Negligent in Reporting Errors in Financial Statements and Letterhead Misuse: ICAI Finds CA Guilty of Professional Misconduct

The Institute of Chartered Accountants of India ( ICAI ) found the CA guilty of professional misconduct negligent in reporting the financial errors and the misuse of the letterhead. The institute reprimanded the CA with fine of Rs. 25,000.

The complainant-CA serving as a Resolution Professional since June 2018, was appointed by NCLT, Ahmedabad, on May 30, 2018. The respondent firm, M/s KMA & Co., represented by its CA acted as the Statutory and Tax Auditor of the company, including for the financial year 2017-18. Despite the complainant's appointment preceding the audit, the respondent audited and signed the financial statements on September 5, 2018.

The Complainant- CA alleged that the Respondent-CA failed to report significant errors and omissions in the financial statements, including:

1. Absurd negative values of tangible assets
2. Improper recognition of an unreceived insurance claim, violation of accounting principles.
3. Failure to disclose NCLT Order initiating Corporate Insolvency Resolution process under section 9 of the IBC in the audit report and
4. Misused M/s. KMA & Co.’s letterhead and registration number in certifying Form 3CA and 3CD for tax audit, but signed in his capacity as partner of M/s. Keshav Chaubey and Co., with the same Firm Registration Number as that of M/s. KMA & CO.

The Disciplinary committee observed that :

With regards to the 1st leg or issue, the committee observed discrepancies in the financial statements regarding negative figures reported for fixed assets like plant and machinery, electrical installation, and furniture and fixtures. Despite appropriate depreciation charges, the net block of fixed assets showed negative values due to sales during the year. AS 10 dictates that upon asset disposal, the carrying amount should be removed from the balance sheet, with gains or losses recognized in the profit statement. However, the company recognized sales at proceeds value, not the carrying value, and the auditor failed to report this. The auditor's subsequent acknowledgment of errors implies negligence, deemed unacceptable by the committee.

With regards to the second leg or issue, the committee observed a violation of AS 9 regarding the recognition of insurance claims without ensuring their measurability and realisation. Despite the uncertainty of claim realisation, the auditor failed to qualify the report or ensure settlement. The company's recognition of the claim without realisation contradicted AS 9, and the auditor's failure to report this was noted as non-compliance.

Further, in the 4th leg or issue, the committee noted the failure to report the commencement of Corporate Insolvency Resolution Process (CIRP) in the audit report, a significant event with material impact. The appointment of a Resolution Professional obligated the company to provide a realistic resolution plan to avoid liquidation. The auditor's subsequent admission of being unaware of the NCLT Order indicated negligence in obtaining sufficient audit evidence. This omission of material information known to the auditor was deemed unacceptable by the committee.

The committee, in the final issue, noted the violation of CA Regulation 190 regarding the use of the incorrect firm name in Form 3CA. Despite the firm's name being changed to M/s. KMA & Co. from November 28, 2016, the respondent continued to use the old name, M/s. Keshav Chaubey & Co. This was deemed a violation of regulations.

Accordingly, the Committee viewed that for the above legs of the allegation the Respondent- CA is held Guilty of Professional Misconduct within the meaning of Items (5), (6), (7) and (9) of Part I as well as item (1) of Part II of Second Schedule to Chartered Accountants Act, 1949.

To Read the full text of the Order CLICK HERE

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