The Council of the Institute of Chartered Accountants of India vs The Superintendent of Police, Crime Branch and Another

Ramachandra Ayyar, J.—This is a reference u/s 21 of the Chartered Accountants Act, 1949 (Act XXXVIII of 1949). The proceedings out

of which this reference arises were initiated on a complaint, dated 15th September 1953, made to the Council of the Institute of Chartered

Accountants of India, by the Superintendent of Police, Crime Branch (C.I.D., Madras) who was entrusted with the investigation into certain

irregularities committed by the management of the Hanuman Bank, Ltd. (now under liquidation). The complainant charged the Respondent who

was practicing as a chartered accountant at Thanjavur, and who was the auditor of the bank, with professional misconduct.

The Hanuman Bank, Ltd., was incorporated in the year 1933 with headquarters at Thanjavur. It had several branches in the district and had

extensive business. Most of the depositors belonged to middle class. Systematic acts of dishonesty and malversation of the bank''s funds appear to

have been committed by those in charge of its management. These led to an inevitable run on the bank and culminated in an order by this Court on

5th November 1951, in Original Petition No. 192 of 1947, for the winding up of the bank. Messrs. Brahmiah and Co., auditors, were appointed

as the Official Liquidators. The police investigation was made by a special staff of the C.I.D., deputed for the purpose. On 19th September 1948,

a charge-sheet containing 67 charges was filed against the Respondent and 27 others u/s 120-B read with Sections 409 and 477-A of the Indian

Penal Code. A special Magistrate was appointed to conduct the enquiry; the enquiry lasted for nearly three years during the course of which 203

witnesses were examined and nearly six thousand exhibits were marked. On being moved by the accused at that stage the High Court quashed the

charges on the ground that it was impracticable to try them at one trial without confusion; this Court directed a de novo trial in accordance with the

provisions of Section 240 of the Code of Criminal Procedure. The order directing de novo trial was set aside by the Supreme Court on 12th

December 1952. The result was that the criminal proceedings initiated against the Respondent and others failed.

Investigation by the police revealed certain other irregularities which showed that it was the callousness of the Respondent that facilitated the

frauds committed by the management. The investigating officer filed a complaint to which reference has been made earlier, to the Council of the

Institute of Chartered Accountants'' setting out several acts of misconduct on the part of the Respondent in relation to his duties as auditor of the

bank. The secretary of the council promptly forwarded a copy of the complaint to the Respondent and called upon him to explain. A written

statement was filed by the latter in November 1953. The enquiry was taken up by the disciplinary committee of the council but for one reason or

another the enquiry was adjourned from time to time. During that period there was a change in the personnel of the committee, and that

necessitated de novo enquiry. Meanwhile proceedings which were taken by the Official Liquidators, for misfeasance of the directors of the bank

and the auditor were concluded before this Court. Subrahmanyam J., after an elaborate enquiry found that the persons in management of the bank

and the auditor were guilty of several acts of malversation of the bank''s funds, gross negligence, etc. The learned Judge held that a large part of the

responsibility for the failure of the bank had to be borne by the auditor, that the balance-sheets prepared since the year 1943, contained false and

unsustainable statements, that there were manipulations of figures taken from books and observed:

The auditor''s liability would have to be fixed at any rate at a lakh of rupees for payment of compensation by him to the bank but lie is said to be in

insolvent condition and the learned Counsel for the Official Liquidator agreed with me in my suggestion that no decree need be passed against him,

since, if a decree were passed the only result would be that the Official Liquidators would have to come to Court again for an application for

writing off the amount due under such decree.

Thus even the misfeasance proceedings came to nothing so far as the auditor (Respondent) was concerned. The disciplinary committee took up

the complaint against the Respondent and enquired into the matter; there can be no doubt that everybody concerned was tired of the case. The

complainant selected only six of the several charges made by him for proof at the enquiry of the six, he did not press three. The committee found

that one of the three remaining charges had not been made out. What then survived were the two charges which were Nos. 3 and 5 in the list.

They were:

Charge 3.-Suppression of the total indebtedness of the directors in the balance-sheet for 1946. As per books the directors were owing to the

bank a sum of Rs. 15,888, as on 31st December 1946, but in the balance-sheet the figure was shown as Rs. 9,396 only.

Charge No. 5.-Wilful neglect of audit by glossing over stupendous alterations and fictitious entries in the books of accounts. The charge then

proceeded to specify the over-statements of the loans on the assets side of the balance-sheet for the year ending 1944, the head office overdraft

balance for the year ending 31st December 1945 and loans for the years 1945-46.

Both the charges covered acts of wilful default and gross negligence. The Respondent denied that there was wilful suppression of any particulars

in the balance-sheet. He submitted that he relied on his assistants and the officers of the bank while subscribing to the balance-sheet. As regards

the failure to make any reference about the alterations and fictitious entries contained in the books, he merely stated that he was not aware of the

same. The committee did not consider the question whether there was any wilful default on the part of the Respondent as it was not the

complainant''s case that the Respondent was a party to the frauds committed by the management. The committee came to the conclusion that the

Respondent was grossly negligent in the performance of his professional duties. The report of the committee was considered by the council of the

Institute of Chartered Accountants in September 1960, and it held that the Respondent was guilty of professional misconduct u/s 21 read with

Clause 7 of part I of the second schedule to the Act. The council, however, made a recommendation to the High Court that although the case was

one for removing the name of the Respondent from the register of members, in view of the plea of mercy made by him he might be dealt with

leniently in the matter of punishment. Taking the third charge, the correct amount of loan advanced to the directors as it stood on 31st December

1946, was Rs. 15,888. The balance-sheet showed only Rs. 9,396, as the amount due from them. The maximum amount of loans advanced to the

directors during the year was also not mentioned in the balance-sheet for the year. The explanation that his assistants did not place before him the

relevant information can hardly exculpate the Respondent. As regards overstatement covered by charge No. 5, the balance-sheet showed a sum of

Rs. 5,34,426-2-10 as the amount of loans in the head office, whereas the correct amount was Rs. 2,53,276-8-3. A mere look into the general

ledger of the head office would have shown the correct amount. The Respondent was unable to explain how the mistake came to be committed.

Besides this, there were manipulations in the books maintained by the bank for the year 1945. The Respondent was equally unable to offer any

explanation why he did not notice them or apprise the shareholders about the same. There is considerable room for suspicion that the conduct of

the Respondent must have been something more than mere negligence. The only explanation was that his assistants did not do their duties properly.

There were similar irregularities in the balance-sheet of the succeeding year as well but the complainant did not press the same. We are not quite

satisfied whether the complainant was right in not pressing the charge in respect of the accounts for 1946, for if the charge were proved, one could

legitimately come to the conclusion that the case was not one of mere negligence on the part of the Respondent but of wilful default as well. On the

materials now available the conclusion arrived at chartered by the Council that the Respondent has been guilty of gross negligence in the discharge

of his duties as auditor of the bank is unassailable.

Section 21 of the Chartered Accountants Act provides for the punishment of the chartered accountant who is a member of the Institute of

Chartered Accountants if he is guilty of misconduct. Section 22 defines what misconduct is, that is conduct which proved, will render a person unfit

to be a member of the Institute. The section also provides that acts and omissions specified in the schedule to the Act should be deemed to be

misconduct.

Clause (9) to the schedule refers to being grossly negligent in the conduct of professional duties. Having regard to the provisions of Section 22

and Clause (q) to the schedule, it is unnecessary to consider whether there was any moral turpitude on the part of the Respondent when he was

grossly negligent in the discharge of his duties. The only plea of the Respondent was that he trusted his assistants and the officers of the bank. No

auditor can escape from personal liability by taking shelter under the misconduct of his own employees. The auditor occupies a special position in a

company. He is no doubt not an officer of the company except for the limited purposes specified in the Indian Companies Act. As has been stated

in Spackman v. Evans (1868) L.R. 3 H.L. 171, an auditor is in a sense the agent of the shareholders. In the case of a banking company, his

responsibilities should be even greater as the audit is for the protection of not merely the shareholders but of the investing public as well. It is his

duty to see that the management of the bank publishes a true statement of the bank''s financial position. In re London and General Bank (1895) 2

Ch. 673, 682, Lindley L.J., observed:

His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then

comes the question, how is he to ascertain that position? The answer is by examining the books of the company. But he does not discharge his

duty by doing this without inquiry and without taking any trouble to see that the books themselves show the company''s true position. He must take

reasonable care to ascertain that they do so. Unless he does this, his audit would be worse than an idle farce.

The rule then is that the auditor should bring to bear upon his work great skill, care and caution which a reasonable auditor would use in the

discharge of his duties. What is reasonable skill, care and caution must undoubtedly depend on the circumstances of each case; the auditor''s

position has been picturesquely described as that of a watch-dog. Callousness and irresponsible abdication of his work can never be regarded as

anything but misconduct; this is more so in regard to a bank which has to handle the moneys of the public. It will be the duty of the auditor to

scrutinise the accounts very carefully so as to give a real picture of the financial position of the bank in the balance-sheet. An auditor who does not

personally look into the accounts but merely delegates it to his assistants cannot be said to be acting with due skill and care. There is nothing in the

present case to indicate the status, qualifications or capacity of his assistants. Under the circumstances the conduct of the Respondent in abdicating

his functions to his subordinates can only amount to gross negligence. Having regard to the seriousness of the charge the appropriate punishment

would, as the council has stated, be the removal of the name of the Respondent from the register of members. The Council has in the special

circumstances of the case recommended lenient punishment and having regard to the fact chat the Respondent is now nearly sixty-five years old,

we consider that that penalty need not be imposed in the circumstances of the case. The learned Advocate, appearing for the Respondent,

submitted that a reprimand from the Bench would meet the ends of justice. We cannot, however, accept this. In our opinion, the removal of the

Respondent''s name from the register of members of the Institute of Chartered Accountants for a period of three years will meet the ends of justice.

We direct accordingly. No order as to costs.