ICAI reprimands CA for non-compliance with accounting standards & disclosure failures

The Institute of Chartered Accountants of India’s Disciplinary Committee (Bench-II) issued an order on September 26, 2024, regarding CA. Sunil Johri . The committee found him guilty of professional misconduct under various clauses of the Second Schedule to the Chartered Accountants Act, 1949. The misconduct stemmed from discrepancies in financial statements for the fiscal year 2007-08, including non-compliance with Accounting Standards (AS 2, AS 3, AS 5, AS 26) and disclosure requirements. CA. Johri’s defenses, including arguments about the applicability of Rule 12, the division of work with a joint auditor, and changes in committee composition, were considered and largely not accepted. The Committee noted that a High Court order did not halt their proceedings. Despite his arguments, and an admission regarding two charges, the committee concluded that professional misconduct was established. Consequently, CA. Sunil Johri was reprimanded under Section 21B (3)(a) of the Chartered Accountants Act, 1949.

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

[PPR/P/254F/2016-DD/118/INF/2016/DC/1531 /2022]

[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 119(1) OF THE CHARTERED ACCOUNTANTS (PROCEDURE OF INVESTIGATIONS OF PROFESSIONAL AND OTHER MISCONDUCT AND CONDUCT OF CASES) RULES, 2007

PPR/P/254F/20,16-DD/119/INF/2016/DC/1531/20221

In the matter of:
CA. Sunil Johri 

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

Date of Hearing: 29th August 2024
Date of Order: 26th September 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. Sunil Johri (hereinafter referred to as the “Respondent”) is GUILTY of Professional Misconduct falling within the meaning of Item (5), (6), (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

2. That pursuant to the said Findings, an action under Section 216(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 10th April 2024.

3. The Committee noted that on the date of the hearing held on 10^th April 2024, the Respondent was present through video conferencing. The Committee noted that  the Respondent relied upon his written representation dated 1st April 2024 on the Findings of the Committee. Further, in his verbal representation before it, the Respondent stated that he had filed a Writ petition before the Hon’ble Chhattisgarh High Court in the context of the instant caste which had been disposed off on 9th April 2024. However, the copy of the detailed Order had not yet been received by him.

4. Thus, looking into the fact that the Writ petition bearing no. WPC no. 2009 of 2024 filed by the Respondent on ‘the ground of applicability of Rule 12 of the Chartered Accountants (Procedure) of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 before the Hon’ble Chhattisgarh High Court had been disposed of on 9^thApril_:2024, the Committee. decided to defer the consideration of the instant case till he receipt of the Order passed by the Hon’ble High Court of Chhattisgarh, Bilaspur in the said petition.

5. Thereafter, at its meeting held on 15^thJuly 2024, the Committee noted that the Hon’ble High Court of Chhattisgarh, Bilaspur disposed of the aforesaid petition vide its ex-prate Order dated 9th ‘April 2024 with the following observations:

“4. Given the facts and circumstances of the case in hand, without commenting anything on the merits of the case, it is observed and held that the petitioner cannot be compelled to submit the documents referred to above. At this stage, the present petition is disposed of with a direction to the Disciplinary Committee i.e. Respondent No. 3 to not compel the petitioner to submit the aforesaid documents. The petitioner would be at liberty to make appropriate representation showing his inability to file those documents.”

5.1 The Committee noted that the issue involved was with respect to applicability of Rule 12 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conducts of Cases) Rules, 2007 in respect of which the plea of the Respondent had already been denied by the Board of Discipline at its meeting held on 14t^h March 2017. The grounds of denial were also communicated to the Respondent.

5.2 Thus, the Committee on a detailed perusal of the documents on record was of the view that the Committee has already arrived at its Findings holding the Respondent guilty of Professional Misconduct and there is no provision under the Chartered Accountants Act 1949 and the Rules framed thereunder to review/revise the decision arrived at by the Disciplinary Committee. Further, the conduct of the Respondent was examined by the Committee on the merits of the case i.e. the conduct of the Respondent was examined by the Committee vis-à-vis the discrepancies in the Financial Statement with respect to non-compliance with Accounting Standards/disclosure requirements which were not pointed out by him while carrying out the audit of the Company for F.Y. 2007-08 and not on the basis of non-availability of working papers. Also, the Respondent admitted his mistake with respect to the second and the third charge during the hearing held on 13th December 2023.

5.3 However, keeping in view the principle of natural justice, the Committee decided to give another opportunity to be heard to the Respondent under Rule 19(1) of the Chartered _Accountants (Procedure of Investigations of Professional and . Other Misconduct and Conduct of Cases) Rules, 2007 before passing any Order under Section 21B (3) of the Chartered Accountants Act 1949.

6. Accordingly, a communication dated 7th August 2024 was addressed to the Respondent thereby grantig another opportunity of being heard in person / through video conferencing and to make representation before the Committee on 29th August 2024.

7. The Committee noted that on the date of the hearing held on 29th August 2024, the Respondent was present through video conferencing. The Committee noted that the Respondent relied upon his written submission dated 27th August 2024 on the Findings of the Committee. Further in his verbal representation before it, he stated that he had filed Writ Petition before Hon’ble High Court of Chhattisgarh vide Writ Petition No. 1668⁸/₂024 on 24th August 2024 wherein, he also made an application to grant him interim relief in the instant matter by way of staying the operation and effect of the impugned Notice dated 7¹h August 2024 and proceedings arising and continuing thereto.

8. Further, on the merits of the case, he referred to the disciplinary case filed against CA. P. Sivarajan  who was the other joint auditor of the alleged company i.e M/s Southern (spat Limited for the financial year 2007-08. He informed that the areas to be covered during the audit were predefined in the scope of work for joint audit vide the joint agreement dated 30^thNovember 2007. The charges levelled against him fall within the scope of the work of other joint auditor. Thus, the responsibility for the same cannot be attributed to him. Though being joint auditor, he was also responsible for his He requested the Committee to take a lenient view in the case as he is having 30 years of unblemished career.

9. The Committee also noted that the Respondent in his written representations on the Findings of the Committee, inter-alia, stated as under:

a. The Respondent requested to keep the matter in abeyance and not to proceed further till the Decision of the High Court in the Writ Petition filed in respect of the Notice dated 07t^hAugust 2024.

b. The Disciplinary Committee has the powers to review/revise the decision of “being Guilty” arrived at earlier by the Committee, under Section 21B (3).—(Words “and may thereafter”),In case the Findings of being “Guilty” are not to be reviewed then the hearing under Section 21B (3) would be only for granting punishment, and that too without allowing an Authorized Representative to argue, which seems to be not right. This may mean “Contempt” of the High Court Order dated 09/04/2024.

c. There is no provision under Rule 19(1) or under Section 21B(3) to give hearing again on 29/08/2024 (in case it is only for granting punishment) when already once the hearing was given on 10/04/2024 under the same Rule and the Section.

d. Documents, working papers and evidence are required not only for defending the charges where the Disciplinary Authorities have specifically referred to the non-availability of the same but for all the other Charges also in order to prove/justify the stand mentioned by the Respondent in his defense. Therefore, the non-availability of the working papers would justify not entertaining the “Information case” under the relevant Rule 12.

e. On one hand, the BOD decided vide letter dated 21/06/2017 not to entertain the request of the Respondent for invoking power under Rule 12 and refuse to entertain the Information, by opining that the discrepancies pointed out in the financial statements are basically with respect to non-compliance with accounting standards/disclosure requirements and can be addressed on the perusal of the financial statements. While on other hand, the Disciplinary Directorate asked the Respondent to supply working papers and other reference records vide their letter dated 23/11/2017.

f. The Director(Discipline) sought further audit evidence in respect of the following charges:

Charge no. 3A – The Respondent has not been diligent while performing his audit procedure of valuation of inventory and also failed to disclose this material misstatement known to him to appear in the Financials of the Company.

Charge no. 5 – The Respondent has neither produced on record the Certificate of the management in relation with valuation of inventory nor did he produce any relevant working papers to !substantiate his defence. The complaint extends beyond the scope of financial statements alone.

Moreover, the outstanding charges for which the Respondent is deemed guilty will also necessitate supplementary audit working papers and evidence. Consequently, the Respondent requested the discontinuation of proceedings related to these charges due to the requisite submission of additional evidence.

g. Disciplinary Committee wrongly held the Respondent Guilty for Charges Numbers 1 and 2 (directly) and for Charge 4 and 7 (indirectly) for not submitting the working paper file when the Disciplinary Committee itself had decided that there was no need for papers and the proceedings are not affected by time limit of 7 years prescribed in Rule 12.

h. The areas covered by alleged Charges clearly were allocated to the Joint Auditor for the purpose of the audit and the work areas attributed to the Respondent did not cover the work areas covered by the said charges.

i. The composition Of the Disciplinary Committee which originally recorded opinion that the Respondent is guilty has itself changed w.e.f February 2024 and therefore the present composition of the Disciplinary Committee is not authorized to proceed further as per the plain and grammatical interpretation of Section 21B. Even otherwise and without prejudice, on account of change of the constitution of the Disciplinary Committee, it would be appropriate and in the interest of natural justice and fairness that the new Committee considers the matter afresh in light of the Order of the Hon’ble High Court.

10. 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. Before deciding on the quantum of punishment to be awarded to the Respondent, th6 Committee considered the representation of the Respondent and opined as under:

a) As regard the submission of the Respondent that since there has been a change in the composition of the Committee, fresh hearing is required in the case, the Committee keeping in view the following observations of the Honorable Appellate Authority in para 8 of its Order dated 14^thJune 2021 passed in Appeal no. OVICA1/2020 in the matter of Devki Nandan Gupta —vs- ICAI and others on the same issue was of the view that there  is no merit in the contention of the Respondent:

“We find no substance in the appellant’s plea that due to change in the composition of DC who had passed the rated 08.02.2018 the new DC kith changed members could not have passed the final order dated I 07.11.2019 …….

We are of the view that no prejudice whatsoever was caused to the appellant due to change in the composition of the DC who had held him guilty _l of ‘professional misconduct’ under Clause 7 of Part —1 of the Second Schedule and the one who had finally awarded punishment vide order dated 07.11.2019. In fact, the changed DC was not expected or required to hear arguments afresh on merits to find if the appellant was guilty of `professional misconduct’. The said findings had already been recorded by the previous DC in its order dated 08.02.2019 and attained finality qua the changed DC. The changed DC was required only to hear the appellant on the quantum of punishment/penalty and for that, the appellant was afforded reasonable opportunity of being heard.”

b) As regard the request of the Respondent to keep the matter in abeyance and not to proceed further till the Decision of the High Court, the Committee perused the copy of Writ (Petition No. 16688/2024 dated 24th August 2024 filed before the Hon’ble High Court of Chhattisgarh and noted that the Respondent, inter-alia, sought the following reliefs in the said writ petition:

i quash and set aside the Impugned Notice dated 07.08.2024 and proceedings rising and continuing thereto.

ii quash and set aside the Impugned Findings dated 07.02.2024.

iii quash he Impugned Information Letter dated 04.10.2016.

iv quashing the letter dated 21.06.2017.

v quash the Impugned Opinion dated 16.09.2021 and Letter dated 14.02.2022.

On perusal, the Committee is of the view that the Honorable High Court of Chhattisgarh has not estopped the Disciplinary Committee from continuing with its proceedings in the case under consideration before it and as on date there was no stay on giving effect to the Committee’s Findings dated 7^th February 2024.

c) Further, the Committee had already arrived at its Findings in terms of the provisions of Rule 18(17) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 and keeping in view the principle of natural justice, another opportunity of being heard was provided to the Respondent on 29t^hAugust 2024 under Section 21(B)(3) of the Chartered Accountants Act 1949 read with Rule le 19(1) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 before passing any Order against him which has been availed by him.

d) As regard comparing the instant case with an earlier decided case of the other Joint auditor, the Committee is of the view that though there was division of the work between tie Joint Auditors as per the requirements of Paragraph 5 of SA 299  Responsibility of Joint Auditors, yet both the auditors are jointly and severally liable for expressing their True and fair view on the financial statements of the Company. Further, the said ; plea of the Respondent had already been considered by the Committee while arriving at its Findings (Para 19 of the Findings).

e) The Committee further noted that as per the letter dated 30′ November 2007 addressed by the Respondent to the other Joint Auditor as regard the division of work in the context of the audit under question, ‘Preparation and finalization of Independi4nt Auditor’s Report and final reporting’ was to be carried out both by the Respondent and the other Joint auditor. The Committee also noted that out of 7 charges alleged against the Respondent, he had been held guilty in respect of the same primarily on the following basis:

Thus the Committee was of the view that the reporting of the alleged irregularities was well within the work domain of the Respondent.

f) The Committee also noted that the Respondent admitted his mistake with respect to the second and the third charge during the hearing held on 13t^hDecember 2023.

11. Thus, keeping in view the facts and circumstances of the case, material on record including verbal and written representations on the Findings, the Committee noted as under:

(a) First Charge: The Respondent argued in terms of net cash flow whereas non-compliance had been raised for gross amounts involved. Hence, the contention of the Respondent as to non-materiality of the amount in this charge was not found acceptable. Moreover, neither any profit nor any loss has been reported to have occurred on the sale of fixed assets in the Profit and loss Account and as such effectively, there was omission of entire related information from the financial statements. The Committee, accordingly, noted that omission of such information was not only an omission of marred to in Section 211 (3C) of the Companies Act, 1956, it is his responsibility to verify the documents. In any case, the Respondent had accepted an error in respect of the same.

(c) Third Charge: The depreciation amount was Rs. 27.48 lakhs and the Company had earned profit after tax of Rs. 2.70 lakhs, hence, the exclusion of depreciation in valuation  of inventory had a material effect. Further, The Respondent at material information from the financial statements but also it led to non-compliance of AS 3 which should have been reported by the Respondent in his audit report.

(b) Second Charge: The Respondent in his defence had mentioned that inventory was valued on Weighted Average basis only and there was only a typographic error in writing the word ‘Weighted in the Significant Accounting Policies. Whenever an auditor states in his report that the financial statements were in compliance with Accounting  Standards rehearing stage accepted that there was lapse on his part of not adding depreciation in the cost. It was viewed that whenever an auditor state in his report that the financial statements were in compliance with accounting standards referred in Section 211 (3C) of the Companies Act, 1956, it was his responsibility to verify the documents accordingly.

(d) Fourth Charge: The Respondent failed to bring forth the circumstances due to which he felt that compliance with the Guidance Note on Audit of Inventories was not necessary. Further, it was noted that out of total Balance Sheet size of Rs 14 crores (approx.), inventory worth Rs 6.7 crores (approx.) was quite material and thus, the approach adopted by the Respondent is not acceptable.

(e) Fifth Charge: The plea of the Respondent that disclosure of quantitative details was impracticable cannot be accepted considering the material nature of transactions held in trading goods being 31.6% of total sales and Services and 32% of total manufacturing expenses and also that cost records mandate maintenance of such records.

(f) Sixth Charge: Neither the fact whether it was a change in estimate/ depreciation method or any error giving rise to a ‘prior period item’ was disclosed nor was it disclosed n the Profit and Loss A/c but in Notes to Accounts. The amount involved relating to the previous year constituted more than 50% of total depreciation charged during the current ‘financial year and thus it was material adjustment in the context of `Profit After Tax’ (PAT).

(g) Seventh Charge: The Committee, on perusal of the Opinion of Expert Advisory Accountin6 Standard 26 which was mandatorily applicable on the Company. Committee viewed that the said Opinion was purely based on the requirements of According y, it was viewed that since the expenses incurred to increase authorised capital did not give rise to any resource controlled by the entity and such increase in authorised capital did not ensure inflow of cash until or unless share capital was issued against it. Accordingly, the plea of Respondent was not found acceptable.

11.1 Hence, profess oval 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.

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

13. Thus, the Committee ordered that CA. Sunil Johri be Reprimanded under Section 21B (3)(a) of the Chartered Accountants Act 1949.

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(CA. RANJEET KUMAR AGARWAL)
PRESIDING OFFICER

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

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(SHRI ARUN KUMAR, IAS RETD.)
GOVERNMENT NOMINEE

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(CA. SANJAY KUMAR AGARWAL )
MEMBER