Late Shri Anil Gangadhar Joshi Vs CA. Govind Shrikant Malu (ICAI Disciplinary Committee)
Delay in Replacing Old Share Certificates Does Not, by Itself, Establish Professional Misconduct by the Auditor
Summary: The ICAI Disciplinary Committee, Bench II, held CA. Govind Shrikant Malu not guilty of professional misconduct under Clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. The complaint concerned the statutory audit of State Bank Nagar Sus Road Prakalp Co-operative Housing Society Ltd. for FY 2017–18. The complainant alleged that the auditor incorrectly reported that share certificates had been issued and the share register was updated, although replacement certificates bearing the name of the newly constituted society had not been distributed following bifurcation of the original society into eight independent societies.
The Director (Discipline) had initially formed an adverse prima facie opinion, noting that the extract of the Register of Members lacked identifying particulars and that the auditor had answered “Yes” to the share certificate question for FY 2017–18 but “No” for FY 2018–19. The Director considered this inconsistent and indicative of insufficient verification. During the disciplinary hearing, however, the respondent explained that members continued to hold certificates issued by the original society, that their share capital had been transferred to the new society, and that the pending exercise concerned replacement of existing certificates rather than the initial issuance of shares.
The Committee considered the AGM resolution dated 30 September 2017, which authorised replacement of the old certificates without prescribing a completion deadline. It also considered the society’s notice dated 19 February 2020, which stated that existing certificates would remain valid until replacement. The respondent had identified other statutory record-keeping deficiencies in his audit report, including non-maintenance of Registers I and J. The Committee found insufficient material establishing deliberate misrepresentation, wilful failure to undertake necessary audit procedures or a false certification. It also declined to examine the separate challenge to the auditor’s appointment because that matter fell outside the framed charge.
Accordingly, the Committee held the respondent not guilty under both provisions and directed closure of the proceedings under Rule 19(2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007. The decision illustrates the importance of examining the underlying records and the precise nature of a reporting discrepancy before attributing professional negligence.
Background
CA. Govind Shrikant Malu was the statutory auditor of State Bank Nagar Sus Road Prakalp Co-operative Housing Society Ltd. for FY 2017–18. The society emerged following the division of the original State Bank Nagar Co-operative Society into eight independent housing societies.
The complainant alleged that, although share certificates had not been issued in the new society’s name since its inception in 2015, the auditor answered “Yes” to the prescribed audit question asking whether share certificates had been issued to shareholders for all shares subscribed. It was also alleged that he incorrectly reported the share register as updated.
According to the complainant, proper verification would have revealed the actual position. A further grievance concerned the auditor’s subsequent correspondence, in which he allegedly blamed the society’s Secretary for providing incorrect information.
The proceedings examined whether this conduct attracted Clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, concerning due diligence, gross negligence and obtaining sufficient information to express an opinion.
Prima Facie View Was Adverse to the Auditor
The Director (Discipline) initially found that the extract of the Register of Members relied upon by the auditor lacked essential particulars, including the society’s name, dates of allotment and signatures of office bearers. Its authenticity was also disputed.
The AGM held on 30 September 2017 had resolved to replace the old certificates with certificates bearing the new society’s name. Nevertheless, the auditor answered “Yes” for FY 2017–18, while answering “No” for FY 2018–19.
The prima facie opinion treated these answers as inconsistent and considered that the auditor had relied excessively on information supplied by the Secretary. It also rejected reliance on the previous auditor’s similar reporting, observing that each auditor has an independent responsibility to verify the facts for the relevant financial year.
The matter consequently proceeded to a disciplinary hearing.
Existing Certificates and Their Replacement Were Distinct Issues
The respondent explained that members already held certificates issued by the original society. Following bifurcation, these required replacement with certificates bearing the new society’s name. No additional share capital had been demanded from members.
He relied on the Register of Members, which recorded the complainant’s name and shares bearing Serial Nos. 4801 to 4805. His affirmative answer for FY 2017–18 reflected the continued existence of the old certificates.
He explained that the negative answer in the subsequent year reflected the continued non-issuance of replacement certificates. According to him, the replacement process had been delayed by pending court proceedings and the Chairman’s death.
The Committee noted that the AGM resolution approved replacement of certificates but did not prescribe a specific period for completing the exercise.
Society’s Notice Supported Continued Validity of Old Certificates
The Committee also considered the respondent’s submission concerning the society’s notice dated 19 February 2020, which called for replacement of certificates and clarified that the original certificates would remain valid until new certificates were issued.
This supported the distinction between absence of any share certificate and delay in replacing an existing certificate after reorganisation.
The Committee examined the reporting in this factual setting, rather than treating the pending replacement exercise as conclusive proof that the auditor had falsely certified the existence of shares or certificates.
Other Record-Keeping Deficiencies Had Been Reported
The respondent pointed out that his audit report had identified violations concerning statutory records, including non-maintenance of Registers I and J and incomplete records.
The Committee regarded these disclosures as demonstrating professional scepticism. It found no material establishing that the respondent knowingly ignored material facts, wilfully omitted necessary audit procedures or made a false certification.
It further observed that deficiencies in the society’s records could not, by themselves, establish professional misconduct by the auditor. Similarly, subsequent issuance of a certificate in a deceased member’s name required an established connection with the audit under examination before responsibility could be attributed to him.
Challenge to the Auditor’s Appointment
The complainant’s counsel also questioned whether the auditor had been properly appointed through an AGM resolution.
The Committee held that this issue was outside the scope of the charge, which concerned verification and reporting of shareholding. In any event, no cogent or conclusive evidence established that the appointment was invalid or that the audit had been undertaken without lawful authority.
Decision
After considering the documents and explanations, the Committee held the respondent not guilty under both Clauses (7) and (8). It ordered closure of the proceedings under Rule 19(2).
Author’s Comments
The decision illustrates why an adverse prima facie opinion does not determine the final disciplinary outcome. The distinction between existing certificates and their pending replacement, the absence of a stipulated replacement deadline and the auditor’s reporting of other deficiencies materially influenced the conclusion.
However, absence of dishonest intention alone does not answer a charge of inadequate diligence. The protection lies in sufficient verification and clear documentation.
A more precise audit response distinguishing “old certificates continuing; replacement certificates pending” could have avoided the ambiguity created by an unqualified “Yes”. Where a prescribed questionnaire does not adequately capture the facts, an explanatory qualification can be more useful than a bare affirmative or negative answer.
