CA Guilty of Misconduct for not properly disclosing Related Party Transactions as per AS-18

The Ministry of Corporate Affairs (MCA) in the matter of CA. Manojkumar Ganeshmal Jain has held CA Guilty of Misconduct for not properly disclosing Related Party Transactions as per AS-18.

The Committee noted that the Respondent has been held guilty vide findings dated 14.12.2023 (Ref no. PPR/G/13/18/DD/05/INF/20-DC/1592/2022). The said findings holding him guilty were duly communicated to the Respondent. This is with regard to M/s. Yogeshwar Diamonds Private Limited.

FINDINGS OF THE COMMITTEE

FIRST CHARGE BY DIRECTOR (DISCIPLINE)

13. The Committee noted that the first charge relates to improper/ misleading reporting regarding the maintenance of cost records in his report for the financial year 2014-15. The Committee noted that the relevant extracts of Paragraph 3(vi) of Companies (Auditor’s Report) Order, 2015 states as under:

“Where maintenance of cost records has been specified by the Central Government under sub­section (1) of section 148 of the Companies Act, 2013 whether such accounts and records have been made and maintained.”

13.1 The Committee noted that the Respondent in his audit report for the financial year 2014-15 in para (8), had mentioned as under:

” .. we have broadly reviewed the books of accounts maintained by the Company pursuant to the order made by the Central Government of India for maintenance of cost records under section 209(1)(d) of the Companies Act, 1956 and are of the opinion that prima facie the prescribed accounts and records have been maintained”.

13.2 From the above vis-a-vis submissions of the Respondent that the Company was engaged in trading of diamonds, however as per the provisions of the Companies Act/ Rules, maintenance of cost records is applicable to the concerns engaged in manufacturing activity. Hence, the Respondent was required to mention that maintenance of cost records is not applicable to the Company.

13.3 The Committee noted that the Respondent had referred to the·provisions of the Companies Act, 1956. However, the matter pertains to the financial year 2014-15 for which the provisions of the Companies Act 2013 were applicable.

13.4 Thus, looking into the above facts vis-a-vis the acceptance of the mistake by the Respondent, the Committee viewed that the Respondent was casual in his approach while issuing his audit report as statutory auditor of the Company for FY 2014-15. Accordingly, the Committee hold the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 on this charge.

SECOND CHARGE BY DIRECTOR (DISCIPLINE)

14. The Committee noted that the second charge is that Respondent in his CARO reporting, he has not reported about the deposits taken by the Company and the amount required to be transferred to the Investor Education and Protection Fund (IEPF) in his report for the financial year 2014-15.

With respect to deposits, the Committee noted that the relevant extracts of Paragraph 3(v) of Companies (Auditor’s Report) Order, 2015 states as under:

“In case the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules framed there under, where applicable, have been complied with? If not, the nature of contraventions should be stated; If an order has been passed by the Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not?”

14. 1 The Committee noted that instead of mentioning about the same in his audit report, the Respondent in his audit report for the financial year 2014-15 in para 6, had mentioned as under:

“The Company has not accepted any deposit from the public pursuant to Section 58A, 5BAA or any other relevant provisions of the Companies Act 1956 and rules framed thereunder. Therefore, the provisions of clause (vi) of the order are not applicable to the Company”

14.2 Thus, looking into above facts vis-a-vis the acceptance of the mistake by the Respondent, the Committee viewed that the Respondent being a statutory auditor of the Company while issuing a report has not properly reported the detail as prescribed under the same. Further, it is noted that the Respondent has referred the provisions of the Companies Act, 1956 whereas the Companies Act 2013 was applicable on the company in year 2014-15. Thus, it is viewed that the Respondent was casual in his approach while issuing his audit report as statutory auditor of the Company for FY 2014-15. Thus, in light of the reasoning given above pertaining to the instant charge, the Respondent is held GUILTY qn this charge for professional misconduct falling within the meaning of Item (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

15. With respect to the Investor Education and Protection Fund (IEPF), the Committee noted that the relevant extracts of Paragraph 3(vii)(c) of Companies (Auditor’s Report) Order, 2015 states as under:

“Whether the amount required to be transferred to investor education and protection fund in accordance with the relevant provisions of the Companies Act, 1956 (1 of 1956) and rules made there under has been transferred to such fund within time.”

15.1 The Committee noted that instead of mentioning about the same in CARO reporting, the Respondent his audit report for the financial year 2014-15 in para 9(a), had mentioned as under:

”The Company has been regular in depositing undisputed statutory dues including provident fund, Investor Education and Protection fund, Employees State Insurance, Income Tax, sales tax, wealth tax, service tax, custom duty, excise duty, cess and other statutory dues with the appropriate authorities during the year. According to the information and explanations given to us, no undisputed amount payable in respect of the aforesaid dues were outstanding as at March 31, 2015, for period of more than six months from the date of becoming payable”.

15.2 The Committee noted that the Respondent was mandatorily required to report the same separately under CARO 2015 as per Paragraph 3(vii)(c) of Companies (Auditor’s Report) Order, 2015.

15.3 Thus, looking into the above facts vis-a-vis the acceptance of the mistake by the Respondent, the Committee viewed that although such type of error neither affects the true and fair view nor affects the decision-making of any user of the financial statement of the Company, however, the auditor has not reported on Clause 3 vii (c) which reflects his casual approach of the Respondent while reporting on CARO 2015. Accordingly, the Committee held the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 on this charge.

THIRD CHARGE BY DIRECTOR (DISCIPLINE)

16. The Committee noted that the third charge related to non-compliance with section 129 read with Schedule-III part I of the Companies Act, 2013 with respect to the negative figure of Trade Payables as on 31.03.2014 (appearing in previous years’ figures of the Financial Statements of 31 03.2015). The Committee on perusal of records noted that in the Balance Sheet for the year ended 31.03.2015 (filed with the Income Tax Department), trade payables were shown as Rs 14, 14,09,387 and in the previous year (i.e., on 31.03.2014) trade payables were shown in bracket as Rs. (89,08,36,063). The Committee noted that as per the charge, since the balance was negative in the previous years, hence it should be disclosed under Other Current Assets rather than Trade payable/ Creditors.

16.1 The Committee noted that Section 129 of the Companies Act, 2013 states that:

“The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III”.

16.2 The Committee noted that general instructions for preparation of Balance Sheet has been given in Schedule III of the Companies Act, 2013 and point 5 of such instructions specifically mentioned as under:

“A payable shall be classified as a -trade payable if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.”

16.3 Accordingly, the amounts which are due on account of goods purchased or services received are required to be mentioned under the head ”Trade Payable” and since advance paid to suppliers does not fall under the above classification, hence, the same should have been disclosed under the head advances paid to suppliers against goods.

16.4 Thus, looking into the above facts vis-a-vis the acceptance of the mistake by the Respondent, the Committee viewed that since the advances paid to suppliers are not liability incurred towards the purchase of goods and services, therefore, they shall not be disclosed as ‘trade payables.’ Such advances should be reported as ‘other current assets’ as income received in advance in line with Schedule Ill to the Companies Act, 2013. Such a type of presentation is not in line with the requirement of Section 129 read with Schedule Ill of the Companies Act. The Committee further noted that the Respondent had made a false statement in his report by stating that financial statements gives true and fair view of the state of the Company’s affairs as at 31.03.2015 (with respect to disclosure of Trade Payable under Sundry Creditors). Accordingly, the Committee hold the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 on this charge.

FOURTH CHARGE BY DIRECTOR (DISCIPLINE)

17. The Committee noted that fourth charge related to non-compliance with section 129 read with Schedule-I/I part I of the Companies Act, 2013 with respect to the negative figure of Trade receivables as on 31.03.2014 (appearing in previous years’ figures of the Financial Statements of 31.03.2015). The Committee on perusal of records noted that in the Balance Sheet for the year ended 31 03 2015 (filed with Income Tax Department), trade receivables were shown as Rs.2, 13, 14,597 and in the previous year (i.e., on 31 03.2014) trade receivables were shown in bracket as Rs. (124,01, 15,337). The Committee noted that as per the charge. since the balance was negative in the previous years, hence it should be treated as Other Current Liability rather than trade receivables/debtors.

17.1 The Committee noted that Section 129 of the Companies Act, 2013 states that:

“The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III”.

17.2 The Committee noted that Paragraph 4 of General instructions for preparation of balance sheet given in Schedule III of the Companies Act, 2013 provides as under:

“A receivable shall be classified as a -trade receivable if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.”

17. 3 Accordingly, the amounts which are due on account of goods sold or services rendered are required to be mentioned under the head “Trade Receivable” Since advance received from the customer does not fall under the above classification, the same should be disclosed under the head Advances received from customers against goods.

17.4 Thus, looking into the above facts vis-a-vis the acceptance of the mistake by the Respondent, the Committee viewed that advance received from customers shall not be disclosed as negative balance of trade receivables and thus as reduction from total assets. It was viewed that such disclosure not only distorts the true and fair presentation of financial statements but also understate the liability of the company since such negative trade receivables are, in their true sense, the advance received from customers and ought to be disclosed as ‘other current liabilities’ in line with Schedule Ill to the Companies Act, 2013. Such type of presentation is not in line with the requirement of Section 129 read with Schedule Ill of the Companies Act and the Respondent had made a false statement in his report by stating that financial statements give a true and fair view of the state of the Company’s affairs as at 31.03.2015 (with respect to disclosure of Trade Payable under Sundry Debtors). Accordingly, the Committee held the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 on this charge.

FIFTH CHARGE BY DIRECTOR (DISCIPLINE)

18. The Committee noted that the fifth charge is that there is a difference in figures of Trade payables and Trade receivables in the set for the financial year ended 31.03.2014 submitted with MCA and the Income Tax.

18. 1 The Committee noted that in the XBRL balance sheet the Respondent has mentioned Trade payable as Rs.1,24,01,15,3371 and trade receivable amounting to Rs. 89,08,36,063 whereas in the balance sheet filed with the Income Tax Department the figures of trade payables are shown as Rs. (89,08,36,0631) and trade receivables amounting to INR (1,24,01, 15,337*as negative figures The Committee further noted that Respondent in his submissions in this regard mentioned that reason of the negative balance is that the Company had received advances from its customers to fulfil their demands, on the other hand, the Company has paid advances to its suppliers for the purchase of diamonds. However, the same could not be delivered/received by the concerned customers/suppliers. He further submitted that XBRL schema did not allow filing negative figures under the head Trade payables and Trade Receivables, therefore, advances received from customers is disclosed under the head “Other Current Liability” and advances paid to suppliers are disclosed under the head “Other Current Assets”.

18. 2 The Committee noted that findings relating to similar charge had been given para 16 to 16.4 and 17 to 17. 4 above wherein it is concluded by the Committee that such a type of presentation is not in line with the requirement of section 129 read with Schedule Ill of the Companies Act 2013. The Committee also viewed that the Respondent should have mentioned the figures as advance paid to the supplier and advance received from customers under the correct head of the Balance Sheet for better and correct presentation. Looking into the findings given above vis-a­vis admission of the Respondent, the Committee hold the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 on this charge also.

SIXTH CHARGE BY DIRECTOR (DISCIPLINE)

19. The Committee noted that the sixth charge is that no details of related party transactions have been mentioned in the set filed with Income Tax for the financial year ended 31.03.2014. The Committee noted that the Respondent in his Written Statement stated that has submitted that he has given adequate disclosures in the XBRL balance sheet.

19. 1 The Committee in this regard noted that management had given the necessary disclosure regarding related party transactions in the XBRL report of the Company but failed to disclose related party transactions in balance sheet filled with the income tax authority.

19.2 The Committee, in view of acceptance of the mistake by the Respondent vis-a-vis the fact that the Respondent being a statutory auditor of the Company failed to point out that the Company, has not properly disclosed Related party Transaction as per AS-18, noted that the Respondent was not only grossly negligent in duties but also failed to report the known material fact in the financial statement. Accordingly, the Committee hold the Respondent GUILTY of Professional Misconduct falling within the meaning of item (s) (5) and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 on this charge.

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 GUILTY of Professional Misconduct falling within the meaning of Items (5) and (7) of Part-I of the Second Schedule to the Chartered Accountants Act, 1949.”

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