In the present case several charges have been leveled against the Respondent alleging misconduct enlisted in the Second Schedule of the Act. The Disciplinary Committee has found that the respondent has been guilty of the relevant clauses in the Second Schedule as far as Charges 1 (iv), 2, 10, 12 and 13 are concerned. The Disciplinary Committee’s findings suggest that it has examined the material based on the re-audit report and the complaint made to it. Due care has been taken by the Committee, during the course of proceedings to consider each and every aspect and perception put forth by the Respondent while explaining his point of view on the charges alleged. The proceedings have been carried out in consonance with the twin principles of fair play and natural justice. The Disciplinary Committee has arrived at findings of fact which in the opinion of this Court, cannot be said to be unjust, unwarranted or contrary to law. This Court while deciding a Reference needs to keep in mind the limitations of its role. It does not sit in appeal over the decision making process of the Disciplinary Committee and the recommendations so made by the Council of the Institute. Hence in examining the Report and the recommendation of the Council it cannot re-appreciate the evidence on record or assess the findings of the Committee as an Appellate Authority.
In discharge of his duties as a Special Auditor entrusted with the work of Audit of the Bank, the Committee has found the respondent guilty of having violated various provisions of the Multi State Cooperative Societies Act, 1984 and non compliance of the guidelines of the Reserve Bank Of India while disbursing loans. The respondent while carrying out the Audit found that he had failed to disclose material fact known to him and/ or failed to report material mis-statement known to him to appear in a financial statement or that he was grossly negligent in performing his duties or had failed to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of opinion.
These are serious flaws, in conduct of and in discharge of professional conduct of a Chartered Accountant. As is evident on reading the provisions of Section 22 of the Chartered Accountants Act, 1949 the Council has wide powers to regulate the conduct of its Members and take disciplinary The Council can make recommendations to the High Court to act on such recommendation. The Council is the custodian of the interests of the profession and its members. Once a Council as a custodian finds that its Member has committed a breach of its code of conduct and has done anything detrimental to the interest and prestige of the profession, he is liable to disciplinary action under, Section 21 of the Chartered Accountants Act, 1949.
Keeping these parameters in mind, we find that the we have no hesitation in accepting the recommendation of the Council which has decided to recommend that the name of the Respondent be removed from the Register of Members for a period of two years.
Accordingly, we answer the Reference by accepting the recommendation and accordingly direct the Council to remove the name of the Respondent from the Register of Members for a period of two years.
Full Text of the High Court Judgment / Order is as follows:-
1. This is a Reference made under Section 21(5) of the Chartered Accountants Act, 1949 (“The Act” for short). The Reference has been made by the Council of the Institute of Chartered Accountants of India (“Council” for short) in respect of a disciplinary proceeding held against the Respondent, a Professional Chartered Accountant. The Council, on consideration of the report of the Disciplinary Committee, found him guilty of certain misconduct and decided to recommend to this Court that the name of the respondent be removed from the Register of Members for a period of two years.
2. The Reference arises in the following background of facts:
2.1 The case pertains to an audit carried out by the firm of the respondent with regard to the Madhavpura Mercantile Cooperative Bank Ltd. (‘MMCB’ for short). The Madhavpura Mercantile Cooperative Bank is registered under the Multi State Cooperative Societies Act, 1984. Audit for the Year 1998- 1999 was allotted by the Registrar of Societies to the respondent firm in order to see whether the affairs of the Bank were carried out in accordance with the Multi State Cooperative Societies Act, 1984, rules there under and the provisions of the Banking Regulation Act and the guidelines of Reserve Bank of India. The audit was assigned to the respondent as he was empanelled by the Central Registrar for this purpose.
2.2 As a result of a scam at the MMCB, the Registrar of Cooperative Societies, Gujarat State on instructions of the Central Registrar carried out a re-audit of the Bank for the year 1998-1999. Based on the re-audit Report, the Registrar found that the respondent had neither disclosed nor reported serious irregularities in the accounts of the Bank and that the respondent had failed to disclose material mis-statements which were not disclosed also in the financial statement of the Bank though they were known to him. Accordingly, according to the Report, the respondent had shown gross negligence in performing his professional duties and had failed to obtain sufficient information to warrant the expression of opinion. The Registrar was also of the opinion that the respondent had failed to invite the attention to material departures from the generally accepted procedure of audit applicable to the Banks.
2.3 As many as 19 Charges were framed against the respondent listing charges of misconduct. After exchange of written representations and opportunity of hearing a report was submitted by the Disciplinary Authority. On consideration of the report of the Disciplinary Authority, the Council decided to accept the report of the Disciplinary Committee. Of the 19 charges, the Disciplinary Committee held the respondent guilty of professional misconduct with respect to Charge 1(iv) and Charge 13 within the meaning of Clauses(8) & (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. The Disciplinary Authority also found the respondent guilty of Charges 2 and 12 within the meaning of Clauses (5),(7), (8) & (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. Further for Charge No. 10, the respondent was found guilty within the meaning of Clause (5), (6), (7), (8) & (9) of the Second Schedule to the Chartered Accountants Act, 1949.
2.4 The Charges on which the respondent was found guilty, in a nutshell are as under:
Charge 1(iv) : Contravention of Section 60 of the Multi State Cooperative Societies Act, 1984.
Charge 2 : Non-compliance of RBI guidelines for Individual and Group Borrowers.
Charge 10 : Regarding defects in loan documents for advances against shares aggregating to Rs. 46,67,48,615.
Charge 12 : Regarding sanctioning of the Temporary Overdraft (TOD) in contravention of RBI Circular,
Charge 13 : Regarding advance against lands and buildings.
3. We shall deal with the factual aspects and the material considered by the Disciplinary Authority, which in turn was considered by the Council and the legality and validity of the recommendations therefore so made. In considering this Reference, we shall only deal with the charges mentioned herein above, on which the findings of the Disciplinary Committee are based. Submissions of the respective Advocates on each charge and the validity of the findings of the Disciplinary Authority, which in turn have been accepted by the Council shall be considered simultaneously. We shall therefore proceed charge-wise.
4. CHARGE 1(iv) – Contravention of Section 60 of the Multi State Cooperative Societies Act, 1984.
4.1 According to the complaint of the Joint-Registrar of the Cooperative Societies, relating to this charge, the Board of Directors of the Bank had failed to carry out its duties in accordance with the provisions of the Multi State Cooperative Societies Act, 1984 and the Rules there under. The Bank, according to the re-audit had violated the provisions of Sections 30(2),34(g),60 and 63 of the Act. According to the complainant, the bank had not identified the Non-Performing Assets correctly. The re-audit report, according to the complaint so filed suggested that 120 Accounts had to their credit of the Profit and Loss Account, interest. Interest could not have been credited to these 120 Bank Accounts as these accounts were Non-Performing Assets. Hence, interest could not be considered as income. In calculating interest credited towards accounts which were Non-Performing Assets, the Counsel Shri Soparkar for the Bank suggested that there was a clear violation of the provisions of Section 60 of the Multi State Cooperative Societies Act,1984. This according to the Institute and the complainant was also in contravention of the RBI Guidelines and circulars.
4.2 Based on the Re-audit report, in the opinion of the Re- Audit Report, the NPA classification as certified by the statutory auditor and sent to the RBI as on 31.3.1999 and 31.3.2000 showed that the gross NPA of the Bank remained at Rs. 5074.62 lacs against the total loans and advances outstanding at Rs. 52776.75 lacs which was 9.62 percentage of the total loans and advances outstanding. The report opined that some of the accounts have been shown as standard assets though they were NPAs and has shown interest on such assets in the Profit and Loss Accounts. According to the Committee’s findings, the interest on the 120 accounts amount to Rs 422.95 lacs while the bank debited only Rs.100 lacs. This resulted in excess profit to the tune of Rs. 322.95 lacs shown by the Bank.
4.3 The complainant produced the working papers which were examined by the Committee. The respondent examined such working papers and defended his action by stating that the position of NPA accounts had been in accordance with the Annual Financial Inspection carried out by the audit. According to the respondent, statutory inspection of the Bank was conducted under Section 35 of the Banking Regulation Act and the Bank’s classification of NPAs was accepted.
4.4 According to Shri Siraj Gori, who appeared for the Respondent, Charge No. I(iv) under no circumstances can be said to have been proved. A specific finding had been arrived at by the Disciplinary Committee that there was no negligence on the part of the Respondent in carrying out the audit and treating the accounts as such. There was no violation of any statutory guidelines of the RBI. According to the Respondent, as per the statutory report, the Bank had made adequate provision of Rs. 10094.88 lacs for loan losses. Relying heavily on the findings of the statutory audit report, the learned advocate for the respondent contended that the findings of the Disciplinary Committee as confirmed and accepted by the Institute are perverse and Charge No. 1(iv) cannot be held to be proved as so held by the Disciplinary Committee. It is contrary to the evidence on record. Shri Gori has also has taken us through the written submissions filed by the Respondent and the question and answer exchange during the inquiry proceedings before the Disciplinary Committee to assail the findings of the Committee.
4.5 The findings of the Committee suggest that the respondent when confronted with the question as to how he had dealt with these accounts and when asked to substantiate his working on the basis of the working papers, failed to explain anything in this regard. The Committee found that the mandatory principles of the AAS1 Basic Governing principles which an Auditor is required to follow were not followed by the respondent. He had failed to document matters in the manner which could go to show that audit was properly carried out. No evidence or working papers were presented to show that the Standard Audit Procedure was followed. According to the committee, the respondent failed to substantiate through the working papers, in order to show that a proper audit programme was followed by which the audit was conducted. The committee however absolved the respondent of the charge of negligence on the ground that in the final assessment of NPA, it was found that the same was approved in the AFI of RBI. However, the Committee based on the factual assessment on record observed that the respondent had failed to obtain sufficient appropriate evidence and had therefore failed to establish that proper accounting procedures were followed. Therefore, the Committee was of the view that the respondent had failed to obtain sufficient information to warrant expression of an opinion and had failed to invite attention to any material departure from the generally accepted audit procedure and was thus held guilty of Clause (8) and (9) of Part I of Second Schedule of the Chartered Accountants Act, 1949 under this charge.
4.6 The findings have been approved in the Institute’s Meeting. Shri Siraj Gori, as stated in the earlier part of this order has tried to bring about a defence that the respondent had followed due procedures. That, the factual findings of the Committee were erroneous in view of the fact that it observed that no defence was raised though in fact detailed reply and written submissions were filed.
4.7 According to Shri Gori, not only is the complaint not specific but there is no date given to justify that the classification of the NPAs and the omission would tantamount to breach of Section 60 of the Multi State Cooperative Societies Act, 1984. According to Shri Gori, once having been absolved of the charge of negligence, the same yardstick should have been applied to see that the Respondent is not held guilty of Clauses (8) &(9) of the Chartered Accountants Act, 1949.
4.8 The charge pertained to the Chartered Accountant not bringing to the notice of the Bank, the violation of provisions of Section 60 of the Multi State Co-operative Societies Act, 1961. The findings of the Committee based on the guidelines of the basic principles of the AA51 found that such principles were not followed by the Auditor. The findings of the Committee, based on the material on record as approved by the Council suggested that some of the accounts were shown as standard assets though they were NPAs. A finding of fact arrived at, based on the re-audit report, assessed by the Disciplinary Committee and approved by the Council would not warrant re-appreciation at our hands as our role is not that of an appellate authority.
Charge 2 – Non-compliance of RBI Guidelines for individual and group borrowers.
5.1 The charge in the complaint is that before sanctioning advances, the Bank, in its meeting of the Board Of Directors, did not scrutinize the applications properly. It was further alleged that the Board did not verify as to whether the borrowers were of the same group and therefore the RBI guidelines for individual and group borrowers were violated. Reliance by the Complainant was placed on the Resolutions dated 19/06/1998 and 31/07/1998 of the Board.
5.2 In the re-audit report, it is pointed out that in the Board Meeting held on 31/7/1998, the Bank sanctioned advances of Rs. 6 crores each to Panther Investment Ltd, Skum Securities Ltd, Luminate Investments Pvt Ltd, Sai Mangal Investments, Panther Industries Product Ltd., V.N.P. Securities Pvt. Ltd, K.M.P. Securities Pvt Ltd and SCE Investments. All these companies belonged to one group of Ketan V Parekh. According to the Bank, as per the RBI Circular dated 27/11/1998, the loans against shares, debentures in physical form should not exceed Rs. 10 lakhs. If the securities were in a dematerialised form, the limit was enhanced to Rs 20 lakhs. The Bank, therefore, had contravened these ceiling limits as stipulated on the said circular of 27th November, 1998.
5.3 According to the reply filed by the respondent, it is the Board of Directors which is the supreme authority for sanctioning the advances. Since the full authority to sanction such advances vests in the Board except to verify the Loan documents etc, it was contended by Shri Gori that as far as this charge is concerned, the allegations were general in nature. Moreover, the Board Meetings, as is evident from the dates of such meetings, were held much before the RBI Circular dated 27/11/1998. According to the case of the respondent, the loans were sanctioned according to the bye-laws of the Bank, fully secured against valuable assets.
5.4 Shri Gori, inviting our attention to the written submissions filed by the respondent, pointed out that the circular was not applicable to companies where the ceiling was in respect of loans against security of shares and PSU Bonds. On merits, it was also pointed out that the total capital funds of the Bank was Rs. 70,08,3 1,940 as on year ending 31st March, 1998. 25% of the same was Rs. 17,52,07,985. The advances therefore did not exceed the ceiling limit. The case of the respondent therefore was that once having stayed within the ceiling limit there was no breach of the circular. The loans were governed by the Circular dated 16th January 1996, and the loans were fully in compliance with the terms of the Circular dated 16/1/1996. Even otherwise, it was suggested by the respondent that the circular of 27/11/1998 applied to individuals and not to other category of borrowers.
5.5 Attention was invited by Shri Gori to the part of the written submissions to point out that the report of Statutory Inspection of the Bank has opined that the Bank has not granted advances in excess of the maximum exposure limits for individual/group borrowers. According to the report, the exposure limits fixed for individual and group borrowers during the three years were as under:
