ICAI Penalises CA for Auditing Struck-Off Company & Related-Party Non-Disclosures

The Institute of Chartered Accountants of India (ICAI) Disciplinary Committee has found CA Gaurav Kansal guilty of professional and other misconduct and has imposed a fine of ₹1,00,000. The order, which followed an investigation and a hearing, detailed several instances of non-compliance and negligence. The committee determined that Kansal failed to properly report on a company’s financial statements for the fiscal year 2013-14, specifically regarding related-party transactions that lacked sufficient disclosure. In the following fiscal years, he was found to have issued clean audit reports despite the company’s non-disclosure of significant payments to its directors and not performing his professional duty of reporting a company’s violation of accounting standards. Furthermore, the committee noted that Kansal continued to audit the company even after its name was struck off the Register of Companies, a fact he claimed to be unaware of. The committee also found that he did not exercise the required due diligence when accepting his appointment as the company’s auditor, failing to confirm that a proper resolution was passed by the company to fill the vacancy. In his defense, Kansal stated that the audit was conducted early in his career and that he had performed due diligence to the best of his knowledge. However, the committee concluded that his actions constituted professional and other misconduct under the Chartered Accountants Act, 1949.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)

[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

[PR/G/63/2022-DM 72/2022-DC/1683/20221

In the matter of:
Smt. Kamna Sharma, Dy. ROC,
Ministry of Corporate Affairs

Versus
CA. Gaurav Kansal 

Members Present: –
CA. Ranjeet Kumar Agarwal, Presiding Officer (in Person)
Mrs. Rani S Nair, I.R.S. (Retd.), Government Nominee (in Person)
CA. Sanjay Kumar Agarwal, Member (in Person)
CA. Cotha S Srinivas, Member (through VC)

Date of Hearing 3^rd February 2025
Date of Order 8^th February 2025

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. Gaurav Kansal, (hereinafter referred to as the ‘Respondent’) is GUILTY of Professional and Other Misconduct falling within the meaning of Item (9) of Part-I and Item (2) of Part-IV of the First Schedule and Item (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 opportunity of being heard in person / through video conferencing and to make representation before the Committee on 03r^d February 2025.

3. The Respondent was present in person before the Committee on 03r^dFebruary 2025 and made his verbal representation on the Findings of the Disciplinary Committee, inter-alia, stating that he qualified as a Chartered Accountant in 2012 and got the audit under question for Financial Year 2013-14. He did not understand the Standards relating to limited transactions so, gave the adverse opinion in Financial Year 2013-14. He added that transaction of Rs.50,00,000/- was not a related party transaction. Besides, the money given to the Directors was shown in the Audit Report and accounting policy and Rs. 40,00,000/- in the Financial Year 2014-15 was sent to the FD account and the same amount was later returned through the sweep account. The money sent to the Directors was disclosed in Financial Year 2014-15. The Company was struck off in the Financial Year 2016-17, but he had no knowledge about the same. Neither had he been informed about the Directors. The Director in his Statement before the ROC has also submitted that it was not in his knowledge. An Affidavit was also provided in this respect. There were no transactions during the year and Respondent did not find anything material in the opening balance and the closing balance so as to make a detailed scrutiny. With regard to his appointment as an Auditor, he had previous auditor’s resignation and his appointment letter and after 2013-14 AGM, he was reappointed for the next five years. So, he never thought that some non-compliance on his part was there. He further added that the audit was done in his initial years of practice, and he did due diligence on his part.

4. The Committee noted that the Respondent in his written representation dated 01.02.2025, inter-alia, submitted as under: –

i. In the very first year of audit of the Company, for FY 2013-14, the Respondent noticed glaring observations in the financial statements placed by the management for the purposes of audit. The Respondent in his professional judgement issued an Adverse Audit Report dt. 25.08.2014, wherein it was reported as under:

“the accompanying financial statements do not give a true and fair view of the state of affairs of the company”.

ii. The Company received a sum of Rs.1.23 crores in FY 2013-14 from M/s Chang Shu Kam Kwong Printing & Dying (H.K.) Co. Ltd. in pursuance of a Contract dt.15.11.2013 to open a media channel, out of which the Company paid a sum of Rs. 50 lakhs to M/s Mediaguru Broadcast Pvt. Ltd. Further it was also reported that apart from the aforesaid payment to M/s Mediaguru Broadcast Pvt. Ltd, the Company also paid a sum of Rs. 19 lakhs to its two Directors. The balance of Rs. 54 Lakhs was available in the bank account of the Company.

iii. There were no other related party transactions other than above payments to the directors. This was also asserted by the management in its representation letter dt. 07.05.2014 at Point No14. There is no finding on record that M/s Mediaguru Broadcast Pvt. Ltd was a related party. It is incorrect to suggest that payment of Rs.50 Lacs pertaining to M/s Mediaguru Broadcast Pvt. Ltd was to a related party, without any finding on record to this effect by the Complainant.

iv. Therefore, the Respondent issued an Adverse Audit Report categorically reported that the financial statements prepared by the management do not show the true and fair view of the financial affairs of the Company and narrated the above factual financial transactions in the paragraph “Basis for Adverse Opinion”.

v. So far as the Audit of FY 2014-15 is concerned, there were no material receipts in FY 2014-15. The transactions in FY 2014-15 pertained to payments to the Directors of the Company which were disclosed in the related party transaction in FY 2014-15.

vi. Apart from that, there was a transaction in the bank account of the company whereas a sweeping FDR of Rs. 40 Lakhs was created out of the opening funds available in the bank account of the Company and the said FDR was liquidated and funds credited back to the bank account of the Company. It is incorrect to suggest that amount transferred to Bank FDR (sweep account) in favor of the Company pertained to any related party transaction.

vii. Thus, the Audit Report for FY 2014-15 did not require any further reporting, in the professional judgement of the Respondent.

viii. After FY 2014-15, there was no transactions in FY 2015-16 onwards and apart from statutory audit fees provisions, the opening balances got carried forward as the closing balances in those years. There was thus no occasion of any detailed scrutiny of accounts of the Company and the Respondent issued the audit reports accordingly.

ix. So far as the striking off the name of the Company in 2017 is concerned, the Respondent was not aware of the same. No notice/order with respect to Strike Off was served upon the Respondent in his capacity as statutory auditor. Neither the Respondent was aware of any action of the ROC disqualifying any of the Directors of the Company.

x. Even as per records and Inquiry Report of ROC, the Director also made a Statement before ROC that he was not aware of the Strike off with respect to the Company and likewise he was not aware about the disqualification as Director, and he came to know only when he was filing DIR-3. Thereafter, he approached the Hon’ble Delhi High Court by way of Writ which was admitted and stay Orders passed therein. The Affidavit of the Director is also placed on record in the reply filed by the Respondent to the Inquiry Report of ROC. Thus, the Respondent was neither aware about the strike off nor about the disqualification of the Director. Undisputedly these actions were taken in ex-parte proceedings by ROC.

xi. The Respondent was appointed as Auditors for FY 2013-14, on account of casual vacancy arisen due to resignation of the previous Auditors whose resignation letter is part of record. Thereafter, in immediately next AGM of Sep 2014, the Respondent’s appointment was approved, and he was reappointed as Auditors for 5 years from 2014-15 to FY 18-19. Proper Appointment Letter after AGM was issued to the Respondent which is part of record. Therefore, there was no occasion for the Respondent to get into examining of any reappointment of the auditors from year to year. Thus, the Respondent pleaded that he is not guilty of any professional negligence and/or misconduct regarding the appointment of the Respondent as Auditors of the Company. The reference to the provisions of Sec-224/225 of Companies Act, 1956 is unwarranted as the relevant provision are Sec 139 of the Companies Act, 2013 and casual vacancy provisions are as per Sec-139(8) of the Act.

5. The Committee considered the reasoning as contained in the Findings holding the Respondent Guilty of Professional and Other Misconduct vis-a-vis written and verbal representation of the Respondent. As regard the submissions of the Respondent on the merits of the case, the Committee was of the view that the same were basically a reiteration of the submissions made by the Respondent during the course of hearing, due cognizance of which has already been taken by the Committee before arriving at its Findings in the instant case.

6. Keeping in view the facts and circumstances of the case and material on record including verbal and written representation of the Respondent on the Findings, the Committee noted the following as per its Findings dated 27th January 2025: –

6.1 First Charge: For the F.Y.2013-14, the Committee noted from the Auditor’s Report that though the Respondent has given Basis for Adverse Opinion in his report on the stated matter, the reason of giving Adverse Opinion is not clear from it. Accordingly, the Committee viewed that the purpose of the Auditor’s Report to promote the user’s understanding by reading the Auditor’s Report has not been achieved. For the FY 2014-15, the Committee observed that Accounting Standard- 18 on Related Party Transactions clearly requires a Company to mention in its Financials apart from the name of the related party and description of the relationship, the nature of transactions also that took place between the Company and such party. However, in the extant case, the Company though has mentioned the name of the related party, description of such relationship and also disclosed the amount of payments viz. Rs.30,95,516 and Rs.14,09,261 made to the related parties (Mr. Mohammed Saqib and Ms. Farah Saqib) but omitted to disclose the nature/reasons of such payments as per the requirements of Accounting Standard-18. Hence, the financials are not giving complete details of the fact that why such a significant amount was transferred to the Directors during the year. The Committee was of the view that the reporting made by the Respondent clearly shows that the Respondent, being statutory auditor despite of violation by the Company of disclosure requirement of Accounting Standard-18, did not perform his professional responsibility of reporting on the financials of the Company diligently with modification rather had given a clean Audit Report. Accordingly, the Committee held the Respondent Guilty as per Item (7) of Part I of the Second Schedule to the Chartered Accountant Act 1949 with respect to the said charge.

6.2 Second charge: The Committee was of the view that the Respondent was required to follow the requirements of SA 250 wherein he was required to report about the pending litigation which would impact -Company’s financial position which he failed to do so. Further, the Respondent in his audit report failed to report the compliance aspect which is fundamental to the operating aspects of the business, to an entity’s ability to continue its business and affecting going concern of the entity as the name of the Company got struck off and the litigation was going on before the Hon’ble Delhi High Court. The Committee also noted that though the written representation letter for FY 2018-19 is dated prior to the date of the auditor’s report, the same is not near to the date of the signing of Auditor’s Report but almost at the initiation of the financial year. The Committee further noted that as per Section 143 of the Companies Act 2013, the Respondent being the Statutory auditor was duty bound to check and report that the financial statements present a true and fair view of the state of the Company’s affairs as at the end of its financial year. However, nowhere in the financial statements of the alleged Company for FY 2017-18 and 2018-19 the fact that the Company was strike off w.e.f. 30-06-2017 or the directors were disqualified, or a suit had been filed against the said disqualification which was pending was mentioned. Thus, the Committee was of the view that the Respondent was not only grossly negligent while discharging his Professional duties but also brought disrepute to the profession as he did not act independently and carried out audit to suit the requirements of the alleged Company. Accordingly, the Committee held the Respondent Guilty of ‘Professional’ and `Other Misconduct’ as per Item (7) of Part I of the Second Schedule and Item (2) of Part IV of the First Schedule to the Chartered Accountant Act, 1949 in respect of the said charge.

6.3 Third Charge: The Committee noted that the Company was incorporated in 2006. The Respondent was appointed as the Statutory Auditor of the Company w.e.f. 05-05-2014. He in his defence brought on record copy of his appointment letter dated 5th May 2014 together with the resignation letter dated 8th April 2014 of the previous auditor. Thus, it is clear that the Respondent had been appointed on account of resignation of the previous auditor. However, he did not bring on record any documentary evidence to establish that whether a proper resolution filling the vacancy has been passed at the General Meeting of the Company. He further brought on record a letter dated 30th September 2014 wherein the Company informed him that his firm had been re-appointed as a Statutory auditor at the AGM held on 30t^h September 2014 from 30t^h September 2014 to 31st March 2019. The Committee thus held that required checks were not exercised by the Respondent prior to acceptance of the appointment as auditor. Accordingly, the Committee held the Respondent Guilty of Professional Misconduct falling within the meaning of Item (9) of Part I of First Schedule to the Chartered Accountants Act, 1949 in respect of the said charge.

6.4 Hence, Professional Misconduct falling within the meaning of Item (9) of Part-I of the First Schedule and Item (7) of Part I of the Second Schedule and Other Misconduct falling within the meaning of Item (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949 on the part of the Respondent is clearly established as held out in the Committee’s Findings dated 27t^h January 2025 which is to be read in consonance with the instant Order being passed in the case.

7. Accordingly, the Committee was of the view that ends of justice will be met if punishment is given to the Respondent in commensurate with his Professional and Other Misconduct.

8. Thus, the Committee, keeping in view the facts and circumstances of the case, material on record and representation of the Respondent before it, ordered that a Fine of Rs. 1,00,000/- (Rupees One Lakh only) be imposed upon CA. Gaurav Kansal, 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, I.R.S. (RETD.)
GOVERNMENT NOMINEE

Sd/-
(CA. SANJAY KUMAR AGARWAL)
MEMBER

Sd/-
(CA. COTHA S SRINIVAS)
MEMBER