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

2. Ananda Bazar Patrika Limited is a Joint Stock Company, hereinafter referred to as the Company, and has got an employees Provident Fund Scheme which was being managed by a Board of Trustees. Respondent No. 1 is a Chartered Accountant and was appointed by the Board of Directors of the Company to audit the accounts of the Provident Fund for the years 1953 and 1954. It appears that in the year 1954 the Trustees of the Fund had made certain advances amounting to about Rs. 6,21,864/- to the Company in contravention of the Rules of the Fund. The Directors of the Company issued various cheques in repayment of the advance, but at the request of the management of the Company the cheques were kept with the Trustees of the Fund uncashed and not credited in the account of the Fund. After receipt of the cheques the Trustees of the Fund made book entries showing the repayment of the loan so granted to the Company, though in fact none of these cheques had been cashed when such entries were made. In his letter dated May 25, 1955 respondent No. 1 wrote to the Company as followsappears that certain loans were granted by the Trustees of the Fund to the Company in l954 which although adjusted within the accounting year, does not appear to be in accordance with the Provident Fund Rules. We disapprove such transaction and believe it will not recur in future. Cheques issued by you to the Fund should also be clearedreceipt of the letter from respondent No. 1 a meeting of the Board of Trustees was held oh May 27, 1955 when a resolution was passed to the following effectmeeting records with regret that the cheques amounting to Rs. 6,21,864/- could not be presented to the bank on the verbal request of the management of the Ananda Bazar Patrika Ltd., this meeting considering all the relevant facts resolves that all the cheques be returned to the Company to the debit of the loan account bearing an interest of 6% per annum with effect from the date of issue of theNo. 1 signed the statement of Accounts ending December 31, 1953 on May 14, 1954, and the Statement Accounts ending December 31, 1954 on June 30, 1955. The Statement was signed by the Trustees of the Fund and respondent No. 1 after signing the statement gave the followingwith the books and account produced and foundrespondent No. 1 pointed out in his letter dated May 25, 1955 that loans were granted and adjustment was made during the accounting year, he did not disclose this fact in his note when he signed the statement of account on June 30, 1955 knowing fully well that the cheques were not only encashed but were returned to the Company in pursuance of the resolution of the Trustees dated May 27, 1955. Respondent No.1 also failed to point out in the statement of account that adjustment of loans was made by showing in a very vague manner cash in hand (Cheques and cash) as Rs. 6,21,864/- and the proportion of the cheques to the cash was not specified. Later on Kishori Lal Dutta, respondent No. 2. President of the Employees Union filed a complaint against respondent No. 1 before the Institute of Chartered Accountants of India, hereinafter referred to as the Institute. It was alleged in the complaint that (1) the loan granted to the Company was in contravention of Rule 12 of the Provident Fund Rules and the auditor failed to disclose this in the statement of account, and (2) the auditor failed to invite attention to the fact that huge amount was shown as cash in hand in the financial statement for the years 1953 and 1954 in contravention of Rule 11 of the Fund. The complaint was referred by the Council of the Institute to the Disciplinary Committee for an inquiry under S. 21 of the Chartered Accountants Act (Act 38 of 1949), hereinafter called the Act, read with regulation made thereunder. The Disciplinary Committee made a report on September 13, 1958. The Disciplinary Committee found that the loans were admittedly granted by the Trustees in contravention of the Provident Fund Rules and respondent No. 1 should have brought out this fact in his report and that respondent No. 1 was guilty of not disclosing the fact that a large amount of loan was given out of the fund of the Provident Fund to the Company and that, the cheques received in payment of these loans and shown as cash In hand "Cheques and cash" were not encashed at least upto the day on which he wrote the letter to the Directors i. e., May 25, 1955 and the non-disclosure of this material information we an act of misconduct on the part of respondent No.1. The Disciplinary Committee held that the loans were given in contravention of the Rules of the Provident Fund and failure to report on the default in clearing the cheques received in repayment of the loans amounted to a failure to report on a material mis-statement known to respondent No. 1. Accordingly the Disciplinary Committee held that respondent No. 1 was guilty of misconduct under items (o), (p) and (q) of the Schedule to the Act. The Council of the Institute agreed with the report of the Disciplinary Committee and held respondent No. 1 guilty of professional misconduct. Under S. 21 of the Act the matter was referred to the Calcutta High Court for final orders. By its judgment dated December 5, 1962 the High Court set aside the findings of the Disciplinary Committee as confirmed by the Council of the Institute and absolved respondent No. 1 of the charges of misconduct.

Court's reasoning:
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.