CA guilty of Misconduct for Signing Audit of Company in which his Partner is Director and Shareholder

The Disciplinary Committee in the matter of Shri Girdhar Viramgama Vs. CA. Shivlal Ghanshyam Dhoot has held CA guilty of Misconduct for Signing Audit of Company in which his Partner is Director and Shareholder.

The Committee noted that the Respondent has been held guilty vide findings dated 14.12.2023 (Ref no.PR-64/21-DD/91/2021-DC/1704/2022). The said findings holding him guilty were duly communicated to the Respondent. The matter pertains to M/s. Pranjal Retail (India) Private Limited.

Findings of Committee

The Committee noted that the Respondent in written submissions dated 6th March, 2023 had, inter-alia, mentioned as under:

i. That the Complainant has not yet disclosed his relationship with the Company despite being asked multiple times.

ii. That as per his knowledge, the Complainant is not concerned with the Company in any manner so the motive behind the complaint after more than 8 years is yet to be disclosed.

iii. That the Complainant had intentionally, with mala-fide intention, had filed the complaint after the expiry of retention period of 7 years for maintaining working papers so that there is no substantial evidence left with the Respondent other than public documents available on MCA.

iv. That after May, 2022 there is no further correspondence on the aforesaid complaint, therefore the Complainant a/so raised the matter before the High Court.

v. That the Director Discipline has not taken into consideration the time limit as per Rule 12 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 wherein the cut off period for entertaining the complaint is 7 years. He has also given the reference of case of Mr. Ashish Agarwal, wherein Delhi High Court has taken the note of said rule.

vi. That share transfer form and confirmation of transfer of the shares of Arvind Soni was taken before accepting appointment of the Audit.

vii. That the Complainant has filed the complaint merely from some extracts of records from MCA without having evidence other than Form 32.

viii. That as per the best of his knowledge and belief, he has come to know the facts that the said Company was a newly incorporated company in the mid of FY 2011-12 and due to lack of proper knowledge and governing compliances of MCA, had failed to file the resignation of CA. Arvind. So_ni and his transfer of shareholding to others with MCA.

ix. The Company has unknowingly and unintentionally failed to file Form 32 and the same was filed on later date with taking fresh resignation letter in current date.

x. That proof of resignation and transfer of shares of CA. Arvind Soni were taken from the Company and was also kept in record till the retention period of the working papers.

xi. That after having knowledge of the above delay in compliances by the weak administrative staff of the Company, the firm has decided to discontinue their audit services with the Company, despite being reappointed by the Company as their statutory auditors for the next financial year 2012-13.

The Committee noted that the charge against the Respondent was the signing of financials of the Company for the financial year ended 31st March 2012 even though one of the partners of the Respondent firm was a director in the Company. The Respondent has submitted that he has obtained, the eligibility certificate from his partner, CA Arvind Soni, but he does not have the same at present due to time lag. The Committee in this regard noted that relevant documents relating to the case such as financial statements, e-forms etc are on record and hence the stand of the Respondent regarding non-availability of documents is not tenable.

The Respondent on merits submitted that his partner CA Arvind Soni has resigned on 20th April 2012 and has also transferred 4000 shares to his wife on 4t1i October 2012 and the Company might have not filed the same at that time and filed it a later date.

The Committee on the same noted the fact on records that resignation letter of CA. Arvind Soni dated 25th September 2012 wherein it is clearly mentioned that he had resigned from the Company w.e.f. 25th September 2012.

As regards shareholdings is concerned, the fact is that CA Arvind Soni along with his wife have continued with the same shareholding in the company i.e. 60% (50% and 10% respectively) on the date of signing of financials of the Company by the Respondent.

The Committee on perusal of member record available with /CAI noted both CA Arvind Soni and the Respondent have been partners since 1st July 2010 and the partnership was in existence on the date of signing of financials by the Respondent.

Thus, from the documents on record, it is clear that one partner of the Respondent firm i.e. the Respondent has audited the financials of the Company for the period during which another partner of the Respondent firm i.e. CA Arvind Soni was the Director cum substantial shareholder in the company i.e. for the period 2011-12.

The Committee observed that section 226(3)(c) of the Companies Act, 1956 in this regard slates as under:

226. QUALIFICATIONS ANO DISQUALIFICATIONS OF AUDITORS

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

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;

Further, Section 2(30) defines “Officer” as below:

“officer” includes any director, manager or secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is or are accustomed to act”

On perusal of above provisions, the Committee noted that a person who is partner of an officer (which includes director) of the Company is disqualified to be appointed as auditor of the Company. However in the extant case the Respondent firm has accepted the audit assignment of the Company despite the fact that CA. Arvind Soni was the director of the Company and even holding the position on the date of signing of financial statement.

The Committee further observed that Code of Ethics- 2009 states as under:-

A professional accountant in public practice should consider when providing any professional service whether there are threats to compliance with the fundamental principle of objectivity resulting from having interests in, or relationships with, a c/ientor directors, officers or employees.

For example, a familiarity threat to objectivity may be created from a personal or business relationship

A professional accountant in public practice who provides an assurance service is required to be independent of the assurance client. Independence of mind and in appearance is necessary to enable the professional accountant in public practice to express a conclusion, and be seen to express a conclusion, without bias, conflict of interest or undue influence of others.”

Independence in Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.”

Further, the Guidance Note on “Independence of Auditor” towards this term “Independence” in its para 3. 3 has specifically recognized Section 226 of the Companies Act, 1956 as discussed above as below:

“In order to ensure independence, the Jaw has made certain provisions which either prohibit lfle appointment of a person as auditor in certain circumstances or place certain restrictions on his appointment as auditor or put third parties on guard against the possibility of an abridgement of independence by requiring certain disclosures to be made.”

In the light of above provisions of Code of Ethics – 2009 and Guidance Note, in the extant case since the partner of the Director of the Company i.e. the Respondent had performed the audit and signed its audit report, the independence of the Respondent while performing its audit is clearly threatened.

Hence, it is apparent that the Respondent firm, by accepting the appointment as statutory auditor of the Company and the Respondent as signing partner by expressing his opinion on the financials of the company and signing an audit report thereon for the period (2011-12) during which the other partner of the Respondent firm had been holding the position as director and also holding 50% shares of the Company, has violated the provision of Section 226 of the Companies Act, 1956, the Code of Ethics – 2009, Guidance Note on ‘Independence of Auditor’.

Conclusion

In view of the above observations, considering the submissions of the Respondent and documents on record, the Committee held the Respondent GUILTY of Professional Misconduct falling within the meaning of Item (4) and (7) Part – I and Item (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949.

After communication of the aforesaid findings of the Committee dated 14.12.2023, the Respondent was called by the Committee to appear before it on 09.01.2024 and to make his submissions / representations under Rule 19(1) of the Chartered Accountants (Procedures of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 on quantum of punishment. The Respondent appeared on 09.01.2024 and submitted his representations with regard to the quantum of punishment as under:-

a. There is not a single finding as how he was grossly negligent or did not exercise due diligence in reporting and to what extent.

b. During the conduct of the audit there was no misreporting or not taking due care. Thus, he may not be held guilty under the said clause.

c. He further submitted that it has been more than 9 years since signing of audit report and hence he was not possessing enough documents to demonstrate his appointment.

d. Further the complaint is barred by limitation as per Rule 12 of the Chartered Accountants (Procedure of investigation of professional and Other Misconduct and conduct of Cases) Rules 2007.

After careful consideration of the facts and circumstances, material on record and submissions of the Respondent before it as well his submissions made on 09.1.2024, the Committee decided to reprimand the Respondent.

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