CA Found guilty of holding Share capital in company in which he was doing audit

The Institute of Chartered Accountant of India(ICAI) in the matter of CA. Narayan Balkrishan Toshniwal has Found CA guilty of holding Share capital in company in which he was doing audit.

The Disciplinary Committee was, inter-alia, of the opinion that CA. Narayan Balkrishan Toshniwal (M. No. 048334), Mumbai (hereinafter referred to as the Respondent”) was GUILTY of Professional and/or Other Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule, Item (1) of Part II of the Second Schedule and Item (2) of Part IV of First Schedule to the Chartered Accountant Act 1949.

FINDINGS:

The Committee in this regard noted that total paid up capital of the Company was Rs. 49,80,000/- (comprising of 4,98,000 number of shares of Rs. 10/- each) whereas the holdings of the Respondent alongwith his family members were only 3200 shares. The Committee also noted neither the Respondent nor his family were not a director or employee of the Company. The Committee looking into meager shareholding (i.e. not even 1 %) opined that the Respondent could not be in a position to influence the management. Further the Committee noted that it has been explicitly specified in the Code of ethics published by ICAI that substantial interest would be deemed to exist only if member has a stake in the equity in business entity exceeding 20%. The Committee looking into same, exonerate the Respondent from this charge and hold him NOT GUILTY of professional misconduct falling within the meaning of Item (4) of Part I of the Second Schedule to the Chartered Accountants Act 1949.

The Counsel for the Respondent with regards to charge levied upon the Respondent regarding Item (7) of Part I of the Second Schedule submitted that this item is applicable only in case when there is lack of due diligence in the discharge of his professional duties. He further mentioned that though the entire documents of the case not even a single mention with respect of the quality of work of the Respondent and therefore, the applicability of Item (7) of Part I of the Second Schedule does not arise.

Further, the Counsel for the Respondent as far as charge levied upon the Respondent regarding Item (1) of Part II of the Second Schedule is concerned submitted that there is no contravention of Chartered Accountants Act or the Council Guidelines in the instant case and hence this item is also not applicable.

The Committee in this regard noted that it is fact on records that the Respondent despite being shareholder of the Company had audited and signed the Financial Statements of the Company for the Financial Year 2012-13. The Committee noted that the Respondent was appointed as auditor of the Company on 3rd September 2012 (B-5 and B-6) and as per records, one Mr. Ankit Jain had transferred shares to the Respondent and his family members on 30th April 2012 and 15th June 2012. Hence, the Respondent along with his family members have purchased the shares about 3 months prior to the date of appointment. The Committee further noted that the Respondent in the extant case has acted as the statutory auditor of the Company for the F.Y. 2012-13 and signed the balance sheet and audit report of the Company for 2012-13 on 29th May 2013 (A-49 to A- 92).

In this regard, the provisions relating to disqualification as an auditor are noted which are given as under:

Section 226: Qualifications and Disqualifications of Auditors: Companies Act 1956

“(3) None of the following persons shall be qualified for appointment as auditor of a company-

(e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000.

Explanation. – For the purposes of this section, “security” means an instrument which carries voting rights.”

It also noted that the intent of provisions of Companies Act in clear terms provides that a person who ceases to be independent on account of holding security of the Company also becomes disqualified from holding the position of auditor of the Company.

It was further noted that Section 143(2) of the Companies Act, 2013 makes it obligatory for the auditor to make the audit report by taking into account all the provisions of Companies Act along with the applicable accounting and auditing standards. In this context, Standard on Auditing (SA) 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing is perused and the same provides as under-

“The auditor ls subject to relevant ethical requirements, including those pertaining to independence, relating to financial statement audit engagements. Relevant ethical requirements ordinan1y comprise the Code of Ethics issued by the Institute of Chartered Accountants of India.

In the case of an audit engagement it is in the public interest and, therefore, required by the Code of Ethics, that the auditor be independent of the entity subject to the audit. The Code describes independence as comprising both independence of mind and independence in appearance. The auditor’s independence from the entity safeguards the auditor’s ability to form an audit opinion without being affected by influences that might compromise that opinion. independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an attitude of professional skepticism.”

Thus, in light of the facts and reasoning given in above stated paras, it is evidently clear that the Respondent was disqualified to act as the statutory auditor of the Company and thus has failed to not only comply with the provisions of Companies Act relating to disqualification in force during relevant year but also failed to follow the mandatory requir,ementr-0fol,mdependence laid down in SA-200. Accordingly the Committee Holds the Respondent GUILTY of professional misconduct falling within the meaning of Item (7) of Part I of the Second Schedule and Item (1) of Part 11 of the Second Schedule to the Chartered Accountants Act 1949.

CONCLUSION:

In view of the above findings the Committee in its considered opinion hold the Respondent is GUILTY of Professional Misconduct falling within the meaning of Items (7) of Part I of the Second Schedule, Item (1) of Part II of the Second Schedule and Item (2) of Part IV of First Schedule to the Chartered Accountants Act 1949 and held NOT GUILTY of Professional Misconduct falling within the meaning of Item (4) of Part I of the Second Schedule to the Chartered Accountants Act 1949.

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