Failure to verify maintenance of cost records: ICAI imposes penalty on CA

The case involves disciplinary action taken by the Institute of Chartered Accountants of India (ICAI) against CA. Sachin Rajnikant Parekh for professional misconduct related to failure to verify the maintenance of cost records during an audit assignment. Here’s a detailed summary of the proceedings and the decision made by the Disciplinary Committee:

1. Background and Allegations: The complaint was filed against CA. Sachin Rajnikant Parekh by Sh. Devendra Kumar, alleging professional misconduct. The allegations included violations falling within the meaning of Item (5), (6), and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. These items likely pertain to the failure to maintain professional standards, negligence, and misstatement in audit reports.
2. Investigation and Hearing: The Disciplinary Committee conducted an investigation into the matter as per the provisions of the Chartered Accountants Act and the related rules. The respondent, CA. Sachin Rajnikant Parekh, was given an opportunity to present his case before the Committee. The hearing took place on March 19, 2024, during which the respondent provided both verbal and written representations.
3. Respondent’s Defense: During the hearing, CA. Sachin Rajnikant Parekh presented several points in his defense:
   • He claimed that all material disclosures had been made in his audit report and that there was no material non-disclosure.
   • He highlighted that certain notifications regarding the maintenance of cost records were issued, and he had difficulties in tracing relevant information despite reviewing these notifications.
   • He asserted that upon becoming aware of the applicability of maintenance of cost records in the subsequent financial year, he appropriately reflected this in the audit report.
   • He emphasized that he conducted additional procedures independently and did not solely rely on management representations.
   • He argued that his actions did not result in any financial loss to stakeholders, nor did they benefit him personally.
   • He contested the findings of gross negligence against him.
4. Committee’s Findings: The Disciplinary Committee considered the respondent’s defense along with the findings of the investigation. Despite the respondent’s arguments, the Committee found him guilty of professional misconduct. It was noted that the respondent failed to exercise due diligence during the audit, specifically in verifying the maintenance of cost records. The Committee highlighted that the respondent’s reliance solely on management representations without independently verifying crucial aspects of the audit was a breach of professional standards.
5. Decision and Penalty: Considering the gravity of the misconduct and the respondent’s experience in the profession (25 years with 10 years of practice), the Committee decided to reprimand CA. Sachin Rajnikant Parekh and imposed a fine of Rs. 1,00,000 (One Lakh Rupees). The respondent was given 60 days to pay the fine from the date of receipt of the order.

In conclusion, the Disciplinary Committee found CA. Sachin Rajnikant Parekh guilty of professional misconduct for failing to verify the maintenance of cost records during an audit assignment. Despite the respondent’s defenses, the Committee determined that his actions constituted a breach of professional standards and warranted disciplinary action.

भारतीय सनदी लेखाकार संस्थान
(संसदीय अधिधनयम द्वारा स्थाधित)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)

PR/G/192/2019-DD/217/2019/DC/1356/2020

[DISCIPLINARY COMMITTEE [BENCH-II (2024-2025)]
[Constituted under Section 21B of the Chartered Accountants Act, 1949]

ORDER UNDER SECTION 21B (3) OF THE CHARTERED ACCOUNTANTS ACT, 1949 READ WITH  RULE 19(1) OF THE CHARTERED ACCOUNTANTS (PROCEDURE OF INVESTIGATIONS OF PROFESSIONAL AND OTHER MISCONDUCT AND CONDUCT OF CASES) RULES, 2007

In the matter of:

Sh. Devendra Kumar, New Delhi
Advisor (Cost), Cost Audit Branch,
Ministry of Corporate Affairs, Govt. of India,
B-1 Wing, 2^nd Floor,
Pt. Deendayal Antyodaya Bhawan,
CGO Complex, Lodhi Road
New Delhi–110003.

…. Complainant

Versus

CA. Sachin Rajnikant Parekh (Membership No. 107038)
M/s Price Waterhouse Chartered Accountants LLP,
Chartered Accountants,

…. Respondent

Members Present:-
CA.  Ranjeet Kumar Agarwal, Presiding Officer (in person)
Mrs. Rani S. Nair, IRS (Retd.), Government Nominee (through VC)
Shri Arun Kumar, IAS (Retd.), Government Nominee (in person)
CA. Sanjay Kumar Agarwal, Member (in person)
CA. Cotha S Srinivas, Member (in person)

Date of Hearing: 19^th March, 2024
Date of Order: 9^th May, 2024

1. That vide Findings under Rule 18(17) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, the Disciplinary Committee was, inter-alia, of the opinion that CA. Sachin Rajnikant Parekh (Membership No. 107038) (hereinafter referred to as the ‘Respondent’) is GUILTY of Professional Misconduct falling within the meaning of Item (5), (6) and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

2. That pursuant to the said Findings, an action under Section 21B (3) of the Chartered Accountants (Amendment) Act, 2006 was contemplated against the Respondent and a communication was addressed to him thereby granting an opportunity of being heard in person / through video conferencing and to make representation before the Committee on 19^th March 2024.

3.  The Committee noted that on the date of the hearing held on 19^th March 2024, the Respondent was present in person and made his verbal representation on the Findings of the Disciplinary Committee, inter-alia, stating that all material disclosures had been done by him in his Audit report and no material non-disclosure was there. Looking into the fact that he was in the audit profession for around 25 years and practicing since last 10 years, he requested for a lenient view in the case. The Committee also noted that the Respondent in his written representation on the Findings of the Committee, inter-alia, stated as under:

(a) The Companies (Cost Records and Audit) Rules, 2014 were notified on June 30, 2014, pursuant to which maintenance of cost records were not applicable to Company. There was a subsequent amendment vide notification dated December 31, 2014 which introduced the CETA code of the product manufactured by the Company which he was not able to trace despite reviewing the amendment. The Company also confirmed that maintenance of cost records was not applicable to the Company.

(b) The Respondent in his report on CARO appropriately reflected applicability of maintenance of cost records in the succeeding Financial year 2016-17 on immediately becoming aware of the fact that the CETA code of Company’s product was covered in between the Block reference (From To) under the amended Companies (Cost Records and Audit) Rules, 2014.

(c) He independently performed additional procedures and not merely relied on the management representation.

(d) The comments on the cost records in CARO report have not resulted in any loss, financial or otherwise to any stakeholder or benefit to him.

(e) The matter does not relate to Item 5 and Item 6 of Part I of the Second Schedule.

(f) No such finding of gross negligence has been made out against him.

4. The Committee considered the reasoning as contained in the findings holding the Respondent Guilty of Professional Misconduct vis-à-vis written and verbal representation of the Respondent.

5. Keeping in view the facts and circumstances of the case, material on record including verbal and written representations on the Findings, the Committee is of the view that as per Para 3 of SA 580 on Written Representations, an auditor should not only depend on representation received from the management but should also collect other necessary evidence which are necessary and relevant at the time of doing the audit. However, the Respondent merely relied upon the representations of the management and failed to check whether cost records as prescribed are made and maintained. The Company as well as the Respondent in his defence and reply before the Ministry accepted the mistake that the product in question i.e., with CETA code 8481 is covered under the requirements of sub-section (1) of section 148 of the Companies Act, 2013 read with Companies (Cost Records & Audit) Rules 2014 and thus, failed to exercise requisite due diligence while auditing and was grossly negligent in reporting material fact and misstatement. Hence, professional misconduct on the part of the Respondent is clearly established as spelt out in the Committee’s Findings dated 7^th February 2024 which is to be read in consonance with the instant Order being passed in the case. The Committee also held that keeping in view the fact that the Respondent was in audit profession for around 25 years and practicing since last 10 years, it was expected of him to be more diligent while carrying out the audit assignment.

6. Accordingly, the Committee was of the view that ends of justice will be met if punishment is given to him in commensurate with his professional misconduct.

7. Thus, the Committee ordered that CA. Sachin Rajnikant Parekh (M.No.107038), Mumbai be reprimanded and also a Fine of Rs. 1,00,000/- (Rupees One Lakh only) be imposed upon him payable within a period of 60 days from the date of receipt of the Order.

sd/-
(CA. RANJEET KUMAR AGARWAL)
PRESIDING OFFICER

sd/-
(MRS. RANI S. NAIR, IRS RETD.)
GOVERNMENT NOMINEE

sd/-
(SHRI ARUN KUMAR, IAS RETD.)
GOVERNMENT NOMINEE

sd/-
(CA. SANJAY KUMAR AGARWAL)
MEMBER

sd/-
(CA. COTHA S. SRINIVAS)
MEMBER