The Disciplinary Committee of the Institute of Chartered Accountants of India (ICAI) has issued a reprimand to a CA firm. The committee emphasized that the firm is prohibited from conducting audits, signing audit reports, or endorsing any financial documents of a company if one of its partners holds a directorial position within that company.
The core accusation against the respondent-CA firm revolves around the signing of financial statements and audit reports for a company despite its partner’s involvement as a director, promoter, and shareholder in the same company, which seemingly contravenes Section 226 of the Companies Act, 1956. The Committee, after thorough deliberation, has noted several key points and initiated actions accordingly.
The respondent-CA firm represented by a Chartered Accountant, was instructed to furnish relevant documents, including the alleged Partner’s resignation letter (which respondents claimed) from the company and any associated records, within the same timeframe. However, the subsequent failure to comply with these directives led to further complications.
The Committee observed that the Respondent-CA Firm hasn’t given the required documents, as instructed in the meeting on July 24, 2023. They mentioned that the documents are too old, from FY 2011-12, which is more than ten years ago. So, they asked for the matter to be looked into under Rule 12 of the Chartered Accountants Rules, 2007.
The Respondent-CA firm has submitted that he has obtained the eligibility certificate from its partner, but he does not have the same at present due to time lag. The Committee in this regard noted that relevant documents relating to the case such as financial statements, e-forms etc are on record and hence the stand of the Respondent regarding non-availability of documents is not tenable.
The Company inadvertently and unintentionally neglected to submit Form 32, which was subsequently filed at a later date along with a new resignation letter dated the current day. Upon learning about the compliance delay caused by the Company’s inefficient administrative staff, the respondent CA firm opted to terminate their audit services with the Company. This decision was made despite the Company’s reappointment of the CA firm as their statutory auditors for the upcoming financial year 2012-13.
In Section 226(3)(c) of Companies Act, 1956 which states about qualifications and disqualifications of an auditor, a term ‘officer’ is mentioned. According to Section 2(30) defines “Officer” as below:
“officer” includes any director, manager or secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is or are accustomed to act”
Upon reviewing the aforementioned provisions, the Committee observed that an individual who serves as a partner of an officer, including a director, within a company is ineligible to be appointed as the company’s auditor. Nevertheless, in the present scenario, the Respondent-CA firm undertook the audit responsibilities for the company, despite one of its partners holding the position of director within the company and continuing in that role at the time of signing the financial statements.
Further, the committee noted the Guidance Note on “Independence of Auditor ‘ towards this term “Independence” in its para 3.3 has specifically recognized Section 226 of the Companies Act, 1956 as discussed above as below:
“In order to ensure independence, the law has made certain provisions which either prohibit the appointment of a person as auditor in certain circumstances or place certain restrictions on his appointment as auditor or put third parties on guard against the possibility of an abridgement of independence by requiring certain disclosures to be made.”
Based on the provisions outlined in the Code of Ethics – 2009 and the accompanying Guidance Note, the Committee observed that in the current scenario involving the Company Director, who is also the respondent, the CA Firm Respondent’s independence during the audit process is compromised.
Upon thorough examination of the facts, circumstances, relevant materials, and the submissions provided by the Respondent, both during the proceedings and on January 9, 2024, the Committee has opted to issue a reprimand to the Respondent.
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