TMI Blog1968 (2) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 note ,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 follows : It appears that certain loans were granted by the Trustees of the Fund to. the Company in 1954 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 cleared promptly. After receipt of the letter from respondent No. 1 a meeting of the Board of Trustees was held on May 27, 1955 when a resolution was passed to the following effect : This meeting records with regret that the cheques amounting to ₹ 6,21,864/- could not be presented to the bank on the verbal request of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 uncashed 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 was an act of misconduct on the part of respondent No. 1. The Disciplinary Committee held that .he 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 misstatement 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 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inquiry by the Council and upon receipt of the finding after such inquiry, deal with the case in the manner provided in sub-section (2) and pass final orders thereon. Section 22 defines misconduct. It reads thus : For the purposes of this Act, the expression 'conduct which, if proved, will render a person unfit to be a member of the Institute' shall be deemed to include any act or omission specified in the Schedule, but nothing in this section shall be construed to limit or abridge, in any way the power conferred on the Council under subsection (1) of section 21 to inquire into the conduct of any member of the Institute under any other circumstances. Clauses (o), (p) and (q) of the Schedule read as follows A chartered accountant shall be deemed to be guilty of conduct rendering him unfit to be a member of the institute, if he . .......... (o) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement not misleading; (p) fails to report a material misstatement known to him to appear, in a financial statement with which he is concerned in a professional cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cleared promptly. As a sequel to this letter the trustees passed a resolution on May 27, 1955 that the cheques amounting to ₹ 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% 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 12 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 acknowledgement 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments 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 shareholders 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. Seea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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