The accounting professionals have been able to organise their work and get social and statutory appreciation for their competence, objectivity and integrity. They provide high-calibre services to our society, in general, and to business community, in particular.
Accounting professionals who act in a professional capacity are bound to exercise the care and skills required by competent practitioners in a profession. If they fail, they are open to action being brought against them by their client. The role of accounting professional that started with the compulsory statutory audit under the Company Law has got boost in the last 50 years towards the management consultancy, data-based management information system, costing and variance analysis and return on investment. The new dimensions added to it with the introduction of high technology, financial planning operations and management, and planning installation and operation of various types of computer, devices in office automation, production and distribution services. The information services of professionally-qualified accountants in the areas of a statutory and special audit and certification of various applications, statements and opinions have strong legal backing and credibility.
Accounting profession is being organised through statutory institutional set up by an act of the Parliament that ensures not only provision of fair, equitable and competent service but also a disciplinary framework for the members of the profession. The question of liability for negligence and incompetence is normally settled through a self-regulatory mechanism and disciplinary framework of the Institute of Chartered Accountants of India (ICAI) itself. However from the Satyam debacle to the latest PNB scams have again and again questioned the role of an auditor. Presently it seems to have cast a very gloomy image of auditors in the minds of the Government and the regulators. NFRA was also made operational under the pressures from a number of quarters .The Government and regulators have simply shifted their onus targeting the auditors. There are many penal provisions and the actions which can be initiated by various regulatory and non-regulatory authorities in case of any lapse on the part of the Auditors in discharging their duties effectively.
Page Contents
- 1. PENALTY FOR NON-COMPLIANCE WITH ANY OF THE PROVISIONS CONTAINED IN SECTIONS 139, 143, 144 AND 145 OF THE ACT
- 2. PENALTY FOR FAILURE TO DISCLOSE FRAUD-SECTION 143(12)
- 3. NFRA -SECTION 132- PENALTY FOR PROFESSIONAL MISCONDUCT
- 4. ACTION UNDER SECTION 447
- 5. LIABILITY OF THE FIRM:
- 6. CLASS ACTION SUITS-SECTION 245
- 7. RISK TO PROFESSIONAL FOR NEGLIGENCE IS VERY REAL
- 8. INSURANCE MARKET IS LIMITED.
- 9. NEGLIGENT ACT, ERROR OR OMISSION
- 10. CIVIL LIABILITY – HOW MUCH COVER IS REQUIRED?
- 11. THE REGULATOR ICAI SHOULD ACT FOR PROTECTION OF HER MEMBERS
1. PENALTY FOR NON-COMPLIANCE WITH ANY OF THE PROVISIONS CONTAINED IN SECTIONS 139, 143, 144 AND 145 OF THE ACT
Section 139 provides for appointment of auditors, Section 143 deals with power and duties of auditors, Section 144 is on certain services which an auditor cannot render and Section 145 is on signing of audit report and other documents by the auditor. The auditor shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-. If an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to 1 year and with fine which shall not be less than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/-.
Further, Convicted auditor shall refund the remuneration received by him from the Company and pay for damages to the company, bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.
2. PENALTY FOR FAILURE TO DISCLOSE FRAUD-SECTION 143(12)
As per Section 143(12), if in the course of the performance of his duties as auditor, he has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, Auditor shall immediately report the matter to the Central Government. In case of any failure on his part to comply with this duty, he shall be punishable with fine which shall not be less than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/-.
3. NFRA -SECTION 132- PENALTY FOR PROFESSIONAL MISCONDUCT
National Financial Review Authority (NFRA) shall have power to investigate, either Sue-Moto or on a reference made to it by the Central Government into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949. Where professional or other misconduct is proved, NFRA shall have the power to make order for—
(A) Imposing penalty of—
(I) not less than Rs. 1,00,000/-, but which may extend to five times of the fees received, in case of individuals; and
(II) not less than Rs.10,00,000/-, but which may extend to ten times of the fees received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in the clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of 6 months or for such higher period not exceeding 10 years as may be decided by the NFRA.
4. ACTION UNDER SECTION 447
Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud.
5. LIABILITY OF THE FIRM:
Where in case of the audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.
6. CLASS ACTION SUITS-SECTION 245
Any 100 or more members/deposit holders of the company or 10% of the total number of members/deposit holders of the company can file a class action suit to claim damages or compensation or demand any other suitable action against the auditor in the manner prescribed under Section 245 of the Act. Action under this section can be initiated against the auditor including audit firm of the company for any improper or misleading statement of particulars made in the audit report or for any fraudulent, unlawful or wrongful act or conduct. Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.
The above mention penalties imposed on professionals may ruin their professional practice, reputation and goodwill. In early 50s, well-organised insurance companies in the west started ‘professional liability insurance’ in the nature of a cover against claims which clients preferred on professionals who provided them service. During the 80s, accounting profession had a loss of face as their clients turned to court frequently for compensation against loss due to professional services which led to monetary loss or a loss of goodwill. This has consequently increased the cases of insurance protection for professions seeking the cover. Thus against claims by clients, accountants sought to limit their liability in the conduct of the audit as the risk for suits of damages became very acute. Insurance covers were so high that unlimited liability was no longer tenable. This era is going to be the era for class action suits.
Although limited-liability concept for business ventures was shaped and improved by corporate laws from time to time during the last 150 years, but it kept professionals like accountants outside its purview. Accountants couldn’t provide their services by organising themselves into private or public limited companies. With an increased role and responsibility of accountants in this age of globalisation, their profession has been exposed to many pitfalls and risks. Here, professional indemnity insurance covers various activities and responsibilities designed and offered. It indemnifies errors and/or omissions by the employees named in the policy or professionals that may include chartered accountants, financial accountants, management consultants, advocates, solicitors or counsels, insurance brokers, or agents, while rendering services.
7. RISK TO PROFESSIONAL FOR NEGLIGENCE IS VERY REAL
“Every person who enters into a learned profession undertakes to exercise a reasonable degree of care and skill.” If he/she is an attorney, he/she does not undertake that in all events she/he shall win your case; nor does a surgeon undertake that she/he will perform a cure. There may be people who have higher education and greater advantages than she/he has. But she/he undertakes to bring a fair, reasonable and competent degree of skill. It follows that there are two counts upon which an action may be based for damages due to negligence: the defendant doesn’t have the necessary degree of skill, and the defendant did not exercise his skills required in a particular case.
The risk to professionals for negligence is very real and the consequences of such an action can be serious: not only she/he may obtain unwanted publicity, but if the action succeeds, she/he may be made bankrupt; not only a claim may be made due to her/his personal acts, but it also may be made, arising out of the actions of any of her/his staff.
8. INSURANCE MARKET IS LIMITED.
From the perspective of insurance companies, whole expense for this class of business has been unfavourable, as insurance market is very limited. On part of insurance provider, a considerable amount of skill is necessary in underwriting this business; consideration has to be given to the current reputation of the individual or firm proposing the insurance. If the firm has been established for some time then, the past experience requires investigation, and if there have been claims made against them in the past, the type of. Claim is very relevant, viz. claims due to:
1) Gross negligence of person concerned or her/his staff.
2) Complete lack of control on part of the partners in the profession.
3) Error of judgments or only its isolated, unlucky incident.
4) Quality of staff whether trained or untrained.
There is no standard form of policy to fit all professions. The insurance companies are having accountant’s Indemnity Insurance Policy that covers incidents happening during the period of insurance or during a specified period after the expiry of the policy. The normal exceptions are:
1) Claims for libel or slander.
2) Claims brought about or contributed to by the dishonest, fraudulent, criminal, or, malicious act or omission of the insured or his employees.
3) Claims for which indemnity is obtained under any other policy.
This policy indemnifying against amounts one is legally liable to pay as damages to the clients, is basically governed by all fundamental principles of insurance contracts such as:
1) Insurable Interest: insured has insurable interest in the financial loss that arises when he has to pay damages under the law.
2) Indemnity: the policy will indemnify the insured to the extent of damages and costs awarded, and legal costs incurred, subject to limits of liability.
3) Subrogation: rights are transferable to insurer.
4) Contribution: all insurers pay rate able share of loss.
5) Utmost Good Faith: insured to disclose all material facts.
Professional indemnity insurance provides cover for claims brought against policyholders due to their professional negligence. Liabilities may arise in the discharge of professional duties due to negligence. This indemnifies policyholders against loss/circumstances incurred only as a result of their negligent act, error or omission in carrying out the policyholders’ business. This is the narrowest form of cover.
9. NEGLIGENT ACT, ERROR OR OMISSION
Negligence is also the reason for the liability loss exposures. In simple words, negligence means “absence of care”. Negligence can be established when the following conditions are satisfied:
1) Existence of duty of care towards the party
2) Breach of that duty
3) Injury or damage as a consequence of the breach
4) Casual connection between the breach of duty and injury or damage
Some professional indemnity policies go further than the standard cover and provide indemnity for any civil liability. These policies cover areas such as breach of contract, libel and slander. Some standard cover policies may also include libel and slander as extensions to the policy wordings if required.
10. CIVIL LIABILITY – HOW MUCH COVER IS REQUIRED?
Only the professionals by their own judgment can assess the amount of cover appropriate to the profession. In determining how much cover to effect, it is important that a realistic view is taken of the potential damages and legal costs for which the professional could become libel. Being under-insured can be almost as financially disastrous as being without can arrange through professional indemnity insurance has not only become costly, but also is not able to take care of various types of agencies to which their professional practice is exposed in a fast changing and increasingly refined accounting environments. With all the proficiency at their command, they are unable to cope up with increasing accounting frauds like those of lending money transmission, security and commodity transactions, venture capital, trade, and manufacturing. Even public investigators and policy personnel are finding it difficult to operate successfully through the corporate trade jungle which is becoming very sophisticated in view of the introduction of the computer-based management information and operating systems. Professional indemnity insurance is often sold in varying limits. The amount of cover required will depend on the amount of exposure that your client has To decide how much professional indemnity insurance you need, you should consider:
- The size of your profession
- The size of the clients you are dealing with
- How much it might cost to defend yourself in court
- Is your professional regulated?
11. THE REGULATOR ICAI SHOULD ACT FOR PROTECTION OF HER MEMBERS
The ICAI recognises the need for CAs to be world-class advisors in an ever mounting and varying business environment. In this age of globlisation , accountants are raring to stretch their wings in the vast awning of the worldwide market. The ICAI had signed mutual agreements with United Kingdom, Australia and many more. In our country Torts Litigation are yet to take up but the countries like England and Australia, it is a day-to-day legal activity. The Companies Act, 2001 of the Mauritius provides that the members of select professional bodies, of which the ICAI is one of the indicated institutes, individually or in partnership can be appointed as a statutory auditor of a company other than a small private company. Like India, at present, there is no legal requirement to have indemnity insurance in Mauritius. However, practicing auditors are requirer individual professional bodies abroad to have professional indemnity insurance.
In view of the fast-growing concern and the near inability of the insurers and the governmental organisations to provide major relief against professional indemnity, the accounting profession has to e its own safeguard mechanism that could be on the following lines:
1) Professionals risk programme and modules to prepare to safeguard for the interests of members.
2) Despite LLP liability, the Company Law and related legislative framework to be effected to provide for the maximum damages linked to the amount of fees charged from the clients whom this service is provided.
3) Representation to the Government to fix the maximum liability.
4) Accountants to form their own insurance fund by setting aside a percentage of their fee income for meeting claims of frauds and damages caused by employees’ negligence.
5) Continuous evaluation and rating of clients by independent agencies to ward off frivolous claims and damages.
6) The work relating to various types of services to be allocated taking into account the cost of indemnity insurance, the hazards of litigation and the fidelity rating of the employee and the client.
Professional accountants are under continuous thrashing. Through various types of claims and their escalating amounts, the protection which they can arrange through professional indemnity insurance has not only become costly, but also is not able to take care of various types of agencies to which their professional practice is exposed in a fast changing and increasingly refined accounting environments. With all the proficiency at their command, they are unable to cope up with increasing accounting frauds like those of lending money transmission, security and commodity transactions, venture capital, trade, and manufacturing. Even public investigators and policy personnel are finding it difficult to operate successfully through the corporate trade jungle which is becoming very sophisticated in view of the introduction of the computer-based management information and operating systems.
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