The Respondent was the statutory auditor of the Company for FYs 2011-12 to 2013-14. The Company had availed working capital and term loans from a consortium of banks led by the Complainant Bank and subsequently defaulted, resulting in the account becoming NPA. A forensic audit initiated by the consortium revealed substantial discrepancies between sales and purchases recorded in the books and those reported in excise and sales tax returns. The Company maintained multiple databases, inflated purchases and sales through related parties, and recorded fictitious sales to government agencies. The Complainant alleged that the Respondent failed to detect or report these irregularities. On merits, the Respondent contended that a statutory audit cannot be equated with a forensic audit, that the forensic findings were post-facto and that the Respondent’s working papers were seized by the CBI. The Respondent also stated that multiple databases were not provided, only selective verification of purchases and sales was conducted and that a later limited review report had been qualified. The Committee observed that the material differences between book figures and statutory returns were significant and should have been detected if due diligence had been exercised. The Respondent relied solely on management-provided records without reconciling them with statutory filings. The plea regarding seized working papers was rejected as no effort was made to obtain copies. Further, the Respondent failed to report under CARO on verification of fixed assets and inventory and provided no evidence of evaluating whether management conducted proper physical verification in accordance with SA-501. In view of substantial discrepancies, lack of professional skepticism, and inadequate audit procedures, the Committee concluded that the Respondent did not exercise due diligence in auditing the Company’s financial statements. Accordingly, the Respondent was held GUILTY of Professional Misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. [PR/245/15/DD/244/2015/DC/1067/2019]

The Respondent was the statutory auditor of a company registered under Section 25 of the Companies Act, 1956 and Section 12A of the Income Tax Act, 1961. Charges levelled against the Respondent includes non-compliance of Accounting Standards, non-compliance with Schedule VI read with Section 211 and violation of the MOA and Section 25 regarding payment of remuneration to members and Directors. The Respondent contended that Accounting Standards were not applicable as the company was a charitable institution. The Committee observed that Accounting Standards formulated by the ICAI do not apply to a Non-for-Profit Organisation (NPO) if no part of the activity of such entity is commercial, industrial or business in nature. The Standards would apply even if a very small proportion of activities is considered to be commercial, industrial or business in nature. Consequently, Accounting Standards were applicable, and Section 211(3A) of the Companies Act, 1956 required compliance even for Section 25 companies. Regarding the MOA and Section 25, the Committee observed that the conditions of license prohibited payment of income or property to members without prior approval of the Central Government. Notes to accounts reflected payments to members “for services rendered” and stated that approval was being obtained. In one year, the Respondent omitted the words “of the Central Government,” showing inadequate understanding of the license conditions. Prior approval was therefore mandatory. Concerning Schedule VI disclosures, certain expenses exceeding 1% and payments to auditors were not disclosed separately. The Respondent failed to report these statutory deviations. Accordingly, the Respondent was held GUILTY of Professional Misconduct under Clauses (5), (7), (8), and (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949. [PR-218/14-DD/231/14/DC/432/2015]