) of AS-18.
(b) The Balance-Sheet of Shree Ganesh Buildtech India Private limited and Anent. Buildcon Private -Limited for PC2018-2019 which were the ‘related ‘Parties to whom STHP .had. provided finance,’ the Respondent being their statutory auditors had duly disclosed the name Of •STHP as related party while discharging his professional duties because AS-18 is applicable to related party whet is recipient Of finances and whose main business does not stand for providing finance, thus, accordingly the disclosure was made in the Balance Sheet who received finance from STHP.
(c) The factum of para 3 and para 4 being mutually exclusive, as arrived upon by this Committee in paragraph 8.13 of the Findings, is neither supported ‘by statute nor precedent. The entirety -of the text of AS-18 fails to mention any such exclusivity between paras 3 and 4. Para 4 of AS-18 lays down exceptions in related party disclosures; which shall be applicable notwithstanding anything provided in para 3 of AS-18.
(d) The Respondent has acted out of his professional judgement and interpreted the two paras in conjunction with each other and further requests the Council to review and clarify the same. Thus, in the professional judgment of the Respondent, it is maintained that related party disclosure was appropriately not made in keeping with the stipulations of para 4.
(e) As per paint 8.8 of the Findings of the Committee, the table of related parties attached is not a part of any of the Balance Sheets provided by the Respondent. The table is attached in a manner that indicates that the table is an extract of AS-18, Related Party Disclosures of a Balance Sheet. The Committee is requested to provide the source of the table and how it has been taken as a reference with respect to the findings of the Committee.
(f) The paragraph which has been quoted in paragraph 8.12 in Findings forms a part of the Master Directions — Bank of India (Non-Banking Financial Company — Scale Based Regulation) Directions 2023, and not the Directions of 2016. Thus, the Master Directions of 2023 cannot be retrospectively made applicable to the case which pertains to the F.Y. 2018-2019 and 2019-2020.
(g) It was Phis honest interpretation that STHP which was the NBFC and the provider of finance for the related entities, does not fall within the ambit of disclosure under AS-18. However, he has been charged with lack of due diligence or grossly negligent in conduct of his professional duties by the Disciplinary Committee. However, with emphasis, the Respondent wishes to re-iterate that in the case of Council of the Institute of Chartered Accountants of India v. Somath Basu, AIR 2007 Cal 29 the Respondent auditor had failed to repo several irregularities in the transactions relating to investments of the bank due to which he was held guilty of misconduct. The Hon’ble High Court of Calcutta, however, ruled in favour of the auditor and held as follows:
“61. Misconduct arises from ill-motive and mere acts of negligence, innocent mistake or errors of judgment do not constitute the misconduct. Even if there is any negligence in performance of duties or errors of judgment in discharging of duties, the same cannot constitute misconduct unless ill-motive in the aforesaid acts are established.
62….
63. As we have already observed that failure to meet the expected standard of efficiency by a professional cannot be regarded as misconduct and ……….
Thus, the term “gross negligence” means some culpable default or some willful blindness which does not merely arise from want of foresight or mistake of judgment.
4. The Committee considered the reasoning as contained in the Findings holding the Respondent Guilty of Professional Misconduct vis-a-vis written and verbal representation of the Respondent. On consideration of the representation of the Respondent, the Committee With respect to the contention of the Respondent as stated in Para 31(e) and Para 3,1(f) above, held that it has arrived at its Findings on the basis of the submissions and documents on record including the Financial Statements brought on record by the Complainant vide his. rejoinder. Received on 4th May 2022 and his further submissions on the, Prima Facie Opinion,dated:29u? June 2023. Further, the Non-Banking Financial Company Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 dated 1st, September 2016 vis-a-vis the requirements of Accounting Standard 18 t Related... Party Disclosures. as applicable during the financial year(s). 2018-2019:and 2020, have only been taken into view by the Committee While examining the conduct of the Respondent. As regard the other contentions of the Respondent, the Committee observed that. the same were basically the reiteration bf the earlier submissions of the Respondent made during the course of hearing which have been duly considered by the Committee.
5. Thus, keeping in view the facts and circumstances of the case, material on record including verbal and written representation of the Respondent on the Findings, the Committee is of the view that it is an admitted fact–by the Respondent that Shree Ganesh Buildtech India Private. Limited and Anant Buildcon Private Limited are the related parties of the alleged Company, The ‘Respondent being the statutory Auditor of the alleged Company and both of these Companies i.e. Shree Ganesh Buildtech India Private Limited and Anent Buildcon Private Limited for the Financial Year 2018-2019 had shown the alleged Company as its related Dirty in the Notes to Accounts of the said companies: However, the alleged Company reflected the name of only Anant Buildcon PVT. Ltd as a .related Party in its Notes to Accounts to Financial Statements for the financial. year 2018-2019 with Out reflecting the complete nature of transactions carried out with it.
5.1 Further, the alleged Company did not reflect the name of aforesaid two. Companies i.e. Shree Ganesh Buildtech India Private Limited and Anant Buildcon Private Limited as a related party in its Notes to Accounts to financial statements for the financial year 2019-2020. The Committee was of the view that paragraph 3 and 4 of the Accounting Standard – 18 are exclusive to each other, Once the related party relationship is established in view of the provisions of paragraph 3 of AS 18, the reporting enterprise has to give disclosure as per requirement of AS 18. Thus, the Committee was of the view that complete disclosure of related party transactions in Notes to Accounts as per AS 18 ought to have been there In case there was a variance as being claimed by the Respondent, the same ought to have been reported by the Respondent in his audit report.
5.2 The Committee also noted that as per the requirements of SA 550 – Related parties, it is the duty of the auditor to see whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the 1 financial statements in accordance with the framework. The Committee noted that in the Notes t3 Accounts to the Financial Statements of the alleged Company for the Financial Year 2018-2019 and 2019-2020, the following comment had been specifically provided:
“Note: R6ted Party relationships are as identified by the Company and relied upon by the Auditors.”
Thus, it is clear that the Respondent has merely relied upon the management explanation a d did not apply his judgment while reporting about the compliance of Accounting Standard-18 with respect to related party disclosures.
5.3 Thus, the Committee was of the view that due diligence has not been exercised by the Respondent while reporting on the compliance of Accounting Standard 18 with respect to related party disclosures in the Audit Report for the Financial Year 2018-2019 and 2019-2020.
5.4 Hence, professional misconduct on the part of the Respondent is clearly established a spelt out in the Committee’s Findings dated 19th November 2024 which is to be read in consonance with the instant Order being passed in the case.
6. Accordingly, he Committee was of the view that ends of justice will be met if punishment is given to him in commensurate with his professional misconduct.
7. Thus, the Committee ordered that CA. Sanjay Mehra (M.No.075182), Agra be Reprimanded under Section 21B(3)(a) of the Chartered Accountants Act 1949.
The Committee also noted that the Complainant had filed a Writ Petition bearing no. WP(C) 9311/2024 & CM APPL. 38134/2024 before the Honorable High Court of Delhi for expeditious disposal of the Proceedings in the instant case in a time bound manner wherein the Honorable High Court of Delhi vide its Order dated 10th July 2024 disposed off the Writ Petition binding the Disciplinary Directorate and the Disciplinary Committee of the Institute of Chartered Accountants of India to adjudicate the proceeding§ within a period of six Months from the dated of the Order Accordingly, in compliance of the same, the Disciplinary Committee has passed its Order reprimanding CA. Sanjay Mehra- (M .No. 075182), Agri under ,Section 218(3)(a) of the Chartered Accountants Act 1949.
Sd/-
(CA. RANJEET KUMAR AGARWAL)
PRESIDING OFFICER
Sd/-
(MRS. RANI S. NAIR, IRS RETD.)
GOVERNMENT NOMINEE
Sd/-
(SHRI ARUN KUMAR, IAS RETD.)
GOVERNMENT. NOMINEE
Sd/-
(CA. SANJAY KUMAR AGARWAL)
MEMBER
Sd/-
(CA. COTHA S SRINIVAS)
MEMBER
