CA held guilty for mentioning incorrect and inflated figures while certifying net worth

The Disciplinary Committee of ICAI in the matter of Shri T. Rajah Balaji vs. CA. Prakash Pesala held CA guilty for mentioning incorrect and inflated figures while certifying net worth.

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.

It was noted that Item (7) and (8) of Part I of Second Schedule states as under:­

Second Schedule

PART I: Professional misconduct in relation to chartered accountants in practice

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he-

“(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion”

An action under Section 21B (3) of the Chartered Accountants Act, 1949 was contemplated against the Respondent and communication dated 27th March 2023 was addressed to him thereby granting him an opportunity of being heard in person and/ or to make a written representation before the Committee on 12th April 2023 through video conferencing.

The Respondent appeared before the Committee on 12th April, 2023 through video conferencing and made his oral representations on the findings of the Disciplinary Committee. The Committee considered the oral as well as the written representation dated 21st January, 2023 and 8th April, 2023. It was noted that the Respondent inter-alia submitted as under:-

a. At the outset, he reiterated his submissions relating to presence of Director (Discipline) through his authorized representative, eligibility of the later and questioned if notice was issued to Director(Discipline).

b. Thereafter, with respect to merits of the matter, he again submitted that the alleged certificate was issued on 30/04/2012 for multiple VISA for business purpose for three Directors of the Company and that the Respondent was not the Statutory Auditor of the Company. The share transfer forms were seen by him which were to be submitted to the Company for transfer. The said transfer would have taken some time due to the process and procedures. When two directors were transferring their shares to the third director who was Managing Director and also when the Company was in their hands and shares were existing in the transferring persons names, as per him, he had duly verified the facts.

c. As per him, “Net worth Certificate” was issued for obtaining multiple VISA for foreign travel purposes therefore, a generalized certificate to the client with the caption “To Whom So Ever it may Concern” was issued as per the ICAI Guidance Note on Audit Reports and Certificates for Special Purpose issued in the year 1984 by ICAI. He argued that it was the Client’s responsibility to forward the Certificate to the concerned authority, where it is so required and in the present case, the CFO erroneously submitted it to the bank.

d. With respect to net-worth certified, the Respondent submitted that he had sought the information and obtained explanations from the parties whose net worth was under certification and in the aspect of shares, the persons who sold shares had reduced such shares from their assets and the person who purchased such shares added to his assets. Further, the net worth certificates as at 31/03/2012 was issued on 30/04/2012. He argued that as per the Complainant, the banker received the alleged net worth certificate vide original letter dated 28/03/2013 that is after 11 months of the date of issuance of the certificate by the Respondent. The Respondent clarified that normally the client won’t wait for a period of 11 months to use the certificate by paying fees for a certificate to the CA 11 month before. Further, no banker will accept any net worth certificate which is older than one quarter.

e. Further, he contended that for the assignment done in the year 2012, it is humanly impossible for anyone to produce the bank statements/ gift deeds / transfer deeds etc. as sought by the Disciplinary Committee.

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 and 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 alongwith 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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