Case: Institute Of Chartered Accountants Of India Vs. P. K. Mukherji And Anr

be debited to the loan account bearing interest at 6 per cent p. a. with effect from the issue of the cheques. It is manifest therefore that on June 30, 1955 when respondent No. 1 signed the statement of accounts he fully knew that a loan had been granted by the trustees to the Company in violation of Rules 11 and l2 and further that cheques received in repayment of the loan were not cashed and, indeed, were not intended to be cashed. In other words, the cheques were issued by the Company not with the intention of repayment of the loan by their being cashed but they really represented acknowledgment of the loan by the Company. In fact, the cheques had been returned to the Company uncashed by virtue of the resolution of the Board of trustees dated May 27, 1955 before the statement of account was signed by respondent No. 1. To put it differently, the cheques were apparently issued by the Company not so much for repayment of the loan as for a false indication of adjustment at the end of the accounting year. We are of opinion that in these circumstances it was the duty of respondent No. 1 to point out in the statement of account that a major part of the cash in hand represented uncashed cheques and that the cheques were apparently given by the Company for repayment of the loan and the transaction was in violation of Rules 11 and 12 of the Provident Fund Rules. We accordingly consider that the failure of respondent No. 1 in not pointing out these facts in the statement of accounts for the year 1954 constituted professional misconduct falling within Cl. (o) of the Schedule to the Act. It is not necessary for us to express any opinion on whether the case also falls within Cls. (p) and (q) of the Schedule.6. On behalf of respondent No. I Mr. Chagla put forward the argument that since the cheques had already been given by the Company the loans stood cleared and, in any event, respondent No. 1 had already informed the Company of the irregularity in his letter dated May 25, 1955.It was therefore contended that there was no professional misconduct on the part of respondent No 1 we are unable accept this argument as correct. It is true that the cheques had been given by the Company before the close of the year 1954 but respondent No. 1 knew that the cheques were not really intended to be encashed by the trustees. Respondent No. 1 also knew of the resolution of the trustees dated May 27,1955 that the cheques were to be returned to the Company and the amount was ordered by the trustees to be entered and carried over to the loan account. It was also maintained by Mr Chagla that respondent No. 1 owed a duty only to the Company which appointed him to audit the accounts of the Provident Fund and there was no duty owed by respondent No. 1 to the beneficiaries of the Fund. It is not possible for us to accept this argument Respondent No. 1 owed a duty to all the subscribers of the Provident Fund who were in the position of beneficiaries. It is not correct to say that respondent No. 1 owed a duty only to the Company which had appointed him to perform the auditing. The contributors to the Provident Fund had a beneficial interest in the Fund and the primary object of auditing the Fund was to appraise them of the true financial position of the accounts and investments made from time to time. Respondent No. 1 therefore owed a duty to the contributors to the Provident Fund for making a true report to them of the financial position. In other words, the auditing was intended for protection of the beneficiaries and the auditor was expected to examine the accounts maintained by the trustees with a view to inform the beneficiaries of the true financial position. The auditor is, in such a case, under a clear duty towards the beneficiaries "to probe into the transactions" and to report on their true character. In our opinion, the legal position of the auditor in the present case is similar to that of the auditor under the Indian Companies Act, 1956. In such a case the audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the Company. The Directors occupy a fiduciary position in relation to the share-holders and in auditing the accounts maintained by the Directors the auditor acts in the interest of the shareholders who are in the position of beneficiaries.In London Oil Storage Co. Ltd. v Seear, Hasluck and Co. Dicksee on Auditing, 17th Edn. p 632. Lord Alverstone stated as follows :He must exercise such reasonable care as would satisfy a man that the accounts are genuine, assuming that there is nothing to arouse his suspicion of honesty and if he does that he fulfils his duty, if his suspicion is aroused, his duty is to probe the thing to the bottom and tell the directors of it and get what information he can"(Vide also the observations in - In re: London and General Bank (No. 2); (1895) 2 Ch 673 - In re. Kingston Cotton Mill Co. (No 2), 1896-2 Ch 279 and - In re: City Equitable Fire Insurance Co Ltd., 1925 Ch 407.7. It was therefore no defence for respondent No 1 in this case to say that he had disclosed the irregularity to the Company by his letter dated May 25, 1955. On the contrary it was a breach of duty on his part not to have made a disclosure thereof to the beneficiaries of the Provident Fund in the statement of accounts for the year 1954 which he signed on June 30, 1955.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]It is the admitted position in this case that respondent No. 1 signed the statement of account for 1954 on June 30, 1955. At the time when be signed the statement be was aware that loans were granted by the trustees of the Fund to the Company in 1954 and cheques had been issued in repayment of the loan. This is apparent from the letter of respondent No. 1 dated May 25, 1955 addressed to the Company in which he pointed out that the loans granted by the trustees do not appear to be in accordance with the Provident Fund Rules and the cheques issued by the Company should be cleared promptly. As a sequel to this letter the trustees passed resolution on May 27, 1955 that the cheques amounting to Rupees 6,21,864/- and odd were not presented to the Bank on the verbal request of the Company and that the cheques should be returned to the Company and the amount should be debited to the loan account bearing interest at 6 per cent p. a. with effect from the issue of the cheques. It is manifest therefore that on June 30, 1955 when respondent No. 1 signed the statement of accounts he fully knew that a loan had been granted by the trustees to the Company in violation of Rules 11 and l2 and further that cheques received in repayment of the loan were not cashed and, indeed, were not intended to be cashed. In other words, the cheques were issued by the Company not with the intention of repayment of the loan by their being cashed but they really represented acknowledgment of the loan by the Company. In fact, the cheques had been returned to the Company uncashed by virtue of the resolution of the Board of trustees dated May 27, 1955 before the statement of account was signed by respondent No. 1. To put it differently, the cheques were apparently issued by the Company not so much for repayment of the loan as for a false indication of adjustment at the end of the accounting year. We are of opinion that in these circumstances it was the duty of respondent No. 1 to point out in the statement of account that a major part of the cash in hand represented uncashed cheques and that the cheques were apparently given by the Company for repayment of the loan and the transaction was in violation of Rules 11 and 12 of the Provident Fund Rules. We accordingly consider that the failure of respondent No. 1 in not pointing out these facts in the statement of accounts for the year 1954 constituted professional misconduct falling within Cl. (o) of the Schedule to the Act. It is not necessary for us to express any opinion on whether the case also falls within Cls. (p) and (q) of the Schedule.6. On behalf of respondent No. I Mr. Chagla put forward the argument that since the cheques had already been given by the Company the loans stood cleared and, in any event, respondent No. 1 had already informed the Company of the irregularity in his letter dated May 25, 1955.It was therefore contended that there was no professional misconduct on the part of respondent No 1 we are unable accept this argument as correct. It is true that the cheques had been given by the Company before the close of the year 1954 but respondent No. 1 knew that the cheques were not really intended to be encashed by the trustees. Respondent No. 1 also knew of the resolution of the trustees dated May 27,1955 that the cheques were to be returned to the Company and the amount was ordered by the trustees to be entered and carried over to the loan account. It was also maintained by Mr Chagla that respondent No. 1 owed a duty only to the Company which appointed him to audit the accounts of the Provident Fund and there was no duty owed by respondent No. 1 to the beneficiaries of the Fund. It is not possible for us to accept this argument Respondent No. 1 owed a duty to all the subscribers of the Provident Fund who were in the position of beneficiaries. It is not correct to say that respondent No. 1 owed a duty only to the Company which had appointed him to perform the auditing. The contributors to the Provident Fund had a beneficial interest in the Fund and the primary object of auditing the Fund was to appraise them of the true financial position of the accounts and investments made from time to time. Respondent No. 1 therefore owed a duty to the contributors to the Provident Fund for making a true report to them of the financial position. In other words, the auditing was intended for protection of the beneficiaries and the auditor was expected to examine the accounts maintained by the trustees with a view to inform the beneficiaries of the true financial position. The auditor is, in such a case, under a clear duty towards the beneficiaries "to probe into the transactions" and to report on their true character. In our opinion, the legal position of the auditor in the present case is similar to that of the auditor under the Indian Companies Act, 1956. In such a case the audit is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the Company. The Directors occupy a fiduciary position in relation to the share-holders and in auditing the accounts maintained by the Directors the auditor acts in the interest of the shareholders who are in the position ofIt was therefore no defence for respondent No 1 in this case to say that he had disclosed the irregularity to the Company by his letter dated May 25, 1955. On the contrary it was a breach of duty on his part not to have made a disclosure thereof to the beneficiaries of the Provident Fund in the statement of accounts for the year 1954 which he signed on June 30, 1955.8. For these reasons we hold that the charge of professional misconduct is established against respondent No. 1 falling under Cl. (o) of the Schedule to the Act.The only question which now remains is the final order to be passed against respondent No. 1. In our opinion, the conduct of respondent No. 1 is wholly unworthy of a Chartered Accountant who is expected to maintain a high standard of professional conduct. The proper punishment would have bees the removal of the respondent No. ls name from the Register for a limited period but in view of the fact that the proceedings have been pending against respondent No. 1 for a long time, we think that the ends of justice will be served in this particular case if respondent No. 1 is severely reprimanded for his misconduct under S. 21 (2) of the Act.