The Disciplinary Committee of the Institute of Chartered Accountants of India (ICAI) has reprimanded CA. Harsharanjit Singh Chahal for professional misconduct, following a complaint from the Registrar of Companies (ROC), Punjab and Chandigarh. The committee found him guilty of misconduct for failing to properly audit a private limited company. Specifically, he did not qualify his audit reports, despite the company having a large amount of unallotted share application money that was utilized for other purposes. The committee noted that the share application money, which was a significant portion of the company’s balance sheet, was collected from 2009-10 to 2012-13 without shares being allotted or refunds being issued. CA. Chahal also failed to obtain sufficient audit evidence, such as balance confirmations for debtors and creditors. The committee concluded that he failed to perform due diligence and report these issues, ultimately leading to him being reprimanded under Section 21B(3)(a) of the Chartered Accountants Act, 1949.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NDIA
(Set up by an Act of Parliament)
[DISCIPLINARY COMMITTEE [BENCH-IV (2024-2025)]
[Constituted under Section 21B of the Chartered Accountants Act, 1949]
ORDER UNDER SECTION 218(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/123/22/DD/134/2022/DC/1787/2023]
In the matter of:
Sh. Shyam Sunder
….Complainant
Versus
CA. Harsharanjit Singh Chahal
…Respondent
MEMBERS PRESENT:
1. CA. Ranjeet Kumar Agarwal, Presiding Officer –
2. Shri Jiwesh Nandan, IAS (Retd.), Government Nominee
3. Ms. Dakshita Das, I.R.A.S. (Retd.), Government Nominee
4. CA. Mangesh P Kinare, Member
5. CA. Abhay Chhajed, Member
DATE OF HEARING : 20th January 2025
DATE OF ORDER : 08th February 2025
1. That vide Findings dated 19/12/2024 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. Harsharanjit Singh Chahal (hereinafter referred to as the Respondent”) is GUILTY of Professional and Other Misconduct falling within the meaning of Item (2) of Part IV of First Schedule and Item (7) of Part I of 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 20thJanuary 2025.
3. The Committee noted that on the date of the hearing on 20thJanuary 2025, the Respondent was present through video conferencing. During the hearing, the Respondent stated that he had already submitted his written representation dated 07th January 2025 on the Findings of the Committee. He submitted that issues raised in in Findings of the Committee were never part of complaint of the Complainant. Section 69 of the Companies Act, 1956 does not apply in instant case as the auditee Company was a Private Limited Company and said Section is applicable for share application offered to public. The Committee also noted the written representation of the Respondent dated 07th January 2025 on the Findings of the Committee, which, inter alia, are given as under: –
a) Since the money was not from a public offer or deemed public offer, same does not fall within the provisions of Section 69 of the Companies Act 1956 and provision for refund within 120 is not applicable in this case.
b) Audit reports were not required to be qualified for the mere reason of not obtaining external balance confirmations.
4. The submissions of the Respondent were heard and completed in the meeting of the Committee held on 20/01/2025 and the decision was deferred. The Committee, thereafter, in its meeting held on 03/02/2025 considered the submissions of the Respondent and documents on record and took decision in the matter.
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.
6. Thus, keeping in view the facts and circumstances of the case, material on record including written and verbal representation of the Respondent on the Findings, the Committee was of the view that mere submitting that the balances are subject to confirmations and reconciliation was specifically mentioned in Notes to Accounts cannot be construed as sufficient. The auditor is required to perform necessary tests to avoid the risks and to ensure that sufficient audit evidences are obtained to confirm the balances as shown in the financial statements.
7. Further as regards the matter related to share application money pending allotment, the Committee observed that the Companies Act 1956, in case of Private Limited Companies, is silent with regard to the provision of period of refund of share application money and if it is assumed for a moment that the contention of Respondent is unassailable; even then Private Companies were expected either to allot shares or refund the application money within a reasonable time. In the extant case, the Committee observed that no allotment of shares has been made by the Company and no refund was issued to the share application holders. The Committee also observed that the share application money was initially collected in Financial Year 2009-10 and it further kept on increasing for next three years i.e. 2010-11, 2011-12 and 2012-13 without making any allotment of shares or any refund of such amount during such period. More so, in Financial Years 2011-12 and 2012-13, the amount so collected is noted to be a material portion of Balance Sheet size being 19% and 25% respectively.
8. In this regard the Committee observed that the Guidance Note on ‘Audit of Capital and Reserves’ (as of January 2006) requires an auditor to follow certain audit procedures to verify the status/details of share application money pending allotment; and to ensure that the ‘Share Application Money’ has been appropriately disclosed in the Financial Statements, like either between the heads ‘Share Capital’ and ‘Reserves & Surpluses’ till the time the amount is transferred to the Share Capital Account; or its disclosure as ‘Current Liability’ in case the share application amount was due for refund to the share applicants. The Committee further observed that the Guidance Note also requires an auditor to examine the reasonableness of the period for which share application money remains pending for allotment. The Committee observed that no such disclosure either in the Financial Statements of the Company or in the Audit Report has been made, so as to ensure the transparency in the Financial Statements. The Committee noted that while share application money pending allotment was Rs. 36.30 lacs as at 31st March 2012, the bank balance was just Rs. 34,155/-. Similarly, as at 31st March 2013, while the share application money pending allotment was Rs. 68.20 lacs, bank balance was just Rs. 48,018/-. The Committee observed that the share application money was received from the proposed shareholders and the shares were still pending to be allotted by the Company i.e. the specific purpose of collecting the money was not achieved but still the whole amount was utilised by the Company for other purposes. The Committee was of the view that there was every chance of mis-utilization of this material amount by the Company and the Respondent being the Auditor was required to exercise necessary due diligence and report these instances in his audit report for those financial years but he failed to do so. In view of the observations as given above, the Committee viewed that the Respondent failed to carry out the appropriate audit procedures and report in his audit report despite the fact that the amount of share application money was material item of the balance sheet.
9. Moreover, the Committee was of the view that the Respondent has given unmodified opinion, wherein the Respondent failed to justify his role in securing audit evidence with regard to balance confirmation of sundry debtor, creditors and loans and advances. Further, share application money pending allotment has been disclosed by the Company in its balance sheet continuously from financial years 2009-10 to 2012-13, but no allotment of shares has been made by the Company and no refund was issued to the share application holders from whom the share application money has been received.
10. Accordingly; the Committee was of the view that the ends of justice would be met if punishment is given to him in commensurate with his Professional and Other Misconduct.
11. Thus, the Committee ordered that the Respondent i.e. CA. Harsharanjit Singh Chahal be REPRIMANDED under Section 21B(3)(a) of the Chartered Accountants Act,1949.
Sd/-
(CA. RANJEET KUMAR AGARWAL)
PRESIDING OFFICER
Sd/-
(SHRI JIWESH NANDAN, I.A.S. (RETD.))
GOVERNMENT NOMINEE
Sd/-
(MS. DAKSHITA DAS, I.R.A.S.{RETD.})
GOVERNMENT NOMINEE
Sd/-
(CA. MANGESH P KINARE)
MEMBER
Sd/-
(CA. ABHAY CHHAJED)
MEMBER
