CA Fails to Properly Report Fraud During Concurrent Audit: Know ICAI Misconduct Rules with Case Laws

Chartered Accountancy (CA) is one of the most respected professions in India, regulated by the Institute of Chartered Accountants of India (ICAI). Chartered Accountancy is a profession that deals with financial management, auditing, taxation, and compliance. In short, CA is a financial watchdog that ensures money is handled legally and ethically.

The Institute of Chartered Accountants of India (ICAI) enforces strict ethical standards. Any dishonest act, hiding facts, issuing false reports, or ignoring fraud, is treated as professional misconduct. ICAI has a disciplinary framework to punish such lapses, ranging from reprimands to permanent removal from the profession. It's worth noting that ICAI divides misconduct into 2 Categories such with the first schedule dealing with lesser misconducts and the second schedule dealing with serious misconducts such as fraud.

What is a concurrent audit?

A concurrent audit is an internal control mechanism that operates in real time alongside daily financial transactions to ensure compliance and detect irregularities immediately, helping prevent potential fraud or huge errors from escalating. Usually, it is done in banks or large institutions. Unlike a statutory audit (done after the financial year ends), concurrent audits happen in parallel to daily operations.

In this context, Fraud means deliberate manipulation of records or transactions that the auditor either fails to detect or is complicit in. So, mainly if a CA intentionally does any kind of false information or fails to report the fraud or commits fraud, it will be considered as a serious professional misconduct under the second schedule.

There are case laws that deal with professional misconduct, especially fraud during Audits.

Let's go through a case like that.

Mainly, the fact of the case was that a complaint filed in 2016 alleged that the auditor failed to detect fake Letters of Credit (LCs), leading to a ₹29.22 crore loss for the bank. During the audit (May–Nov 2014), the CA repeatedly wrote “No Record Found” in reports, ignoring glaring irregularities in high-value transactions. The ICAI Disciplinary Committee found this amounted to gross negligence and a breach of professional duty.

The CA argued that the fraudulent LCs were fabricated by the branch manager and weren’t visible in the bank’s computerised records. The committee responded that the duty of a concurrent auditor goes beyond checking system outputs. Large outstanding balances in the books should have raised red flags. Even the absence of data was a warning sign that required escalation.

The Committee rejected the defence and emphasised that a concurrent auditor’s duty extends beyond verifying documents and includes actively scrutinising internal records to identify discrepancies

Here, the committee held that the CA was guilty of misconduct under the rules covering :

• Failure to gather sufficient information
• Failure to disclose material facts
• Failure to report misstatements
• Lack of due diligence

These rules were covered under items (5), (6), (7), and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. Mainly, fraud during a concurrent audit would fall under these items, which state that they failed to disclose material facts or misstatements and gross negligence.

Items (5), (6), (7), and (8) of Part 1 of the Second Schedule say that “A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he-

(5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity;

(6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;

(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion”

So clearly we can see that if a CA fails to Properly Report Fraud During a Concurrent Audit or any other misconduct, ICAI has the authority to impose disciplinary measures depending on the severity of the violation. The punishments are different for less severe misconduct and serious misconduct, like cases involving fraud. A CA’s integrity is the backbone of financial trust. Once compromised, no audit or balance sheet can restore it.

ICAI’s disciplinary framework ensures accountability, reminding every CA that misconduct, whether minor or serious, will have consequences. Fraud during concurrent audits isn’t just a mistake; it’s a betrayal of trust. And ICAI very strictly makes sure that betrayal doesn’t go unpunished.

As per the rule of ICAI, Punishments are clearly laid out in Sections 21, 21A, 21B, and 22 of the Act, along with the Schedules (First and Second), which classify misconduct.

At last, in this case, the Committee concluded that the respondent’s failure to identify and report significant irregularities in high-value LC transactions amounted to gross negligence and lack of due diligence. Consequently, the ICAI reprimanded the Chartered Accountant and imposed a monetary penalty of ₹2 lakh, to be paid within 60 days.

How the disciplinary committee works

The Disciplinary Committee is the guardian of accountability within the profession. It ensures that the trust placed in Chartered Accountants by businesses, banks, and the public is never taken lightly.

The disciplinary committee works at two levels :

Board of Discipline (Section 21A) → Handles minor misconduct (First Schedule cases).

Disciplinary Committee (Section 21B) → Handles serious misconduct (Second Schedule cases, e.g., fraud, gross negligence).

Also, Section 21B(3)- Chartered Accountants Act, 1949. This section lays down the powers of the Disciplinary Committee when it concludes that a member is guilty of misconduct under the Second Schedule (serious misconduct) or both the First and Second Schedules.

• Opportunity to be heard: The CA must be given a chance to present their defence before any order is passed.
• Actions the Committee may take:
• Reprimand the member.
• Remove the name of the member from the Register permanently or for a fixed period.
• Impose a fine of up to ₹5 lakh.
• It states that once the Committee arrives at a finding (under Rule 18) that the respondent is guilty of misconduct, it must allow the respondent to be heard before passing any order under Section 21B(3).
• If the respondent fails to appear despite being given the chance, the Committee can still proceed to pass an order.

Along with section 21B(3), Rule 19(1)- Disciplinary Rules, 2007 is also important.This rule is part of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.

So, simply we can say that Rule 19(1) operationalises Section 21B(3) by making the “right to be heard” a mandatory step before punishment.

In a world where financial truth is supreme, the Chartered Accountant must remain a guardian of trust, for once integrity is compromised, no audit, no report, and no balance sheet can restore what has been lost. CA holds the position entrusted with safeguarding transparency and accountability. Once it's lost through misconduct, the consequences are far beyond what we imagine. But the ICAI disciplinary framework makes it clear. Whether the misconduct is minor or serious, the person who committed the misconduct will surely have to pay for that; likewise, penalties range from reprimands to permanent removal and heavy fines.

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