AI Structured Summary
Not yet generated for this judgment
Judgment
D. Falshaw, C.J.—This is a disciplinary case referred to this Court under the provisions of Section 21 of the Chartered Accountants Act, 1949. Mr. J.C. Chandlok of Messrs. Walker Chandlok and Co. (bartered Accountants of New Delhi, has been found guilty of! professional misconduct under Clause (8) or Part 1. of the Second Schedule to the Act by the Disciplinary Committee which has recommended that be should be reprimanded....
The facts are as follows: A company called Messrs. Sulphur and Chemicals (Private) Ltd., with its registered office at Delhi bad appointed the firm of which Mr. J.C. Chandlok is the proprietor as its auditors for the year ending the 81st of March. 1988. He compiled and submitted his Auditors'' Report dated the 11th or December, 1958, which was placed along with the balance sheet before the annual general meeting of the company held on the 30th of December, 1958. The Auditors'' Report reads:
We have audited the annexed Balance Sheet of Sulphur and Chemicals (Private) Ltd., New Delhi, as at 31st March, 1958, and also the annexed Profit and Loss Account of the Company for the year ended on that date, and report that:
Books of Accounts and the supporting vouchers have been examined by Shri P.C. Guha, Chartered Accountant, Calcutta, and Internal Auditor of the Company.
We have obtained all the information and explanations which to the best of our knowledge Mid belief were necessary for the purposes of of audit.
In our opinion proper books of account a required by law have been kept by the Company, so far as appears from the examination of the Books by die Internal Auditor.
The Balance Sheet and Profit and Loss Account dealt with by the Report are in agreement with the books of account as per report of the Internal Auditor.
Subject to (a) the plant and machinery has been written down, it is stated to disclose the approximate value of the saleable items, and (b) the advance disclosed in the Balance Sheet, as due from the International Sales Corporation (Private) Ltd. (Balance Sheet whereof has not been seen by us), may receive the attention of the members, in our opinion and to the best of our information and according to the explanations given to us the accounts together with the notes thereon give tin information required by the Companies Act, 1956 in the manner so required and give a (rue and fan view:
(a) in the case of the Balance Sheet ot the state of the affairs of the Company as at 31st March, 1958 and
(b) in the case of a Profit and Loss Account of the Profit tor the year ended on that date.
After this Auditors. Report had come to the notice of the Registrar of Companies at Delhi he instituted a complaint against the firm and Mr. J.C. Chandlok u/s 203 of the Companies Act In January, 1960, for an alleged breach of the provisions of Section 227 of the Act, the basis of which was that he had not examined the company''s account books himself, but had based his report on the examination carried out by Mr. P.C. Guha, a Calcutta Accountant. The accused were acquitted in that case by the trial Magistrate on the 5th of December. 1960 and a petition I u/s 417 of the Code of Criminal Procedure filed by the Registrar of Companies for leave to appeal against the acquittal was dismissed in limine by S.B. Capoor, J., and myself on the 20th of February, 1961. It appears, however, that the Registrar had also sent a copy of the complaint to the Institute of Chartered Accountants which proceeded independently of the proceedings in the Criminal Court to hold an enquiry whether Mr. Chandlok had been guilty of professional misconduct.
Part I of the Second Schedule to the Chartered Accountants Act deals with professional misconduct in relation to Chartered Accountants in practice requiring action by a High Court, and die report of the Disciplinary Committee makes it clear that the alleged misconduct which they were considering was under Clauses (2) and (8). The opening words are, "A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he". and Clause (2) reads-
(2) Certifies or submits in his name or in the name of his firm a report of and examination of financial statements unless the. Examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another Chartered Accountant in practice; Clause (8) reads-
(8) fails to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of an opinion.
4a. Some more detailed aspects of the facts as found by the Disciplinary Committee may now be mentioned. It has been found that the company Sulphur and Chemicals (Private) Ltd., during the bear in question was moribund and did not carry on any business at all in the ordinary sense of the word The total income of the company during that veer was a single item of Rs. 12,878.69 nP on account of interest recoverable from another company called Messrs. International Sales Corporation (Private) Ltd., and the expenditure was Rs. 10,829.06 nP consisting of Rs. 3,000/ on account of rent. Rs. 5,000/- on account of salary Rs. 1,878/- by way of legal charges Rs. 100/- NP Auditors lee and a few lesser items The books and relevant documents of the Company were kept at Calcutta where they were examined by Mr. P.C. Guha. a Chartered Accountant of a firm called Guha and Guha. who was the company''s Internal Auditor but was not an employee of the firm and is in practice as a Chartered Accountant.
It further came out that after receiving the report of Mr. P.C. Guha Mr Chandlok addressed a letter D/- 4-12-1958, to die Managing Director of Company asking for additional information, before certifying the accounts, on the following points:
Increase in rent, rates and taxes, salaries, miscellaneous expenses, conveyance etc when no-business was done during the veer with Boarder Resolution, if available.
Banker''s certificate confirming the balance.
Certificate of International Sales Corpora lion (Private) Ltd.
Details of sundry creditors Us 2,892.50 nP.
It was after a reply had been received from the Managing Director giving the necessary information on these points that Mr. Chandlok drew up his Auditors Report on the 11th of December, 1958. The Disciplinary Committee found on these facts that Mi Chandlok was not guilty of professional misconduct in respect of Clause (2) or the first part of Clause (8) of Part I of the Second Schedule since he had relied, as he was entitled to On work done by another Chartered Accountant in practice, and it should not be said that he had failed to obtain sufficient information to warrant the expression of the opinion contained in his -report. At the same time it was made clear that_ these findings were given in the; light of the peculiar circumstances of this case and the fact that, the company was not doing any business, and no doubt was left regarding their view that in ordinary circumstances it would be the duty of a statutory auditor to inspect the books of account himself and not merely to rely on inspection carried out by an Internal Auditor.
The count on which the Disciplinary Committee has held Mr. Chandlok guilty of the professional misconduct was that his report on the financial statement container "exceptions which were sufficiently material as to negate the expression of an opinion" and in particular they referred to the words used in paragraphs 1, 3 and 4 of the Auditors Report where the reliance on the work carried out by Mr. P.C. Guha was mentioned. The Disciplinary Committee did not regard as convincing the explanation given at the conclusion of the hearing by Mr. Chandiok to die effect that his reason for incorporating qualifications in the report was that Mr. P.C. Guha was an Accountant connected as statutory auditor with the other companies belonging to the same group and therefore it might give more confidence to the persons concerned that the inspection of the accounts had been done by a person auditing the accounts of other allied companies and otherwise there might be some wonderment as to how he himself had gone to Calcutta for a fee of only Rs. 100/-.
With due respect I must say that it seems to me that there is some inconsistency in the findings of the Disciplinary Committee in that if, us has been found, there was no misconduct involved in his basing his report to a great extent on the work of another practising Accountant, it is difficult to see how there could be any misconduct involved in his mentioning this fact in his report. Indeed there might appear to be more impropriety involved if an auditor submitted a report based on the work of some Accountant outside his own firm without mentioning the fact so as to create an impression that he himself had examined everything.
The learned Counsel representing the institute would seem to have had something like what I have said above in his mind when he argued the case, since his argument amounted to saying that under the provisions of Section 227 of the Companies Act it was illegal for an Auditor to submit in report at all without having personally examined the accounts. It must be admitted that the section certainly appears to contemplate an auditor''s report based on the result of his own examinations and enquiries. It is, however, clear that this line of argument amounts to nothing more or less than turning these proceedings into an appeal against the acquittal of Mr. Chandlok by the criminal Court, for which leave has already been refused by this Court, and this does not appear to me to be proper.
Apart from this it is evident that what can be gone into in these proceedings is confined to the clauses of professional misconduct contained in Part I of the Second Schedule, which describes the various kinds of professional misconduct in relation to Chartered Accountants in practice which require action by a High Court. The Disciplinary Committee has picked out Clauses (2) and (8) as being those which might cover the facts of the present case, and nobody has suggested that any of the other right clause arises at all,
Clause (2) clearly contemplates the furnishing of a report by as Chartered Accountant based'' on the work done by a partner or employee of his own firm or even an outsider who is in'' practice, and one must assume that if Clause (2)-was only intended to apply to reports or examinations of financial statements otherwise than in...the Accountants capacity as a statutory auditor this exception would have been expressly included. The Disciplinary Committee consists of experienced Members of the profession and their acquittal of Mr. Chandlok in respect of Clause (2) must be taken as recognition of the fact that it is not illegal for an auditor to base his report,?(furnished u/s 227 of the Companies, Act on the work done by others.
The, learned Counsel for the Institute has not challenged the exoneration of Mr. Chandlok on the charge of misconduct falling under the first part of Clause (8), and we are thus left with the-question whether his mention of the examination and report of the Internal Auditor in paragraphs 3 and 4 of his report amounts to an exception sufficiently material to negate the expression of an opinion which, as I understand it,, means, that; the, opinions expressed in the report cease to have any meaning or value. The crux of the matter would appear to be whether if the opinion expressed in paragraphs 3 and the statement made in paragraph 4 of the report turned out to be false Mr. Chandlok could escape responsibility. The answer to this question would appear to me to be in the negative. In saying this, however, I must make it clear that, like the Members of the Disciplinary Committee, I am keeping in mind the peculiar facts of this case which relate to a company described by the Committee as moribund, and which, in effect, did no business at all during the relevant year. I agree with the view of the Committee that although in this case no professional misconduct may be involved in submitting a report u/s 227 of the Companies Act based mainly on the work of another Accountant, as a general rule a statutory auditor would be guilty on this count if he performed his work so recklessly as to give his report without looking into the books of account of the company.
The question which remains is whether if Mr. Chandlok could, without being guilty of misconduct, base the essential parts of his report contained in paragraphs 3 and 4 on the work done by Mr. P.C. Guha referred to in paragraph I, he becomes guilty of misconduct simply because he has motioned this in the report, and, as I have alertly indicated above, my own opinion Is that it would have been improper on his part not to have mentioned the work of Mr. Guha in the relevant parts of the report. I am therefore of the opinion that no misconduct on the part of Mr. Chandlok has been established and I would accordingly direct that the proceeding be filed u/s 21(6)(a) of the Chartered Accountants Act.
Dulat, J.
I agree.