Failure of CA to investigate transactions in depth is gross negligence in performing professional duties

Brief of the case:

The Hon’ble Delhi High Court in the above cited case held that a Chartered Accountant while doing concurrent audit is expected to check the transactions falling within the scope of audit in depth. Thus, non-checking of the same would be gross negligence on his part while performing professional duties.Accordingly, he is liable to face the charge of professional misconduct under clause 7 of the First Schedule of the CA Act, 1949.

Facts of the case:

• M/s. J.S.Bedi and Co., Chartered Accountants of which Sh.U.S.Jha was a partner/member, he being a Chartered Accountant, were appointed concurrent auditors to audit the account of the Branch of Punjab and Sindh Bank New Delhi at ChandniChowk for the period July 01, 2003 to June30, 2004.
• As per the terms of appointment the audit spanned the entire working of the branch and shortcomings observed to be reported to the Branch Manager in the form of short notes for necessary rectification. If a fraud, fraudulent activity or foul play was noticed or detected it was to be reported to the General Manager (Vigilance) as also to the Zonal Inspectorate and the General Manager as well.
• It was specifically brought to the notice of the auditors that recently a fraud allegedly committed by a staff member had been reported by the branch and a special audit conducted by the bank revealed that the fraudulent activities had continued to take place.
• The respondent admitted that the firm J.S.Bedi& Co. was charged with the concurrent audit for the period in question and that it had carried out the concurrent audit under his supervision but denied any fraud perpetrated for the period of the audit
• A complaint was made against concurrent auditors for carrying out the audit negligently resultantly failing to detect the fraudulent transactions.
• The findings by the Disciplinary Committee are that the respondent may be right that the manner in which the fraud was committed required an in-depth investigation but opined that with a little more diligence the concurrent auditors could have unearthed the modus operandi.
• Accordingly, committed found auditor guilty of professional misconduct by working in a gross negligent manner under clause 7 of Part I of First Schedule to CA Act,1949.
• Aggrieved auditor is in in appeal before High court.
  

Held by Hon’ble Delhi HC:

• The court considered report of the council which stated that the basic objective of concurrent audit is to keep the current routine work under continuous check and to ensure adherence to the system and procedures from the viewpoint of internal control and statutory compliance.
• The court concurred with the stand take by the council of the institute that noting the terms of reference of the Respondent’s appointment held that although the fraudulent transactions were carried out in the Branch wherein the Respondent had acted as a concurrent auditor but had the respondent while carrying out his professional duties acted with more care and caution, such modus operandi /or at least certain transactional entries would have been disclosed/unearthed by him in course of his routine crosschecking particularly wherein the terms of reference very well covered checking of such kind of transactions also.
• Therefore, the auditor was guilty of professional misconduct by working in a gross negligent manner under clause 7 of Part I of First Schedule to CA Act, 1949.Accordingly , court accepted the council’s decision of removal of respondent’s name from register of members for a period of 1 year.