ICAI Reprimands CA for Auditing Sister’s Firm; Holds Independence Compromised

A complaint was filed against CA Kanika Gupta (M. No. 520423), Faridabad, alleging that she signed the financial statements of M/s Scube Solutions for FY 201-20 as auditor while her sister, Ms. Swati Gupta, held a 50% profit-sharing ratio in the firm. The audit fee of Rs. 20,000 was debited to the Profit and Loss Account, and the complainant questioned the auditor’s independence. The Respondent admitted that her sister was a partner and that she had conducted the audit, but stated that the firm’s turnover was only Rs. 1.10 lakh and the audit was not legally mandatory.

The partnership deed confirmed the sister’s 50% share. The Disciplinary Committee examined whether auditing a concern in which a close relative held a substantial interest violated professional standards.

Main Issue: Whether a Chartered Accountant can audit a firm in which her sister holds a 50% profit share, in view of Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Committee’s Decision: The Disciplinary Committee of the The Institute of Chartered Accountants of India held that a sister falls within the definition of “relative” and that a 50% profit-sharing ratio constitutes substantial interest under the Chartered Accountants Regulations, 1988. Where a relative holds not less than 20% interest, a member in practice is prohibited from giving an audit opinion on the financial statements of such person.

The Committee rejected the defence that the audit was voluntary or that no financial loss was caused, stating that auditor independence is fundamental and cannot be compromised based on turnover or circumstances. Therefore, the Respondent was found guilty of Professional Misconduct under Clause (4) of Part I of the Second Schedule and was reprimanded.

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