The Institute of Chartered Accountants of India in a recent ruling observed that Chartered Accountant (CA), acting as statutory auditor guilty of professional misconduct in not detecting wrong financial statement in audit report.
The respondent, CA L Janardhan Rao, on behalf of the respondent firm conducted the statutory audit of the CVM Solutions Private Limited (“Complainant Company”) from FY 2005-06 to FY 2014-15 and that the Respondent Firm was removed as the statutory auditor of the Company by Ministry of Corporate Affairs (MCA) order.
The Complainant has alleged that the Company had suffered huge losses in the financial year 2015-16 and further expected to face potential penalties on account of the non-compliance majorly of Foreign Exchange Management Act (FEMA) and Tax Deduction at Source (TDS) which the Respondent, being statutory auditor, failed to report during the respective periods.
In respect of first charge relating to non-reporting of TDS defaults in accordance to the requirements of Companies (Auditor’s Report) Order, 2003, it was noted that the Respondent was statutory auditor of the Complainant Company since its inception i.e. from the FY 2005-06 and till FY 2014-15, the Board noted that the Respondent was Guilty for Professional Misconduct falling within the meaning of Item (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
In respect of second leg of first charge regarding reporting of non-compliance of FEMA regulations, it was noted that the said charge was arising out of the second charge relating to Rs. 12.90 lakhs received from its parent company which as per the Complainant, was received towards services rendered but was wrongly classified as loan from the directors of the Company that had to be treated as ECB (External Commercial Borrowing) as per FEMA regulations.
In this scenario, the Respondent was under an obligation to report the material misstatement. It was viewed that if the Respondent had performed his professional duties with due diligence, being the statutory auditor of the Company for so many years, he could have easily detected the wrong classification of said amount in the Company’s financial statements or would have reported about the said material misstatement in his Audit Report.
A Four-Member Bench of the Board comprising Smt. Anita Kapur, Presiding Officer and Member (Govt. Nominee), Dr. K Rajeswara Rao, Member (Govt. Nominee), CA. Vishal Doshi, Member and CA. Sushil Kumar Goyal, Member observed that “the Committee is of the considered view that the Respondent was held guilty of Professional Misconduct falling within the meaning of Items (6) and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.”
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
