CA guilty of Misconduct for signing BS and P&L without doing Real Audit

The Institute of Chartered Accountants of India(ICAI) in the matter of Shri T. Rajah Balaji vs. CA. Prakash Pesala has held CA guilty of Misconduct for signing BS and P&L without doing Real Audit.

The Disciplinary Committee was of the opinion that CA. Prakash Pesala (M. No. 200805) was GUILTY Professional Misconduct falling within the meaning of Items (7) & (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949 with respect to the allegation that the Respondent had issued a Net-worth certificate (C-33) dated 30.04.2012 to Shri K Srinivas Kalyan Rao certifying his net worth as on 31.03.2012 at Rs. 2,60,21,62,333/­(Rs.260.21Crore) which was incorrect and contained inflated figures as the said Net-worth was certified based on the huge investment in shares of the Company but subject shares were not actually transferred in the name of Shri K. Kalyan Srinivas Rao on the date of the said certificate.

It was noted that the said complaint was based on a case registered with CBI against Sh. Kalyan Rao, the Managing Director of M/s Best Crompton Engineering Projects ltd. (hereinafter referred to as the ‘Company’) on the basis of complaint made by the Assistant General Manager, Central Bank of India, Corporate Finance Branch, Chennai (hereinafter referred to as the ‘Bank’) regarding fraud committed to the tune of Rs.133.31 Crores. It was stated that in pursuance of the said criminal conspiracy, the Managing Director induced and cheated the bank to sanction them various credit limits such as Cash credit, Bank Guarantee and letter of credit along with adhoc/enhanced limits from 2010 to 2013 and due to non-repayment, the loan account became NPA on 28.05.2013 which caused wrongful loss of Rs.133.31 crore to the Bank.

At the outset, with respect to objections reiterated by the Respondent relating to appearance of Director(Discipline} through authorized representative, it was noted that said objection was addressed in detail in the Findings Report, hence, the hearing held was in line with the provisions of CA Rules, 2007. In context of merits of the matter, the Committee noted that out of total net worth of Rs. 260.21 crore certified, the investment in shares amounted Rs. 255.88 crores, thus latter constituted substantial portion of the net-worth certified. Further, it is evident that the alleged shares were not transferred in the name of his client as on 31.03.2012. It is noted that net worth represents the excess of assets over liabilities and that an asset is a resource that should be under the control of the individual due to past transaction. It is noted that in extant case, the fact that shares were, yet to be transferred signify that the shares were not in his control. Further, it was noted that the Respondent issued the alleged certificate considering his client owning shares without confirming the same either from the share certificates or any endorsed, share folio. With respect to the argument that shares were reduced from the net worth certificate of two individuals and added to that of Mr. Rao, it is noted that net worth could not be determined based on understanding among the individuals through adjustments to their net worth certificates or through sale deeds. The Respondent could produce no evidence to show that the consideration in lieu of these shares was transferred which is of crucial relevance as no liability for purchase of the shares figured in the net worth certificate. Hence, it is incomprehensive to understand the basis on which the Respondent was convinced that Mr. Rao was the owner of the shares, other than an informal understanding among individuals. Moreover, when the Respondent had omitted to mention the fact of shares were yet to be transferred and included the said shares in the determination of net worth, it resulted in the inflation of Net-worth of Mr. Rao by Rs.255.88 crores (total Net­ worth Rs.260 crores) in the said certificate so issued by the Respondent. It is further noted that issuing the generic certificate by using title “To Whom So Ever It May Concern” on the alleged Net-worth Certificate by the Respondent added to misconduct on the part of the Respondent as it gave an opportunity to the Company to submit the same to the Bank.

Thus, it is viewed that when a professional issues a certificate, he is responsible for the factual accuracy of what is stated therein. In fact, his examination of the records should be intense at the time of issuing certificate than that issuing audit report. However, in view of the incomplete verification done by the Respondent and absence of disclaimer relating to legal ownership of the shares reflected in the said certificate which the Respondent was required to state in the said certificate, it is viewed that he had not performed his professional duties diligently.

The Committee thus viewed that the misconduct on the part of the Respondent has been held and established within the meaning of Item (7) and (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949 and keeping in view the facts and circumstances of the case as aforesaid, ordered that the name of the Respondent CA. Prakash Pesala (M. No. 200805) be removed for a period of 3 (Three) months from the Register of members along with a fine of Rs. 25,000/- (Rupees Twenty Five Thousand Only) be levied upon him that shall be payable within a period of 3 (Three) months from the date of receipt of the Order and in case he failed to pay the same as stipulated, the name of the Respondent be removed from the Register of members for a further period of 1 (One) month as per the order of the Committee.

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