Case Law Details

Case Name : Mahavir Jain Vs Disciplinary Committee (Appellate Authority)
Appeal Number : Appeal No. 09/ICAI/2018
Date of Judgement/Order : 05/10/2018
Related Assessment Year :

Mahavir Jain Vs Disciplinary Committee (Appellate Authority)

1. This Appeal has been filed by the Appellant before this Authority against the Order dated 7th November, 2017 passed by the Disciplinary Committee (Bench-I) of the Institute of Chartered Accountants of India under Section 21B (3) of the Chartered Accountants Act, 1949 read with Rule 19 (1) of the Chartered Accountants (Procedure of Investigation of Professional and Other misconduct and Conduct of Cases) Rules, 2007, consequent upon a Report of the Disciplinary Committee dated 6th February, 2017, wherein the Appellant was held guilty under Clauses (7) and (8) of Part-I of the Second Schedule to the Act, whereby, the Appellant has been awarded the punishment of Reprimand and also imposed fine of Rs.50,000/- (Rupees Fifty Thousand Only) upon him to be paid within a period of 30 days from the date of receipt of the Impugned Order. The said Clauses (7) & (8) of Part-I of the Second Schedule of the Act reads as under:

“Second Schedule:-

PART-I: Professional misconduct in relation to chartered accountants in practice

A chartered accountant in practice shall be deemed to be guilty of Professional Misconduct, if he –

(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion.”

2. The brief facts of the instant appeal, as narrated in the aforesaid Report of the Disciplinary Committee of the Institute of Chartered Accountants of India, are as under:

“1.1 The Respondent as auditor of Resurgere Mines & Minerals India Ltd. (hereinafter referred to as the “Company”) for financial year 2010-11 has refused to take responsibility of certification of inventory and sundry debtors of the Company as mentioned in the Balance Sheet audited by him.

1.2 He relied solely on the physical verification certificate produced and representation given by the Management for valuing stocks. 

1.3 Fixed Assets as certified by the Respondent as auditors in the Balance Sheet could not be verified by the lenders during inspection.

1.4 As per Annexure to the Auditor‟s Report dated 30th May, 2011, the Company has not defaulted in repayment of its dues to banks and Financial Institutions except in the repayment of Term Loan from the Union Bank of India, whereas the Company has defaulted in payment of interest of all Working Capital Consortium Banks.

1.5 The end use of money raised by issue of GDR has not been mentioned in the Annual Report.

1.6 The Company has submitted false statement of account of Keonjhar Central Co-op Ban (KCCB) for the period 1st April, 2010 to 31st March, 2011 to consortium member Banks in support of routing transactions through the Current Account maintained with KCCB. The matter has been reported as fraud to RBI. ”

3. Accordingly, this complaint was taken up for consideration by the Director (Discipline), who vide Order dated 1st June, 2015 found the Appellant Prima Facie guilty of the professional misconduct falling within the meaning of aforementioned Clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, in respect of some of the charges mentioned in Para (2) supra.

4. Pursuant to forming of the Prima Facie Opinion, the Director (Discipline), in terms of the requirements of Section 21 (3) of the Act read with rules as applicable, placed his Prima-Facie Opinion‟ before the Disciplinary Committee of the Institute for consideration, which, in turn, on examination of the said complaint, written statements, evidence written as well as oral, further replies Prima-Facie Opinion‟ and after hearing the parties, while agreeing with the Prima-Facie Opinion‟decided to proceed further in the matter and accordingly gave its findings as hereunder:

“21. As regard this charge, it has been alleged against the Respondent that he has failed to Report submitting false statement of current account maintained with KCCB for the period 1st April, 2010 to 31st March, 2011. The Respondent submitted that he relied on the bank statements provided to him by the Auditee Company as in case of other banks. The Respondent came to know about the false bank statement of KCCB being submitted by the Company when the Complainant mentioned the same in their correspondence with the Respondent.

22. The Committee in this regard noted the further submission of the Respondent that he has written a specific letter dated 28thJune, 2012 to the said Bank. Since by that time, he had ceased to be the auditor, the Bank failed to respond to the said letter. The submission made by the Respondent as regards the balance confirmation is noted by the Committee. Out of 18 bank accounts, 4 bank accounts statements were relied upon in absence of the balance confirmation out of which one was the said bank in question.

23. The Committee in this regard felt that the Respondent ought to have used his professional scepticism and made a note of the same in the audit report issued by him that the balance confirmation could not be made available as regards 4 bank accounts. The Respondent as an auditor was required to bring the same to the knowledge of the users of the financial statements through his audit report that sufficient audit evidence and appropriate information could not be obtained by him despite writing letters to the Bank. The Committee is thus of the view that since the Respondent failed to exercise due diligence and also failed to gather sufficient information for expression of opinion he is therefore guilty of professional misconduct for this charge falling within the meaning of Clauses (7) and (8) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949.” 

5. Thus, based on the above findings, the Disciplinary Committee held the Appellant guilty of professional misconduct only in respect of charge number 1.6 mentioned in Para (2) supra and awarded the punishment as mentioned under Para (1) of this Order supra.

6. Aggrieved by the same the Appellant is in appeal before us.

7. During the proceedings of this Appeal before us, Shri S. G. Gokhale, the Learned Counsel appearing on behalf of the Appellant took various grounds of defence, which are being dealt with and disposed of as below. The Appellant reiterated before us the same submissions.

8. The facts of the case are very brief and not disputed. As mentioned in complaint, the Appellant was an Auditor of M/s Resurgere Mines & Minerals India Ltd. (the company) for the year ended on 31stMarch, 2011, which obtained loans from various banks. It is also mentioned in complaint that the said company committed fraud and defaulted in repayment of interest and loan. The said fraud has been reported to RBI. It is alleged that the Appellant did not carry out the audit properly and relied upon the false Statement of Account of Keonjihar Central Co-operative Bank (KCCB) given by the company. The Disciplinary Committee observed that the Appellant did not use the professional skepticism and neither obtained the balance confirmation of closing balances as prescribed in the Auditing Standards, nor reported this matter in the Audit Report.

9. The Appellant while admitting that he did not obtain the balance confirmation of KCCB submitted that out of total 18 banks he had obtained the balance confirmation of the 14 Banks and only 4 banks were remaining with which the dealings and balances were small. He also submitted that it was general practice that banks do not issue the balance confirmations despite reminders. He further submitted that he had placed reliance on bank statement given to him by the company, which was ultimately found to be fake. He also submitted that it was impossible to detect the fraud as he was carrying out the statutory audit and not the investigation. The Learned Counsel of the Appellant admitted that the Appellant committed mistake in not obtaining the external confirmation of KCCB but it was not gross negligence.

10. The Appellant also relied upon the following observations in the Code of Ethics‟, 11thedition, reprinted in December, 2010, at Pages 251-252, as issued by the Institute of Chartered Accountants of India:-

“Professional misconduct on the part of a person practicing one of the technical professions cannot fairly or reasonably be found merely on a finding of a bare non-performance of a duty or some default in performing it. The charge is not one of inefficiency but of misconduct. Imputation of certain mental condition is always involved. The test must always be whether in addition to the failure to do the duty, there has also been a failure to act honestly and reasonably. ”

“The misconduct implies failure to act honestly and reasonably either according to the ordinary and natural standard or according to the standard of a particular profession ”

11. The Learned Counsel appearing on behalf of the Respondent Institute vehemently supported the Impugned Order passed by the Disciplinary Committee.

2. We have heard rival submissions of all the parties in detail, examined all pleadings on records in addition to perusing all relevant documents and evidence produced before us as well as before the Disciplinary Committee.

13. We have also examined the said fake statement of account of KCCB which is said to have been given to the Appellant by the Company. We find that this is only a printed paper bearing no signatures or the seal of the bank. We have also noted that the transactions are also in millions of rupees and not that of small amount. No suitable reply was given by the Appellant, as to how he assessed the Risk of Material misstatement in the financial statements, which would be very high while relying on a printed paper as evidence. The procedure is clearly laid down in Standard on Auditing (SA 315) “IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT.”

14. The Standard on Auditing (SA 330) “THE AUDITOR’S RESPONSES TO ASSESSED RISKS“ provides that after assessment of the Risk, the auditor is required to consider whether external confirmation procedures are to be performed as substantive audit procedures. In our opinion the fact that the account statement of KCCB was not properly authenticated increased the risk and the Appellant was required to use his expertise about how to mitigate the same, including obtaining External Confirmations. The detailed procedure of obtaining and examining such external confirmations are prescribed in Standard on Auditing (SA-505) “EXTERNAL CONFIRMATIONS” which was followed for 14 banks out of 18 but not for others including the KCCB which turned out to be fabricated.

15.  It appears from the records that the Appellant was having knowledge of the relevant Auditing Standards and had assessed the risk of Material Misstatement as higher. Therefore, he had obtained the External confirmations of 14 Banks out of 18 Banks. However, no justifiable reason was explained as to why the External Confirmations of the remaining 4 banks were not obtained more so when the Bank statement of KCCB was nothing but a computer printout without any seal, signature or authentication.

16. When we enquired as to whether Appellant had sent the letter to KCCB or asked the company to send letter to KCCB seeking confirmation of account, no evidence was produced to proving dispatch of such letter. Therefore, we are of the view that he did not exercise due diligence expected from him as per Auditing Standards and also did not obtain sufficient information for expression of opinion on the Financial Statements of the Company.

17. Additionally, the Learned Counsel for the Appellant heavily relied upon the following judicial pronouncements:

i. Council of Institute of Chartered Accountants of India Vs. Somnath Basu (AIR 2007 Calcutta 29)

ii. The Council of Institute Chartered Accountants of India Vs. V. Rajaram (AIR 1960 Madras 122 (V.47 C36)

The Learned Counsel of the Appellant drew our attention towards the following observations in case of Council of Institute of Chartered Accountants of India vs. Somnath Basu:-

59. Failure to rise to the expected level of efficiency in discharging professional duties cannot be regarded as misconduct treating such failure as negligent act in the conduct of the professional duties. In the Division Bench judgement of this Court in the case of S. Ganesan v. A.K. Joscelyne reported in AIR 1957 Calcutta 33. Chief Justice Chakravartti observed as hereunder:-

“33…. Professional misconduct on the part of the person exercising one of the technical professions cannot fairly or reasonably be found, merely on a finding of a bare non-performance of a duty or some default in performing it. The charge is not one of inefficiency, but of misconduct and in an allegation of misconduct an imputation of a certain mental condition is always involved. I think, it would be impossible for any professional man to exercise his profession if he was to be held guilty of misconduct simply because he had not, in a given case, been able to do all that was required in the circumstances or that had misconceived his duty or failed to perform a part of it. I think the test must always be whether in addition to the failure to do the duty, partial or entire, which had happened, there had also been a failure to act honestly and reasonably.”

18. However, this Authority pointed out to him that these judgements are under the Chartered Accountants Act, as it stood before the amendment in the year 2006. As per un-amended Law clause (7) was as under:

“Second Schedule:-

PART-I: Professional misconduct in relation to chartered accountants in practice requiring action by a High Court

A chartered accountant in practice shall be deemed to be guilty of Professiona l Misconduct, if he

(7) is grossly negligent in the conduct of his professional duties. ” 

19. Whereas after amendment in the year 2006, the said clause (7) has been amended and now reads as mentioned under Para (1) of this Order, supra, for which no satisfactory reply or explanation was given by the Leaned Counsel of the Appellant.

20. In our view, it is clear that the scope of clause (7) has been widened by the Parliament of India by way of inserting the words “does not exercise due diligence” and therefore the said judicial pronouncements are not relevant for the present case.

21. Thus, it is evident that the Appellant did not exercise due diligence expected from him and also did not obtain sufficient information for expression of opinion on the Financial Statements of the Company.

22. We are of the considered view that the Disciplinary Committee was justified in holding the Appellant guilty under Clauses (7) & (8) of Part-I of the Second Schedule of the Act and thus, we upheld the findings of the Disciplinary Committee, as noted above. Thus we find no merit in the appeal and the same is dismissed.

23. On the issue of punishment as awarded by the Disciplinary Committee of the Institute, we are of the view that the same is very minimal and thus, we found no grounds to reduce the same.

24. Consequently, based on the above, the present appeal is dismissed and the Orders passed by the Disciplinary Committee are sustained. Stay orders, if any, are vacated. No order as to cost.

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