Code of Ethics- Disciplinary Mechanism of ICAI- Part I

We are currently in the diamond jubilee year of our Republic as well as of our Institute. The motto of our nation is Satyameva Jayate (Truth alone triumphs). We can only dream of poetic justice of truth winning over untruth. In this Kaliyug, real life events often shatter this fond belief. The recent episode of ‘Satyam Computers’ has evoked a storm in our profession as well. The motto of our Institute of Chartered Accountants of India is ‘Ya esha Supteshu Jagarti’ (He who is awake when others are asleep.) This was actually spoken about the ‘Soul’ — the ‘Atman’ in the Upanishadas. It implies that our conscience should always be awake. Unfortunately, the overall scenario is such that not only others but our own professionals have started losing faith in the profession. The situation calls for a good degree of introspection and self-criticism.

1. Introduction

1.1 We are currently in the diamond jubilee year of our Republic as well as of our Institute. The motto of our nation is Satyameva Jayate (Truth alone triumphs). We can only dream of poetic justice of truth winning over untruth. In this Kaliyug, real life events often shatter this fond belief. The recent episode of ‘Satyam Computers’ has evoked a storm in our profession as well. The motto of our Institute of Chartered Accountants of India is ‘Ya esha Supteshu Jagarti’ (He who is awake when others are asleep.) This was actually spoken about the ‘Soul’ — the ‘Atman’ in the Upanishadas. It implies that our conscience should always be awake. Unfortunately, the overall scenario is such that not only others but our own professionals have started losing faith in the profession. The situation calls for a good degree of introspection and self-criticism.

1.2 In recent years, there was a spate of complaints against our professional brothers for alleged misconduct. I had occasion to handle quite a few such cases which gave me some insight in the field. It is not only torturous for the respondents whom I represented, but even more stressful to me. I have, therefore, taken it as a mission to spread awareness of this subject and caution our fellow-members, since prevention is always better than cure.

1.3 The topic is too vast. The experiences which I wish to share are often frightening and depressing. But unless all of us develop positive attitude, assertive approach and collective action, the future seems to be very gloomy. Not much can be expected from our leaders. It is the same state of affairs as in our Indian democracy. Our own indifference and inaction will put us into deeper trouble. Time has come to really wake up and get out of our slumber.

The purpose of this article is to make readers conscious of the grave reality. I have consciously avoided technicalities and focussed on practical aspects.

2. Some glaring statistics

2.1 When the Chartered Accountants’ Act was originally passed in the year 1949, the ‘Disciplinary Committee’ consisted of 5 persons. viz. President, Vice-President, two other elected members of Central Council and one Government Nominee. This Committee was supposed to hear the cases all over India. Today our membership is nearing 1,50,000 and till 2007, the same committee was discharging this function.

2.2 Times have changed. General tolerance level of people has gone down. People have not only become aware of nuisance value, but have started using it. In the first 30 to 40 years of our Institute’s existence, there might have been about 300 to 400 complaints; whereas now the rate is about 500 to 600 hundred per year.

2.3 Due to various scams, mass scale complaints are received by the Council or initiated suo moto based on ‘Information’. Such scams add 100 to 200 cases in one stroke.

2.4 A complaint can be filed within 10 years from the occurrence of the event complained against — Regulation 14 of the ICAI Regulations, 1988. Unfortunately, there is no time-limit prescribed for disposal. For example, even today, a few cases filed in the year 1996 in respect of accounts for the year 1987-88 might have remained undecided.

After the passage of CA Amendment Act, 2006, the new procedure seeks to cut short the time by introducing a procedure for summary disposal.

2.5 A survey carried out in the USA revealed that 95% of the complaints against professionals (doctors) are filed out of ego problems —mainly due to improper communication by the professionals.

3. Certain fundamental principles

3.1 A complaint once filed could not be withdrawn under the old system. Under the new system, it can be withdrawn subject to the permission of Director Discipline and Board of Discipline.

3.2 For holding a member guilty, the following points are considered absolutely inconsequential —

(a) Whether the complainant or anybody is aggrieved or not.

(b) Whether the complainant, although aggrieved, wants to pardon a respondent.

(c) Whether the complainant has approached the Council with clean hands or whether the complainant himself is a confirmed criminal or has committed contributory negligence.

(d) Whether the respondent has compensated the complainant for the loss that was incurred by him due to negligence of the respondent.

(e) Whether the complainant backs out and remains absent during the hearing.

3.3 Nevertheless, the basic duty of adducing evidence against the respondent does lie on the complainant. These are quasi-criminal proceedings and the Disciplinary Committee has the powers of the Civil Court.

3.4 The basic objective of the Council is to examine whether the respondent is fit to continue as a member. This is as per a Calcutta High Court decision. The Council does not have jurisdiction to examine the conduct of the complainant or a non-member. It is primarily concerned with safeguarding the credibility and image of the profession. A clear message should go to the public at large that an unscrupulous member is severely punished; and that the Code of Ethics is religiously and rigorously enforced.

3.5 A general feeling in the society is that complaints are not processed expeditiously. There are delays and members are treated leniently. The Society expects that the Code of Ethics should be strictly implemented.

4. Reasons for delays

4.1 Many a time, complaints are filed even after 6 to 7 years of the occurrence of alleged misconduct. The permissible time is 10 years as per Regulation 14.

4.2 Sometimes, the complaints remain unattended at the Council for a number of years — may be due to administrative pressures or due to sudden shifts in priorities.

4.3 After a complaint is received by the Council, it is forwarded to the respondent asking him to file an explanation (written statement). That written statement is forwarded to the complainant with a request to send a rejoinder. To that rejoinder again, the respondent is asked to give his comments. Thus, both the parties get two innings. This was under old regime.

In the amended system, the last limb (comments on the rejoinder by respondent) has been eliminated. This is in respect of complaints filed on or after 28th day of February 2007. However, the Disciplinary Directorate may seek further information from the concerned parties, if required.

4.4 After this preliminary data, the Director Discipline forms a prima facie opinion as to whether the Respondent is ‘prima facie’ guilty. Under the old system, this decision rested with the Council of 30 members. One can imagine the delay inherent in the old system.

4.5 The instant reaction of any person on receiving a complaint against him is either total nervousness; or a serious anger against the complainant. Both these extremes result in loss of objectivity. The respondent on some pretext or the other seeks extension of time to write a reply.

4.6 Normally, a member tries to hide this from his friends and colleagues; and approaches some lawyer. Lawyers can seldom appreciate the substance of the complaint in the context of our profession. If it requires knowledge of accounting standards and audit technicalities, lawyers may have serious limitations. They usually write a legalistic reply which is often in the nature of counter-attack on the complainant. As stated earlier, the Council is not much concerned with the conduct of the complainant. Thus, the reply becomes either verbose or irrelevant, in the context of our Council’s perception. It is necessary to write a concise and objective reply, by briefly describing the background. In most of the cases, a member is made a scapegoat, as an arm-twisting pressure tactic, in the dispute of the complainant with some other party. (for interesting instances, see para 6)

4.7 When a person is found ‘prima facie’ guilty, the disciplinary proceedings are deemed to have commenced. The disqualification or ineligibilities for allotment of bank audits, C & AG Audits, etc. become applicable from this point of time. It should be noted that these ineligibilities are as per the norms of the appointing authorities and not of the ICAI.

4.8 Hearing of cases under the new system is just commencing. At present, the old cases are still pending. The Disciplinary Committee (DC) has its sittings for one or two days each at various important cities in the country. In Mumbai, for example, it might visit on 4 to 5 occasions in a year.

4.9 Duration of a hearing may range from half-an-hour to 8 to 10 hours. Once or twice, a case may be adjourned at the request of the parties. During the hearing, there are witnesses summoned, examined and cross-examined, evidences adduced, submissions made, and complainants as well as respondents are interrogated. Proceedings are tape-recorded and verbatim report (minutes) are made available to the parties. There is a high degree of transparency. Sometimes, submissions are so voluminous that they may run into a couple of thousand pages.

4.10 After the hearing is concluded, it takes normally not less than 10 to 12 months to receive a report. Basically, the DC members are themselves very busy professionals. They are on tours off and on and have many other issues to deal with. Sitting in judgment against fellow-members is a very delicate task, far from pleasant. Ordinarily, out of five members, only three of them actually sit for hearing. Either the President or the Vice-President presides over the proceedings.

4.11 The report of the DC is basically in the nature of fact finding. It is not conclusive. Under the old system, the DC report is considered by the entire Council. Members of the DC who had sat for the actual hearing at DC cannot sit in the Council while their report is considered. So also, a few other members may be disqualified. In the Council again, both the parties are represented and heard.

Before the DC, a lawyer or any member of ICAI could represent; but before the Council, only a member can represent.

4.12 After the hearing, the Council takes the decision immediately, usually by a majority vote. The Council may take any of the following decisions :

(a) Send back the matter to the DC for reconsideration.

(b) In case of misconduct specified in schedule I, decide whether a member is guilty and if yes, to award punishment. Since, for Schedule I, the Council’s decision is as good as final, the Council gives one more hearing to the respondent before awarding punishment — Sec. 21(4) of CA Act, 1949.

(c) In respect of offences in the second Schedule, the Council has only a power to recommend to the High Court — both the aspects — viz. Whether the Respondent is guilty and if yes, what is the punishment.

For First Schedule, in case the punishment recommended is suspension of membership for a period exceeding 5 years or for life, then also, the Council has to refer it to the High Court.

4.13 Readers may be aware that the High Court in turn may take a few more years. It is thus possible that the decision may become final (unless contested in the Supreme Court) after about 15 to 20 years from the occurrence of the alleged misconduct.

5. Types of punishment

Under the old system, there were only two types of punishment —

For First Schedule —

(i) reprimand or

(ii) suspension of membership for not exceeding five years.

For Second Schedule —

(i) reprimand or

(ii) suspension of membership for any length of time.

6. Interesting (and alarming) instances

6.1 As mentioned earlier, the chartered accountant has become a very soft target. The role of a CA, especially as an auditor, is very vulnerable. There is an increasing tendency to make him a victim of disputes between two parties. The CA is totally unconnected with the dispute.

6.2 I am not trying to say that the work of the CAs in these instances was flawless. There were lacunae; but by no stretch of imagination there was any serious lapse or negligence or mala fide intention or misbehaviour. It was sheer misfortune that brought them into trouble. One very important lesson one should learn is ‘not to do anything in good faith’.

6.3 So far, I have had occasion to handle quite a few cases. The following live instances can really be eye-openers —

6.3.1 For co-operative Societies, there is a system that after consecutive two years, the auditor should be changed. Audits are in individual name. There was a couple, both CAs. The wife did a particular audit for 2 years; followed by the husband doing it. Unfortunately, there was a legal separation proceeding between the two; and the wife lodged a complaint that the husband accepted the audit without communicating with the previous auditor.

6.3.2 A private limited company, only two shareholders — brothers; and both were directors. A reputed CA firm doing audit for more than 15 years. In one particular year, since the younger brother was busy in visa formalities since both were to travel together —auditor signed the accounts when only one — elder brother — who was MD with 60% holding — signed the accounts. Income-tax return was filed thereafter, younger brother refused to sign and filed a complaint that the auditor signed without signature of two directors — Sec. 215 of the Companies Act.

At this juncture, let me point out that in terms of Sec. 215, it is not enough that two directors have signed. What is more important is the approval of accounts in a Board Meeting. This aspect is often overlooked. I would advise that the auditor should retain at least one copy of accounts signed by not only two, but all directors or partners as the case may be.

Interestingly, the reason behind this complaint was that the auditor had declined the complainant’s personal request to accommodate his daughter as a ‘dummy article’.

6.3.3 Mr. A — held Certificate of Practice. — but never pursued it. He was always into a business with Mr. B —Both promoters and co-directors. B’s son completed articleship under A. Unfortunately, there was a dispute between A and B. B’s son files a complaint that A was engaged in a business without obtaining the Council’s permission.

6.3.4 Situation is all the more vulnerable in co-operative housing societies. Invariably, there are internal quarrels. A co-operative housing society received a large sum on sale of FSI five years ago. There was no issue with the Income Tax. Due to the disputes among members and also the managing committee, one member files a case that as an honest citizen, he will approach the I.T. authorities to issue notice u/s 148, make the society pay the tax and recover from auditor since he did not give proper advice ! The purpose was to exert pressure on the other party by threatening the auditor.

6.3.5 A fraudulent lady entered into an ‘arrangement’ with the proprietor of 100% export business. The auditor who was basically a tax practitioner, used to do the audit basically for Sec. 44AB and 80HHC of the Income Tax Act. There was total exemption under Income Tax as well as Sales Tax. The lady in collusion with the businessman and CMD of a nationalised bank, fraudulently got a huge loan disbursed. She herself took away the money. All the three (the lady, the businessman and CMD of bank) were chargesheeted by CBI. And the lady files a complaint that she was misguided by the audited figures. It could be proved beyond doubt that the auditor and the accounts had no role to play in the entire deed.

Nevertheless, certain shortcomings which are inherent in any accounts were exposed and the otherwise innocent chartered accountant had to face disciplinary proceedings.

6.3.6 One proprietor CA signed the tax audit report of a medium-scale CA firm — all the partners of which were his close friends. The total collection of the firm about 10 years ago was nearing Rs. two crores. Unfortunately, in the scrutiny assessment of the firm, it was found that on one particular day, there was a negative cash balance of a few hundred rupees. The Assessing Officer intimated this to the ICAI as a misconduct.

I repeat that in none of the cases one could say that there was no mistake at all. However, the courts have held that the charge in terms of Clause (7) of Part I of Second Schedule is that of ‘gross negligence’ and not of ‘inefficiency’. Every mistake is not a gross negligence. I am sure, these stories are representative of the present scenario.

Our fellow members will be well-advised to proceed with utmost care and caution.

What is essential is a positive perception and conviction that the Code of Ethics is for our protection. It is not a burden, but a shield.

I wish all the readers a trouble-free practice and good luck.

6.3.7 In a deal of immovable properties between Mr. A & Mr. B, Mr. C — a CA was representing Mr. B. In the course of documentation, there were certain differences. C’s presence was felt inconvenient by A and his lawyer. Hence, a complaint was filed against C that he was rendering services of ‘legal drafting’ which is not permissible for a CA.

Under the amended law, there are three types of punishments prescribed.

For First Schedule

(i) reprimand

(ii) suspension of membership for not exceeding 3 months; or

(iii) fine not exceeding Rs. one lakh.

For Second Schedule

(i) reprimand

(ii) suspension of membership for any length of time.

(iii) fine not exceeding Rs. five lakhs.

Further, under the new system, the Council’s function is now entrusted to an Appellate Tribunal of five constituents.

Note : After the amendment in the year 2006, the procedure has undergone a radical change. The same will be dealt with in a separate article. At present, a number of old cases are still pending and readers need to know the real position in its perspective.

Author: Chandrashekhar Vaze, Chartered Accountant

Categories: CA, CS, CMA


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