CHARTERED ACCOUNTS MUST BE MORE CAREFUL

[CA DEV KUMAR KOTHARI]

Role of Chartered Accountants:

Chartered Accountants play big role in financial matters including taxation. Reports of CA are required by money lenders like banks, FI, NBFC, government agencies as well as capital provider who provide capital against shares and debentures or other securities to be issued by company.  

Various government authorities also rely on reports of CA which concerns determination of tax liability. These includes audited final accounts, and specific reports and certificates.

Audited accounts and statements duly verified and certified by CA are generally accepted as reflecting correct position. If a CA certifies that his client has maintained proper books of account and he has examined the same, no one will doubt that the client has not maintained books of account at all. The results shown in the account are also taken at face value, unless there is serious reason of doubt. In case of contradictory information found in statements, there can be case of apparent mistake which can be due to oversight or negligence.

CA must take reasonable care and apply cross checking, confirmations, physical verification methods to do his work in more result oriented manner in course of carrying out audit and attestation. In course of reporting, he must be more careful to tally final figures with final statements like Trial Balance, Ledger, confirmations, outside party statements etc. The reports should not contain different related figures or contradictory figures without a reason and reconciliation.

While applying copy and paste method, one needs to be more careful to avoid mistakes. It is always advisable to take a print, check it with base documents, keep copy duly signed by all concerned persons- clients representative, audit assistants and himself for record purposes to show and prove due diligence and care. All working papers need to be maintained properly.

Increasing number of complaints:

We find increasing number of complaints being lodged by persons who rely on documents certified by CA, in case they notice some mistakes. Tax authorities are also complaining to the Institute (ICAI) if a member has rendered wrong report and based on such complaints disciplinary actions are being taken by the Institute.

A recent case before Allahabad High court:

In Council of Institute of C. A. of India Versus Shri Satish Chand Jain - 2013 (7) TMI 525 case of professional negligence came up on complaint of Income-tax Department. In this case it was found that the Respondent CA has audited accounts of M/s. Tyagi Gur Khandsari Udyog for the assessment year 1998-1999. The audited balance sheet and profit and loss accounts were submitted by the firm with Income Tax Return. The Income Tax Officer, Roorkee noticed various discrepancies in the balance sheet and profits and loss accounts of the said firm. The case of the firm was taken up for scrutiny by Income Tax department but the said firm did not produce any book of accounts, manufacturing and other records even after issuance of notice u/s.142(1) and summons u/s.131 of the Income Tax Act. Consequently, penalty was imposed on the said firm for non compliance of terms of the notices u/s. 142(1). When the assessee firm did not produce the books of accounts for verification even after being penalised, the Income Tax department decided to inspect the records of the firm maintained by the Trade Tax officer. Thereupon it transpired that Trade Tax officer, Sector-I, Roorkee had conducted number of surveys during the relevant period but no books of accounts were found though manufacturing was going on. The Trade Tax officer has categorically mentioned in his assessment order that no books of accounts were produced before him in the course of assessment proceedings even after several opportunities.

The Income Tax officer after noticing serious discrepancies in the audited balance sheet and profit and loss accounts of the assessee firm which were prepared by respondent in his capacity as a chartered accountant vide its letter dated 18-6-2001 brought these facts to the knowledge of the Council.

On receipt of the letter from Income Tax Officer, the Council called for a clarification from the respondent vide its letter dated 11-10-2002. In response to it, the respondent submitted his clarification vide letter dated 22-10-2002. The clarifications received from respondent were not found to be satisfactory and therefore, the information sent by Income Tax officer was treated as information u/s. 21 of the Act and on basis thereof, following charges were framed against the respondent .

Based on information provided by the ITO the following discrepancies were noticed:

Contradictory figures:

Closing stock of Sugarcane and Gur was Rs.40,20,005/- in the audited balance sheet while the closing stock of Gur was Rs.44,10,000/- and of Sugarcane Rs.32,550/- aggregating to Rs.44,42,550/- has been shown in the Manufacturing, Trading and Profit and Loss account. The balance sheet tallies on a figure of Rs.40,99,728.51 while the value of closing stock was only Rs.44,42,550/-.

The closing stock of 468 quintals of sugarcane is shown as per col.12 of form no. 3CD signed by CA. while the closing stock of 465 quintals of sugarcane is shown in the Manufacturing Trading and Profit & Loss Account which is also signed by CA.

The Audit Report, Balance Sheet, Manufacturing, Trading and Profit & Loss Account has been prepared on computer but all the documents bear date in ink, the question arises as to what was the need of keeping the date blank while print outs were taken.

The respondent CA failed to point out discrepancies in the audit report and books of accounts of M/s. Tyagi Gur Khandsari Udyog for the assessment year 1998-1999 relating to financial year 1997-98.

The Income Tax department issued notice u/s. 142(1) and summons u/s. 131 of the Income Tax Act, 1961 but the firm failed to produce any books of Accounts. Penalty was imposed for non compliance of the terms of Notices.

The Trade Tax Officer, has in his assessment order categorically mentioned that no books of accounts were produced before him. The Trade Tax Officer had passed an ex-parte order assessing total sales of Rs.23360102/- as against sales declared by assessed firm of Rs.15060101.48. An exparte order had also to be passed by Income Tax Officer on total income of Rs.5187640/- as income declared in the return of income was only Rs.8090/-

The maintenance of books of accounts and audit thereof is at stake looking to the discrepancy in the audit report as also from the conduct of assessee firm.

Submission of CA:

The respondent CA submitted his clarifications vide letter dated 22-10-2002 stating that the closing stock of Rs.40,20,000/- as shown in the balance sheet has been wrongly copied up by his computer operator from the closing stock of last year (this year opening stock figure). In the profit & loss account, the figure of closing stock of Rs.44,10,000/- of Gur and Rs.32,550/- of Sugarcane is correct. It is a case of clerical mistake of the computer operator.

CA also pleaded guilty before disciplinary committee of ICAI.

Observations and order of Court:

Even after opportunities and notices duly served the respondent CA is absent.

Alleged misconduct has to be judged taking into consideration the duties and responsibilities cast upon a chartered accountant by law.

It has to be seen whether he was 'grossly negligent' in conducting himself as a chartered accountant or not.

The respondent was personally present before the disciplinary committee and he accepted his guilt under Regulation 15(2) of the Chartered Accountants Regulations, 1988. The disciplinary committee after considering the explanation and evidence on record arrived at the following findings :-

The Committee noted that there is a difference in the Closing stock value in the Balance Sheet as compared to the Trading & Profit & Loss Account. Further, despite the variance in the Closing stock value, the Balance Sheet tallied. If it was due to typographical error than the total of Balance Sheet would not have tallied.

The Committee also noted that there was a difference of 3 quintals in the amount shown against the closing stock in Form 3CD against the column no.12 whereas the amount shown in the Manufacturing Trading and Profit & Loss Account, the said figure was shown as 465 quintals.

The judges stated that they have gone through the record of the case with the assistance of Sri Vinod Swarup, advocate for the Council.

On minute scrutiny, Court did not find illegality in the findings recorded by the disciplinary committee and which were accepted by the Council. Admittedly, the balance sheet and profits and loss accounts of the assessee were incorrect. Whether the mistake was bonafide or not is not very material.

The respondent has utterly failed to perform his duties as a tax auditor. Even if the computer typist took the last year's closing stock figure and adjusted the cane payment dues account to tally the balance sheet, the respondent was required to compare the closing figure with the closing balance in the books of accounts and the trial balance thereof. There is also no evidence that the respondent cared to obtain confirmation from third parties regarding the amount due to them, which would have demonstrated that the cane dues as mentioned in the balance sheet are incorrect.

Respondent simply signed the balance sheet, profits and loss account prepared by the computer operator without verifying the correctness and authenticity of the facts and figures appearing therein.

This is also evident from his own admission contained in the written representation of the respondent dated 15-11-2010 wherein he stated that the mistake could not be detected "due to work pressure of tax audit being near last closing date".

Signing of the balance sheet prepared by computer operator without cross checking the same, amounts to total abdication of his responsibility.

The respondent CA failed to exercise the professional skill which he possessed by acting in a totally perfunctory manner. Thus, there can be no escape from the conclusion that the respondent acted in a grossly negligent manner and failed to obtain sufficient information to warrant the expression of opinion in the balance sheet and profits and loss accounts. This court, therefore, has no hesitation in accepting the finding of misconduct arrived at by the Council.

Punishment :

The court observed that the next question which arises is regarding punishment which is to be awarded to the respondent. The respondent has very fairly admitted his guilt. It is not disputed that no malafide intention has been found on part of the respondent in furnishing incorrect audit report and financial statements. Further respondent claims to be in profession for more than 20 years with no history of any such misconduct in the past. These are mitigating circumstances and impel us to take a lenient view as regards the quantum of punishment. We are of the opinion that the interest of justice will be served if respondent is severely reprimanded for his misconduct as provided by section 21(6) (b) of the Act.

19. Accordingly, Reference is accepted. Respondent is held guilty of misconduct under clause (7) and (8) of part I of Second Schedule read with section 21(5) and 22 of the Act and is hereby severely reprimanded. Let a copy of this order be communicated to the Council for taking consequential action in accordance with law.

Observations of author :

The non production of books of account by client before Trade Tax authorities or Income Tax authorities is due to default of client. For this Tax Auditor or Auditor cannot be blamed. However, non production of books of account even after several opportunities is a good reason to suspect existence of books of account. To save such situations, the auditors must have sufficient records and report and working papers to prove that auditor has inspected and checked books of account.

In this case negligence of the CA was self proved due to contradictory and different figures about closing stock in two reports both of which were part of tax audit report. This shows that in the final print, due care should be taken to see that they tally with other final base documents like trial balance, physical or other stock reports, confirmations and statements submitted by client or obtained by client.

Regarding confirmation of cane growers balances, it is practically not possible to obtain such confirmations because there are large number of cane growers , they are farmers having not much education, and expecting a confirmation from them is not in accordance with ground realities. However, each manufacturing unit of gur, sugar or khandsari has to maintain proper records of supply, amount credited amount paid and un-paid amount. If the details or summary of such list of liabilities was cross checked, the CA could have found discrepancy.

Another mistake which seems is due to relying on reading on computer screen. We experience that while reading on computer screen there can be frequent eye illusion, particularly in the matter of numbers this is serious problem. Therefore, it is always advisable to have a print of accounts and report and check figures with base documents.

The case is an eye opener and suggests that CA must be more careful.