The Institute of Chartered Accountants of India vs V.K. Madhava Rao

Jaganmohan Reddy, J.—These are proceedings u/s 21, Chartered Accountants Act, 1949 for taking disciplinary action against one V.K. Madhava Rao, Chartered Accountant. The enquiry was instituted as a consequence of a letter dated 21-2-1954, addressed by one Venkatswamy of the National Youths Union, Secunderabad, to the Income Tax authorities, a copy of which was, sent to the Institute of Chartered Accountants.

In that application Venkatswamy alleged that the Accountant had falsely certified printing and circulation of the daily, ''''Deccan Chronicle" as 8000 contrary to the figure shown in the account books which disclosed a circulation of 4000 to 5000 copies and by this malpractice, it was alleged that Madhava Rao helped the Deccan Chronicle to successfully cheat the Income Tax Department.

The Council of the Institute of Chartered Accountants upon receipt of the letter aforesaid issued a notice to the chartered account Madhava Rao dated 27-4-54 asking him to file his written statement and to disclose as required under Regulation 11(5) read with Regulation 11A of the'' Chartered Accountants Regulation, the name of the member concerned to die Council immediately on receipt of the letter.

In the written statement filed by the Accountant dated 31-5-1954 he denied that he certified untrue accounts or suppressed any accounts or made up any false accounts as alleged and that as the complainant has also addressed the Commissioner of Income Tax, the matter will no doubt be shortly enquired into by the Department and the result thereof known very soon. In para 7 of the written statement he makes the following statement:

In July 1951, one of the Managing Partners in the Deccan Chronicle Press desired and requested me to give a letter about the daily average sales analysis of the Press in the form shown in the copy sent to you by the complainant and marked "2". The said partner informed me and I satisfied myself that it was purely asked for and intended for showing to some advertisers and obtaining some advertisements.

Accordingly I gave a letter in the said form without going into the actual figures, as it was purely for the above purpose. The Management got the letter printed and sent it to some of the advertisers. I informed the said partner that my letter was not of any real value as it was not supported by the Audit Bureau of Circulations Ltd., Bombay. The said letter, however, had nothing to do with the actual sales, the proceeds whereof were duly recorded in the books.

As the books were wholly unaffected and as there was no question of making up or submitting any untrue statements of accounts or returns to Revenue authorities or any idea of defrauding Revenue or evading tax, I was under the bona fide impression that there was nothing improper in giving such a letter purely for advertisement purposes.

Thereafter he states that having regard to the fact that he has practised for only a few years he was not aware of the professional ethics and while reading the journal of the Institute of Chartered Accountants and perusing the Annual Report of the Council for the year ending 31-3-1943 he discovered that even granting of such certificates amounted to professional misconduct. He states that as soon as he realised this he went to the proprietors of the "Deccan Chronicle'''' and asked them not to use the certificate for any purpose and as they had promised him not to use the certificate he took no further action.

In para 10 of the written statement he stated that if the Institute should view his conduct in issuing a letter as falling within Section 21 of the Act or Regulation 11, "he would in all humility express his regards and assure the Council that at no future time will such action recur on his part. After this letter was issued, evidently, he either took counsel or advice was offered to him; in any case acting on advice or counsel he changed his line of defence.

By his letter dated 2-7-1954 Madhav Rao took up the attitude that at the time of giving the certificate he did examine the account books and had verified the statement and that he had checked up the issue register and had certified the number of copies printed for circulation. This is what he says:

I beg to state that the figures of circulation as certified by me on 31-7-1951 was correct in accordance with the statistical figures supplied to me by the Management and this has included all specimen, free and voucher copies and also many complimentary copies. As this circulation certificate was not based on any manner of calculation as prescribed by the Audit Bureau of Circulations Ltd., Bombay, I thought I was free to use my discretion.

This change in the attitude certainly did him no credit and in fact prolonged the proceedings before the Disciplinary Committee. In order to see to what extent this attitude is justified, it is necessary to peruse the certificate issued by him on 30-7-1951 and addressed to the partners of the Deccan Chronicle Press which is as follows:

Dear Sirs,

As desired by you we have examined the book''1 of account of Deccan Chronicle Press for the yea ended 30-6-1951 and we hereby certify the dai1 average sales analysis of the aforesaid press as under:

AVERAGE DAILY CIRCULATION 9505 COPIES

Sales in the twin cities of publication, i.e. Hyderabad and Secunderabad ... 5,706 Sales in the various Districts of publication ... 3,545 Sales outside the Hyderabad State ... 254 ----------- Total copies ... 9,505

Sales through Agents and Hawkers ... 6,081 Sales through Subscribers ... 3,287 Complimentary copies including voucher copies to Advertisers ... 157 ----------- Total copies ... 9,505

Yours faithfully, V.K. Madhava Rao and Co. Chartered Accountants.

It is clear from this letter that what the accountant certified was not the number of newspapers printed for circulation but the actual sales which excluded copies not sold and in so certifying he has admittedly not given the correct figures which he would have done had he examined the books as alleged by him in his second application.

The Council referred the matter to the Disciplinary Committee which, by a majority, reported that the conduct of the accountant was grossly negligent rendering him unfit to be a member of the Institute. The fourth Member was of the view that the Respondent was lacking in that high degree of care that is expected of a Chartered Accountant in believing that the return of sale copies from or with the agents was not to be taken into account while furnishing the circulation figures and in not wording his letter of 30-7-1951 appropriately so as to bring out its true import."

In the circumstances set out above the third member was of the view that the Accountant having admitted his error as soon as he discovert it and having offered his unconditional apology and further as lie derived no pecuniary benefit, his conduct was not such as would amount to misconduct within the meaning of Section 21, Chartered Accountants Act, 1949. The Report of the Disciplinary Committee came up before the Council which passed the following resolution:

The Respondent is guilty of misconduct as a Member of the Institute in that he signed an incorrect certificate for the Deccan Chronicle Press in gross negligence of his professional duties.

These proceedings have now been referred to us u/s 21, Chartered Accountants Act for confirmation. Learned Advocate for the Accountant raised a preliminary point namely that as the official member nominated by the Government of India was not present when the Disciplinary Committee met the whole proceedings were vitiated.

We think there is no force in this argument because all that the Act and the Rules require is that there should be a Member nominated by the Government of India in the Disciplinary Committee. It is not the case of the Accountant that notices were not issued to all the members of the disciplinary committee but that the absence of a member nominated by the Government of India was fatal to the proceedings.

Rule 62(b) of the Regulation prescribes the quorum for a Business Committee as being three and a "Business Committee" has been defined by Rule 17(3) to include the "Disciplinary Committee." It is, therefore, clear that the Disciplinary Committee which is a Business Committee should have as its quorum three members and it is not necessary for the valid constitution of that Committee that all the Members, namely, all the five members should be present. In this view of the matter the preliminary objection has no force.

Learned advocate for the Respondent has raised a further point that the Accountant owed no duty, to any one in certifying the sales of the Deccan Chronicle; as such he could not be held guilty of negligence for which the owing of a duty is an essential requisite. The Council at the time of its finding had evidently in view the provisions of item (q) of the Schedule to the Act under which a Chartered Accountant is deemed to be guilty of an act which, if proved, renders a person unfit to be member of the Institute.

Section 22, however, does not preclude the Council to limit the enquiry only to the items specified in the Schedule, but justifies an enquiry with respect to matters other than those specified in the Schedule and it will be for it and the Court to decide whether the acts or omissions complained of are such as to render the dilinquent unfit to be a member of the Institute.

Mr. Rangachari contends on the authority of - Commr. of Income Tax, Madras Vs. G.M. Dandekar of M.K. Dandekar and Co., Chartered Accountants, Madras, (A) that there could be no case of negligence, much less gross negligence unless there has been a breach of duty. In this case he submits it has not been established that any duty was owed by the M auditor to any one.

In the above referred Madras case their Lordships no doubt on the facts of the case did hold that the preparation of a statement which was filed before the Income Tax authorities was not negligent in that the auditor owed no duty to probe into the matter and no duty was cast upon him to do the particular act which he failed to do, though, no doubt, in the case of joint stock companies he owed a duty to the shareholders.

The cases cited in that judgment deal with charges of misfeasance under the respective English Companies Acts where certain duty was cast to certify balance sheets after examining all books and an allegation of negligence in performing that duty was made. The test applied in these statutory cases for determining whether there has. been a breach of duty is in our view different to that required in ascertaining whether any particular act constitutes gross negligence for purposes of professional misconduct.

The duty which is owed should not only be to the person who engages the auditor but also to all those who, as Lord Atkin observed in - ''Donoghue v. Stevenson'' 1932 AC 562 (B)

are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.

No doubt these observations were made in determining a case of tortuous liability, but the principle enunciated therein cannot but generally be applied. The purpose which an auditor fulfils is not only to chock accounts and give a statement of the financial position of the concern, but also to give it the stamp of authenticity of the actual position of the company as reflected in the statements of account certified by him.

If as in ''Dandekar''s case (A)'' the Assessees merely placed one set of accounts before the auditor and suppressed the other set, there is no duty cast upon him to go out of his way and probe into the matter or to investigate and rule out the possibility of a second set of accounts being kept for black-market transactions. The auditor has in that case done what was expected of him, namely, to examine the accounts and certify the statement to be correct in accordance with these accounts.

But where an auditor in order to assist his client to increase his sales or to achieve some specified object becomes a party to the statement without taking the most elementary precautions to check the facts contained in the accounts, he would be deemed guilty of gross negligence, because the duty he owes is to all those who are likely to act to their detriment upon the strength of that statement and whom he should have in contemplation at the time when he made the statement.

Apart from the question of owing a duty to some one or other there may in some cases be instances where an auditor is guilty of misconduct in the manner in which he performs his duties from a professional point of view. The condition that some one or other should have a relief against the auditor for a breach of duty owed to him is not a sine qua non of actions amounting to professional misconduct u/s 22, Chartered Accountants Act. The schedule itself clearly contemplates different acts and conduct as amounting to professional misconduct such as where an auditor fails to obtain sufficient information to warrant an opinion etc.

In this case the charge against the Accountant was that he blindly certified the sales of the Deccan Chronicle" without checking the books of account and knowing fully well that the certificate was required for boosting up the advertisement insertions. When persons intend to insert advertisements in newspapers, one of the considerations which weighs with them in selecting a newspaper is to enquire what its circulation or sales is and advertise in a paper which has a wide circulation.

The revenue received from such advertisements gives financial stability to the running of the newspaper. For these reasons the proprietors of the "Deccan Chronicle." wanted to obtain a certificate relating to sales for the purpose of attracting advertisers and readers etc., and it is alleged that the Respondent assisted them by giving a false certificate in order to utilise it for the aforesaid purpose.

We have already stated what the case of the Respondent was when he filed his written statement and how he changed his version by his letter dated 2-7-1954 in which he said that he acted upon the statistical statements furnished by the management which included in the figures of circulation certified by him all specimen, free and voucher copies and also many complimentary copies.

The statement of the Respondent was taken into account by the Disciplinary Committee and they were all unanimous in holding that the certificate given by the Respondent was not a correct certificate and at any rate die majority found it difficult to believe that an Accountant could be so irresponsible as to give a certificate on the basis of statistical records produced before him without taking the trouble to link these records with the financial books and to certify that the figures were extracted from the books of account.

The statement in the Respondent''s letter of 30-7-1951 that he examined the books of account for the year ended 30-6-1951 was certainly a deliberate misstatement which was admitted by him at the first opportunity in para 7 of his written statement. In these circumstances we have no reason to disagree with the finding of the Council that there was gross negligence or at any rate if the Accountant did not have sufficient material to give such a certificate in failing to obtain sufficient information "to warrant the expression of such an opinion.

Now coming to the question whether such conduct would necessarily attract the severest punishment viz., of being struck off the rolls we have heard the learned Counsel for the Respondent Chartered Accountant as well as for the Council. Both of them referred us to a number of cases for the proposition that the High Court is empowered to g a warning or a severe warning or suspend the accountant and need not necessarily order him to struck off the rolls of Accountants u/s 20(2).

On a reading of the relevant provisions arid! a reference to the cases cited, namely, - In Re: J.K. Ghosh, (C); - ''Council of institute of Chartered Accountants v. Rajamany'' 1953 Mad 310(D); - ''In re: W.G. Ambekar 1952 Nag 393 (E); and in - ''Ministry of Finance S.N. Das Gupta'' 1955 Com Cas 413 : (AIR 1 Cal 414) (F), it would appear that the High C need not necessarily inflict the punishment of ha the accountant struck off the rolls and may pass other order commensurate with the nature of the complained of.

We may point out that the Act was applied this State in April, 1951 and the offending certified was issued on 30-7-1951 only three to four mi after the Act came into force. We are satisfied the Accountant who did not have sufficient evidence acted without due care and caution in g the certificate. We do not think that he was act by any motive of gain, pecuniary or otherwise issued the certificate without checking the from stated in the certificate. The duty of a chartered accountant is a very onerous one.

Upon this certificate will depend the confidence of those sections of the public who are likely affected by the statement of the auditor and certain if certificates are lightly given without verification without personally ascertaining as to the correct of the figures stated therein, these certification would be not worth the paper on which the written, and not only do positive harm (sic) bring down considerably the status of Chartered Accountants.

Having regard to the onerous duties we view the action of the Accountant with complain and it would not be appropriate to let him oil out some action being taken against him. In on the punishment of suspension is too severe the circumstances we think that this being the case and having regard to the very short time elapsed between the application of the Charter Accountants Act to this State and the giving offending certificate a warning would be suffered meet the situation. In the result we order warning be issued to the Respondent and sent back to the Council of the Institute of Chartered Accountants of India, New Delhi.