1968 (2) TMI 122 - SC - Indian Laws

Summary

Issues Involved:
1. Professional misconduct by the auditor.
2. Violation of Provident Fund Rules.
3. Duty of the auditor towards beneficiaries.
4. Appropriate punishment for the auditor.

Detailed Analysis:

1. Professional Misconduct by the Auditor:
The primary issue was whether the auditor, respondent No. 1, was guilty of professional misconduct under clauses (o), (p), and (q) of the Schedule to the Chartered Accountants Act. The Disciplinary Committee and the Council of the Institute found the respondent guilty of failing to disclose material facts and reporting a material misstatement in the financial statements for the years 1953 and 1954. Specifically, the auditor did not disclose that significant loans were given to the Company in violation of Provident Fund Rules and that the cheques issued in repayment were not cashed but returned to the Company. The Supreme Court agreed with the Disciplinary Committee's findings, emphasizing that the auditor's failure to disclose these facts constituted professional misconduct under clause (o) of the Schedule.

2. Violation of Provident Fund Rules:
The Provident Fund Rules, particularly Rules 11 and 12, were violated when the Trustees granted loans to the Company. Rule 11 required all funds to be deposited in a bank and withdrawn only by authorized cheques. Rule 12 mandated that funds not immediately required should be invested in specified securities. The auditor knew that the loans were granted in contravention of these rules and that the cheques issued in repayment were not intended to be cashed. The Supreme Court noted that the auditor should have disclosed these violations in the financial statements.

3. Duty of the Auditor Towards Beneficiaries:
The Supreme Court rejected the argument that the auditor owed a duty only to the Company that appointed him. Instead, the Court held that the auditor owed a duty to all subscribers of the Provident Fund, who were in the position of beneficiaries. The primary purpose of auditing the Fund was to inform the beneficiaries of the true financial position. The Court compared the auditor's duty to that of an auditor under the Indian Companies Act, 1956, who must act in the interest of shareholders. The auditor's failure to disclose the irregularities to the beneficiaries in the financial statements was deemed a breach of duty.

4. Appropriate Punishment for the Auditor:
Considering the long duration of the proceedings against the auditor, the Supreme Court decided that the ends of justice would be served by severely reprimanding the auditor rather than removing his name from the Register for a limited period. The Court highlighted that the conduct of the auditor was unworthy of a Chartered Accountant, who is expected to maintain high professional standards. The Court also directed the auditor to pay the costs of the appellant in both the Supreme Court and the High Court.

Conclusion:
The Supreme Court allowed the appeal, set aside the High Court's order, and found the auditor guilty of professional misconduct under clause (o) of the Schedule to the Chartered Accountants Act. The auditor was severely reprimanded, and costs were awarded to the appellant.