CA upheld guilty of certifying fake balance sheet for obtaining credit facility

CA upheld guilty of certifying fake balance sheet for obtaining loan-credit facility. No satisfactory working papers were found. Ban of one year and fine also upheld

ABCAUS Case Law Citation:
ABCAUS 2399 (2018) 07 AA

As per the complaint of the CBI to the Institute of Chartered Accountants of India (ICAI), it was alleged that the chartered accountant made fake and fabricated audited Balance Sheets and Profit and Loss Account to help a fictitious company to get huge trade finance.

The said company had never existed and was a fictitious one and neither any manufacturing activity nor any business transactions ever took place by the said fictitious company as certified by the CA. The CA had never checked any statutory records or any supporting documents before certifying the audited financial statements. Further, no IT return had been filed in the name of the said firm. The above facts had allegedly been admitted by the CA  before the CBI. Later, the said company defaulted and failed to pay the limits availed causing looses to the financer.

In a yet another case, as alleged by the CBI, the said CA certified provisional balance sheet, provisional profit & loss account of a company wherein inflated profit was shown. Acting on the above, the financer enhanced the Trade Limit to the Company. The Respondent had further audited the accounts of the Company and certified the balance. During the CBI investigation it was disclosed that the company had never made any trade transaction and suppliers/buyers  mentioned were non-existent and constituted only on papers of the Company for the purpose of fraudulently availing Trade Finance Limit, by furnishing false and forged supply.

The CA had not checked any statutory records or any supporting documents while certifying the audited financial statements, which had been admitted by him before CBI. The financial statements had been falsely certified by the CA, reflecting a huge net profit. The Company had also not filed any Income Tax Return or paid Income Tax during the relevant period and has not filed the Annual Report/Balance sheet with Registrar of Companies. The Company after fraudulently availing the trade Finance Limit defaulted and failed to pay the limits availed causing a wrongful loss to the financer.

In both these matters, Prima Facie Opinions were formed by the Director (Discipline) of ICAI, holding the CA as Prima Facie Guilty under various Clauses of the Chartered Accountants Act, 1949. These matters were then placed by him before the Disciplinary Committee in accordance with the applicable provisions of the Chartered Accountants Act, 1949 read with rules of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.

The Disciplinary Committee, in both these matters, directed the CA to submit his working papers and various documents to prove that he had actually carried out the audit.

The CA submitted various papers including the some working papers, copy of bank statement, copy of some management representations, trial balance and financial statements of auditee and copies of some income tax returns.

The CA admitted that he had not gone through tax records, stock records and signed the balance sheet/Profit and loss account and tax audit reports as produced before him and only on his belief. The CA also admitted that his working papers were taken by the auditee and he was not having any working papers. With respect to appointment letter and NOC from the previous auditor, the Committee found that CA antedated evidences to substantiate his defence.

It was also noted by the Committee that the Respondent had given the Report on Form 3CB. To a specific question by the Committee to the Respondent as to why he had certified on Form 3CB and not Form 3CA, the Respondent failed to give a satisfactory reply and just mentioned that this was done in his initial year of practice. It was further noticed by the Committee that the Respondent had also made modification in Form 3CB and had also not mentioned date on Audit Report.

According to the Committee, as per AAS-3, working papers are the property of the auditor and he ought to have retained the same for a period of time sufficient to meet the needs of his practice which the Respondent failed to do so. Also, the Respondent not only performed his duties negligently but also failed to obtain substantial information for expressing an opinion.

Accordingly the Committee held him guilty of professional misconduct within the meaning of various clauses of the Chartered Accountants Act, 1949 and awarded the punishment of the removal of his name from the Register of Members for a period of one year in both the cases and also imposed a consolidated penalty of Rs. 50000/- and Rs. 25000/- respectively.

Aggrieved by the orders passed by the Disciplinary Committee of the ICAI, the CA approached Appellate Authority and filed the instant appeals.

It was contended that the Disciplinary proceedings were barred by limitation. In response thereto, the ICAI submitted that no complaint in Form “I” was filed by CBI. It was further submitted that when they finally requested the matter to be taken up as “information” only thereafter the matter was proceeded in accordance with the provisions of Rule 8 (1) (a) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 and therefore, these matters were accordingly proceeded with, which are within limitation. Accordingly, the ground of limitation was rejected.

The CA on the basis of a typing mistake in CBI report contended that the entity named was never audited by him. However, the Appellate Authority opined that a typing mistake at one place does not vitiate the proceedings.

The Appellate Authority observed that the CA was found guilty by the Disciplinary Committee on account of not applying due diligence or being grossly negligent in carrying out professional duties in addition to his failure for obtaining sufficient information which was necessary before expressing an opinion.

One of his main defences of the CA was that his working papers which have been taken away by the auditee and the Disciplinary Committee did not examine him as one of his witness. However despite Disciplinary Committee had given many opportunities to produce him as witness, the CA failed to produce him.

It was observed by the Appellate Authority that the working papers of the CA were very general and sketchy and did not contain the required information as mandated by the Auditing Standards i.e., AAS–3. In many cases even the year for which audit was done, name of person in-charge who carried out the examination and the details of his observations were not mentioned. Further, how the observations were satisfied was also not mentioned. No proper audit programme was found in the working papers.

The Appellate Authority observed that the CA in his letter to the Disciplinary Directorate had stated that he had checked the trial balance which would also mean confirming the balances as available in the trial balance with books of accounts and other records. When we asked him as to whether this would be sufficient examination, the CA again reiterated that proper examination and due diligence was done by him but the records were taken away by the auditee. However, the CA  was not able to reply as to why records were taken by him, why no FIR was filed by the CA against him for records.

The Appellate Authority opined that undoubtedly the CA failed to prove that he had obtained all the information which was necessary for expressing the opinion and had exercised due diligence in the performance of his professional duties. Accordingly, both the Appeals were dismissed. Also the AA declined to interfere with the punishment awarded.

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