CA guilty of Misconduct for accepting Audit when undisputed fees of previous Auditor was pending

The Disciplinary Committee in the matter of CA. Sachin Miniyar Vs. CA. Nimesh Haresh Thakkar has held CA guilty of Misconduct for accepting an Audit when undisputed fees of the previous Auditor were pending.

The Committee noted that the Respondent has been held guilty vide findings dated – 14.12.2023 (Ref no.PR-105/20-DD/131/2020-DC/1670/2022). The said findings holding him guilty were duly communicated to the Respondent. The matter pertains to M/s. Tejimandi Analytics Private Limited. The findings of the Committee whereby the Respondent had been held guilty are as below:-

1. As regards the first charge, the Committee noted that the Respondent admitted his mistake that he did not communicate with the previous auditor due to work pressure, making it evident that the Respondent had failed to ensure compliance with the requirement of Item (8) of Part I of First Schedule to the Chartered Accountants Act, 1949.

2. The Committee noted that the objective of communicating with the previous auditor is that the incoming auditor may have an opportunity to know the reasons for the change in auditor to safeguard his own interest. Fut1her there is a specific requirement in the Code of Ethics regarding communication with the previous auditor. Therefore, the plea of heavy work pressure cannot be treated as a valid excuse for non-compliance with this requirement.

3. The Committee noted that the Respondent on this charge had already accepted his guilt. Accordingly, the Committee held the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949.

4. As regards the second charge of acceptance of audit without ensuring that outstanding audit fees of the previous auditor have not been paid, the Committee observed that in this regard Chapter VII of Council Guidelines No. 1-CA (7)/02/2008, dated 8th August 2008 states as under:

“A member of the Institute in practice shall not accept the appointment as auditor of an entity in case the undisputed audit fee of another Chartered Accountant for carrying out the statutory audit under the Companies Act, 1956 or various other statutes has not been paid:

Provided that in the case of sick unit, the above prohibition of acceptance shall not apply.

Explanation 1:

For this purpose, the provision for audit fees in accounts signed by both- the auditee and the auditor shall be considered as “undisputed” audit fee.

Explanation 2:

For this purpose, “sick unit” shall mean where the net worth is negative.”

5. The Committee observed that Explanation 1 states that the provision of audit fees in accounts signed by both the auditee and the auditor shall be considered as an “undisputed” audit fee. The Committee on perusal of the financial statements for the F. Y. 2017-18 signed by the Complainant noted that no provision regarding the pending audit of the fee was disclosed on the face of the Balance Sheet.

6. The Committee noted that the Complainant in this regard had submitted that his pending fee was reflected under the head of sundry creditors. The Committee noted that since the pending fee was not reflected on the face of the Balance Sheet, hence the Respondent as the incoming auditor was not in a position to identify whether the undisputed audit fee of the previous auditor was pending or not.

7. The Committee further noted that while performing his statutory audit of the Books of Accounts for the F. Y. 2018-2019, the Respondent had come across the ledger of the previous auditor showing outstanding payable and hence, he compelled the management to clear the outstanding payable immediately.

8. The Committee on perusal of the Ledger account noted that, as per books of accounts, the pending audit fee of the Complainant on the date of acceptance of the audit (29th September 2018) by the Respondent was Rs. 67,501. The Committee noted that the pending fee was paid to the Complainant on two dates, i.e. Rs. 20,000 (on 19th January 2019) and Rs. 50,000 (on 27th September 2019). This fact was duly accepted by the Complainant also.

9. The Committee noted that the Respondent accepted that the amount of the undisputed audit fee was paid to the outgoing auditor by the auditee after acceptance of the audit by him and it was due to his constant follow-up with the management of the Company.

10. The Committee on perusal of the above guidelines vis-a-vis reasonings as discussed in the above paras noted that the Respondent has accepted the audit without ensuring that undisputed outstanding fees of the previous auditor were not paid by the auditee. The Committee noted that the same is a clear violation of Chapter VII of Council Guidelines No. 1-CA (7)/02/2008, dated 8th August 2008.

11. The Committee noted that the Respondent on this charge also had accepted his guilt. Accordingly, the Committee held the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949 also.

Conclusion

In view of the above findings stated in the above para’s vis-a-vis material on record, the Committee, in its considered opinion, holds the Respondent is GUILTY of Professional Misconduct falling within the meaning of Item (8) of Part 1 of the First Schedule and Item (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949.”

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