2016 (9) TMI 658 - HC - Indian Laws

Misconduct by Chartered Accountant - Held that - Having perused the documents we find that the Disciplinary Committee of the Council had accorded full opportunity to the respondent to present his case. All material documents have been considered by the Disciplinary Committee. The Council has very fairly considered the respondent s response to the report of the Disciplinary Committee and has re-appraised the material to conclude that whereas the respondent cannot be held guilty of professional misconduct within the meaning of clauses (5) and (6) of Part I of Second Schedule read with Sections 21 and 22 of the Chartered Accountants Act, 1949, he would be guilty of professional misconduct within the meaning of clause (7) thereof. It is apparent that the misconduct contemplated by clauses (5) and (6) are severe vis-a-vis clause (7). Taking into account said fact and that we are deciding the reference in the year 2016 we are of the opinion that accepting the decision of the Council at its meetings held on January 16 and 17, 2011 in so far it concludes the respondent guilty of misconduct contemplated by clause (7) of Part I of Second Schedule read with Sections 21 and 22 of the Chartered Accountants Act, 1949, ends of justice would suffice if penalty of severe reprimand contemplated by Section 21(6)(c) of the Chartered Accountants Act, 1949 is inflicted upon the respondent.

Summary

Issues:
Reference under Section 21 of the Chartered Accountants Act, 1949 regarding professional misconduct as a concurrent auditor.

Analysis:
1. The case involves a reference under sub-Section 5 of Section 21 of the Chartered Accountants Act, 1949, regarding a Chartered Accountant indicted for negligence in detecting fraudulent transactions during a concurrent audit. The audit spanned from July 01, 2003, to June 30, 2004, at a branch of a bank. The auditors were required to report any fraud or foul play detected during the audit. The respondent, a Chartered Accountant, denied any fraud during the audit period but admitted to carrying out the audit under his supervision. The Disciplinary Committee found the respondent guilty of professional misconduct for negligence in detecting fraudulent transactions.

2. The Council deliberated on the report and the respondent's defense. It noted that the fraud remained undetected for nearly three years, involving entries made by a senior branch manager. The Council considered the applicability of clauses (5) and (6) of the Second Schedule to the Chartered Accountants Act, 1949, which deal with non-disclosure of material facts and misstatements. The Council concluded that while the respondent may not have had knowledge of the fraud, he acted negligently in performing his duties as a concurrent auditor, leading to the undetected fraudulent transactions.

3. The Council accepted the report of the Disciplinary Committee to the extent that the respondent was found guilty of professional misconduct falling within the meaning of clause (7) of Part I of the Second Schedule read with Sections 21 and 22 of the Chartered Accountants Act, 1949. It recommended to the High Court the removal of the respondent's name from the Register of Members for one month as a penalty for the misconduct.

4. The High Court, in 2016, upheld the decision of the Council regarding the respondent's guilt of misconduct under clause (7) of the Act. Considering the severity of the misconduct under clauses (5) and (6), the Court imposed a penalty of severe reprimand on the respondent in accordance with Section 21(6)(c) of the Chartered Accountants Act, 1949.

In summary, the judgment upheld the finding of professional misconduct against the Chartered Accountant for negligence in detecting fraudulent transactions during a concurrent audit, leading to a penalty of severe reprimand.