2019 (3) TMI 353 - Tri - Companies Law

Professional misconduct on the part of Chartered Accountant - case of Revenue is that the Respondent No 1, being the Statutory Auditor of the Respondent No 2 Company has miserably failed to fulfill the statutory duty entrusted to him as per the provisions of the Companies Act, 2013 - Held that - In the present times when the national economy is highly dependent upon the profitability and credibility of commercial institutions, the role of Statutory Auditors is becoming a very important tool of keeping a check and preventing re-occurrence of scams like Satyam. This Tribunal while exercising its power under the Insolvency and Bankruptcy Code, 2016 and the Companies Act, 2013 has on several occasions made crucial decisions in important matters relating to Amalgamations and Merger, Oppression and Mismanagement, Voluntary Liquidation, Insolvency petitions, etc.and for such matters, it has to rely upon the reports of the Independent Auditors. It is not only the Company or the Board of Directors or promoters of a company, but the investors, both current and prospective, Securities Market, and the Courts/Tribunals too, that often rely upon the reports of independent Auditors - The role of Statutory Auditor is thus vital, and the auditor owes a fiduciary duty towards Nation. It is, therefore, necessary to take stern action against the person who has tried to diminish the credibility of the Auditor s profession. The conduct of the Respondent no. 1, who happens to be a senior member of the ICAI, amounts to a gross violation in the form of professional misconduct and has challenged the credibility of the whole Profession. The respondent no. 1 has brought disrepute to the Institute of Chartered Accountant and the profession itself. We hope the ICAI will take necessary action against Respondent No. 1 for his professional misconduct. It is clear that the R-1 Mr Mukesh Maneklal Choksi colluded with the Director of R-2 company and has given a false Audit certificate relating to the Profit & Loss Account and Balance Sheet of the R-2 company, without even examining and verifying the books of accounts, The Statutory Auditor has not given any plausible explanation for such irresponsible fraudulent activities. Thus the charges levelled against the R-1 Mr Mukesh Maneklal Choksi have been found correct - petition allowed.

Summary

Issues Involved:
1. Failure of the statutory auditor to fulfill statutory duties.
2. Allegations of siphoning investors' money and other irregularities by the company.
3. Non-cooperation by the company and its directors during the inspection.
4. Violation of Section 141(3)(d) of the Companies Act, 2013 by the statutory auditor.
5. Consequences for the statutory auditor's professional misconduct.

Detailed Analysis:

1. Failure of the statutory auditor to fulfill statutory duties:
The statutory auditor, Mr. Mukesh Maneklal Choksi, admitted that he signed the audit reports for Zen Shaving Ltd. for the financial years 2014-15 and 2015-16 without examining the books of accounts. He acknowledged that he did not attend any AGMs and was unaware of the company's internal audit system. The auditor's statements revealed a gross negligence of his duties, as he certified the financial statements without verifying the necessary documents, which is a clear violation of Section 143 of the Companies Act, 2013.

2. Allegations of siphoning investors' money and other irregularities by the company:
Multiple complaints were made against the company, alleging siphoning of investors' money, non-issuance of financial statements since 1995, frequent changes in the registered office, and non-responsiveness to regulatory bodies. An inspection ordered by the Ministry of Corporate Affairs confirmed many of these allegations, highlighting that the company did not produce books of accounts and had no registered office.

3. Non-cooperation by the company and its directors during the inspection:
The inspection reports dated 10th May 2018 and 13th August 2018 noted that the company and its directors failed to respond to notices and summons. The directors were untraceable, and the company exhibited characteristics of a shell company. The chairman, Mr. Arvind Goyal Babulal, was identified as the "officer in default" under Section 2(60)(v) of the Companies Act, 2013.

4. Violation of Section 141(3)(d) of the Companies Act, 2013 by the statutory auditor:
The statutory auditor's family members were shareholders of the company, making him ineligible to serve as the auditor under Section 141(3)(d) of the Companies Act, 2013. Despite this conflict of interest, he issued audit certificates without examining the company's books, further violating statutory provisions.

5. Consequences for the statutory auditor's professional misconduct:
The tribunal found that Mr. Mukesh Maneklal Choksi colluded with the company's directors and issued false audit certificates, thereby committing professional misconduct. The tribunal ordered that he be ineligible to be appointed as an auditor for any company for five years and directed him to refund the remuneration received during his tenure as the auditor. Additionally, the tribunal recommended that the ICAI take appropriate action against him for his professional misconduct.

Conclusion:
The tribunal concluded that the statutory auditor acted fraudulently and in collusion with the company's directors, violating his statutory duties and the Companies Act, 2013. The tribunal's orders included disqualifying the auditor from future appointments, refunding his remuneration, and recommending further action by the ICAI. The judgment underscores the importance of the statutory auditor's role in maintaining the integrity of financial statements and protecting investors' interests.