ICAI Finds Chartered Accountant Guilty of Misconduct in Loan Fraud Audit Case

A complaint was filed by the Central Bureau of Investigation against a chartered accountant alleging serious lapses during the audit of a company’s financial statements. The investigation revealed that the auditor had certified financial statements for two financial years showing significantly inflated turnover and profits. These documents were later used by the company to secure a bank credit facility of about Rs. 10.35 crore.

According to the investigation, the figures reflected in the audited accounts were far higher than the company’s actual transactions. The loan eventually turned into a non-performing asset, leading to substantial loss for the bank. The matter was subsequently examined by the disciplinary authorities under the Chartered Accountants Act, 1949.

Main Issue: Whether the auditor was guilty of professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 for failing to exercise due diligence and displaying gross negligence while certifying the company’s financial statements.

Tribunal Held: The Institute of Chartered Accountants of India disciplinary committee held the auditor guilty of professional misconduct. It observed that basic audit checks—such as examining books of accounts, bank records and tax documents were not properly carried out before the financial statements were certified.

The committee rejected the defence that the auditor merely relied on information provided by the company’s management. It emphasized that an auditor is expected to independently verify financial data and maintain professional skepticism. In view of the serious lapse, the committee reprimanded the member and imposed a monetary penalty of Rs. 1,00,000, directing that the amount be paid within thirty days.

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