CA held guilty of misconduct by not obtaining bank confirmation by exercising due diligence

CA held guilty of misconduct by not obtaining bank confirmation by exercising due diligence when fake statement was only a printed paper with no signatures or seal

ABCAUS Case Law Citation:
ABCAUS 2572 (2018) (10) AA

Important Case Laws Cited/relied upon by the Appellant:
Council of Institute of Chartered Accountants of India Vs. Somnath Basu (AIR 2007 Calcutta 29)
The Council of Institute Chartered Accountants of India Vs. V. Rajaram (AIR 1960 Madras 122 (V.47 C36)

Clauses (7) & (8) of Part-I of the Second Schedule of the Chartered Accountants Act, 1949 (the Act) contains the provisions regarding Professional misconduct in relation to chartered accountants in practice. As per the said provisions, a chartered accountant in practice shall be deemed to be guilty of Professional Misconduct, if he does not exercise due diligence / is grossly negligent in the conduct of his professional duties or 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.

In the instant case, the Disciplinary Committee (DC) of the Institute of Chartered Accountants of India (ICAI) held the appellant Chartered Accountant (CA) guilty under the said Clauses (7) and (8) and awarded the punishment of Reprimand along with a fine of Rs. 50,000/-

The facts were as under:

The Appellant CA was an Auditor of a company which had obtained loans from various banks. The complaint made to ICAI, inter alia alleged that the said company committed fraud and defaulted in repayment of interest and loan. The said fraud had also been reported to RBI. However, the Appellant CA did not carry out the audit properly and relied upon the false Statement of Account of a Co-operative Bank (KCCB) given by the company.

The other charges were as under:

1. As an auditor of a company, he had refused to take responsibility of certification of inventory and sundry debtors of the Company as mentioned in the Balance Sheet audited by him.

2. He relied solely on the physical verification certificate produced and representation given by the Management for valuing stocks.

3 Fixed Assets as certified by the CA as auditors in the Balance Sheet could not be verified by the lenders during inspection.

4 As per Annexure to the Auditor‟s Report, the Company had not defaulted in repayment of its dues to banks and Financial Institutions except in the repayment of Term Loan from one Bank , whereas the Company had actually defaulted in payment of interest of all Working Capital Consortium Banks.

5. The end use of money raised by issue of GDR had not been mentioned in the Annual Report.

With respect to the charge of false bank statement, it had been alleged that the CA had failed to Report submitting false statement of current account. The CA submitted that he had relied on the bank statements provided by the Auditee Company as in case of other banks. He came to know about the false bank statement being submitted by the Company only when the Complainant mentioned the same in their correspondence with the CA.

It was further submitted by the CA that he had written a specific letter to the said Bank. Since by that time, he had ceased to be the auditor, the Bank failed to respond to the said letter.

The Disciplinary Committee noted that out of 18 bank accounts, 4 bank accounts statements were relied upon in absence of the balance confirmation out of which one was the said bank in question.

The DC was of the opinion that the CA as auditor ought to have used his professional scepticism and made a note of the same in the audit report issued by him that the balance confirmation could not be made available as regards 4 bank accounts. The CA as an auditor was required to bring the same to the knowledge of the users of the financial statements through his audit report that sufficient audit evidence and appropriate information could not be obtained by him despite writing letters to the Bank.

The Committee was of the view that since the CA failed to exercise due diligence and also failed to gather sufficient information for expression of opinion he was therefore guilty of said professional misconduct.

Thus, the Disciplinary Committee held the Appellant CA guilty of professional misconduct only in respect of not reporting false bank statement.

Before the Appellate Authority (AA), the CA submitted that it was general practice that banks do not issue the balance confirmations despite reminders. He further submitted that he had placed reliance on bank statement given to him by the company, which was ultimately found to be fake. He also submitted that it was impossible to detect the fraud as he was carrying out the statutory audit and not the investigation.

It was admitted that the Appellant committed mistake in not obtaining the external confirmation of KCCB but it was not gross negligence. Relying on the  “Code of Ethics”, the CA contended that the misconduct implies failure to act honestly and reasonably either according to the ordinary and natural standard or according to the standard of a particular profession.

The AA observed that the examination of the said fake statement of account of KCCB was only a printed paper bearing no signatures or the seal of the bank. It was also noted that in the said statement, the transactions were also in millions of rupees and not that of small amount.

When asked as to how he assessed the Risk of Material misstatement in the financial statements, which would be very high while relying on a printed paper as evidence, the CA could not offer any suitable reply. The AA observed that the procedure in such scenario has been clearly laid down in Standard on Auditing (SA 315) “Identifying And Assessing The Risk Of Material Misstatement Through Understanding The Entity And Its Environment”.

The AA further observed that the Standard on Auditing (SA 330) “The Auditor’s Responses to Assessed Risks” provides that after assessment of the Risk, the auditor is required to consider whether external confirmation procedures are to be performed as substantive audit procedures. In our opinion the fact that the account statement of KCCB was not properly authenticated increased the risk and the Appellant was required to use his expertise about how to mitigate the same, including obtaining External Confirmations. The detailed procedure of obtaining and examining such external confirmations are prescribed in Standard on Auditing (SA-505) “External Confirmations” which he followed for 14 banks out of 18 but not for others including the KCCB which turned out to be fabricated.

No evidence was produced before the AA as to if the Appellant CA had sent the letter to KCCB or asked the company to send letter to KCCB seeking confirmation of account.

The AA opined that the Appellant CA did not exercise due diligence expected from him as per Auditing Standards and also did not obtain sufficient information for expression of opinion on the Financial Statements of the Company. 

The AA pointed out that the scope of said clause (7) has been widened by the amendment of 2006 by way of inserting the words “does not exercise due diligence” and therefore the judicial pronouncements relied upon by the appellant CA was of no use.

Thus, the Appellate Authority held that the Appellant CA had not exercised due diligence expected from him and also had not obtained sufficient information for expression of opinion on the Financial Statements of the Company. 

Accordingly, the appeal was dismissed.

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