1955 (8) TMI 18 - HC - Companies Law

Summary

Issues Involved:
1. Alleged negligence by the respondent in verifying the cash balance.
2. Failure to inform shareholders of the bank's weaknesses.
3. General lack of skill and diligence in performing audit duties.

Issue-wise Detailed Analysis:

1. Alleged Negligence by the Respondent in Verifying the Cash Balance:
The Disciplinary Committee found that the respondent failed to verify the cash in hand for the years 1942 and 1943, which was a fundamental duty of an auditor. The respondent admitted in his special reports that he had not verified the cash but had relied on the management's certification. The Committee held that this omission could not absolve him of his statutory liability. The court emphasized that an auditor must verify the cash balance by actual counting, and reliance on management's certification was insufficient. This failure constituted gross negligence in the discharge of his duties.

2. Failure to Inform Shareholders of the Bank's Weaknesses:
The Committee found that the respondent did not clearly communicate his doubts and reservations about certain entries in the balance sheets for the years 1942 and 1943. Instead, he used cryptic and ambiguous language in his special reports, which did not provide adequate information to the shareholders. The court noted that an auditor's duty is to provide clear and specific information, not just means of information. The respondent's failure to do so was considered a significant lapse in his professional responsibilities.

3. General Lack of Skill and Diligence in Performing Audit Duties:
The Committee concluded that the respondent failed to bring to bear the requisite skill and diligence in performing his audit duties for the years 1942, 1943, and 1944. The respondent's personal files lacked audit notes, queries, or certificates, and he did not take further steps to investigate doubtful entries. His passive and incurious attitude, especially regarding the large cash balances and the unusual fact that major investments and cash were held by branches, demonstrated a lack of due diligence. The court found this general negligence to be well-established.

Judgment:
The court confirmed the findings of the Disciplinary Committee and the Council of the Institute of Chartered Accountants. The respondent was found guilty of gross negligence in verifying the cash balance, failing to inform shareholders of the bank's weaknesses, and lacking skill and diligence in performing his audit duties. The court emphasized the importance of auditors in maintaining public confidence in joint stock enterprises and the severe consequences of their negligence.

Order:
The respondent was suspended from the membership of the Institute of Chartered Accountants and from practice for two years from the date of the order. Each party was directed to bear its own costs.