2012 (12) TMI 510 - HC - Companies Law

Chartered Accountant Penalty Upheld for Audit Errors

The court upheld the decisions of the Disciplinary Committee and the Appellate Committee regarding a Chartered Accountant's penalty for professional ... Removal of Petition's (Chartered Accountant) name from the the register of members of ICAI, for a period of 1 year - It appears from the record that on the basis of the certificate issued by the petitioner in his capacity as CA, the Excise Department had made certain assessments and liability of the said company towards excise duty under Excise Act were assessed. Thereafter, it came to the notice of the Excise Department that the accounts and audit report submitted by the petitioner was inaccurate and there were several serious and material discrepancies and anomalies. In this view of the matter, the office of Commissioner of Central Excise, Surat lodged complaint with the institute of the Chartered Accountants of India. A Chartered Accountant has an obligation, not only statutory but also moral and social, to be absolutely and completely diligent and cautious and careful while preparing, signing and certifying Annual Accounts and/or Audit report. Several Government and private organizations and individuals rely on the report/certificate by Chartered Accountant and once a particular factual aspect or entries, etc. are prepared, signed and certified by Chartered Accountant they are ordinarily accepted without further probing or investigation. In such circumstances, the duty and obligation of being absolutely diligent, conscious and careful is multiplied manifold and a Chartered Accountant should not, and cannot take, such obligation or perform his duties lightly or casually. A mistake by a petty clerk or lower level accountant may be dealt with in different manner but a mistake by a Chartered Accountant cannot be treated with indifference or casually or lightly. A mistake by a clerk or an accountant, which may be considered or allowed or overlooked as inadvertent error, cannot be overlooked lightly or casually if committed by a practicing Chartered Accountant, more so when it is committed in Annual report duly certified by him as correct and authentic report. It has to be, and should be, dealt with seriousness which it would deserve. In present case, it is not possible to hold that punishment of removal of petitioner's name from the register for one year is harsh as compared to the proved charge. The decision as regards quantum of penalty is in the realm of the Disciplinary Authority and once misconduct is proved - and accepted as proved by the Court - then Court would not interfere with Disciplinary Authority's decision regarding quantum of penalty unless it is excessively disproportionate which amounts to or appears to be on the verge of victimisation. - Decided against the petitioner. Issues Involved:1. Validity of the punishment imposed on the petitioner for professional misconduct.2. Alleged violation of principles of natural justice.3. Whether the errors in the audit report constituted gross negligence.4. Appropriateness of the quantum of penalty imposed.Detailed Analysis:Issue 1: Validity of the Punishment for Professional MisconductThe petitioner, a Chartered Accountant, was penalized by the Institute of Chartered Accountants for professional misconduct. The misconduct involved inaccuracies and anomalies in the audit report of M/s. Sumilon Industries Ltd., which were identified by the Excise Department. The Disciplinary Committee of the Institute found the petitioner guilty under Clause (7) of Part-I of the Second Schedule to the Chartered Accountants (Amendment) Act, 2006, for not exercising due diligence and gross negligence. The petitioner admitted to the mistakes but claimed they were minor typographical errors. However, the Committee concluded that the errors were serious and affected the true and fair view of the financial statements, thus justifying the punishment.Issue 2: Alleged Violation of Principles of Natural JusticeThe petitioner argued that the principles of natural justice were violated as he was not granted a proper hearing on the penalty. The court, however, found that the petitioner was given multiple opportunities to present his case, both in person and through written submissions. Despite these opportunities, the petitioner failed to appear or submit written representations, leading the Committee to proceed with the decision. The court held that the petitioner's failure to avail the opportunities provided negated his claim of denial of natural justice.Issue 3: Whether the Errors Constituted Gross NegligenceThe petitioner contended that the errors in the audit report did not amount to gross negligence. The court examined the provisions under Clause (7) of Part-I of the Second Schedule to the Act, which includes both gross negligence and lack of due diligence as professional misconduct. The Disciplinary Committee found multiple errors in the audit report, including discrepancies in raw material consumption, production, and sales figures, which the petitioner admitted. The court concluded that the petitioner failed to exercise due diligence, and the errors were significant enough to constitute gross negligence.Issue 4: Appropriateness of the Quantum of PenaltyThe petitioner argued that the penalty of removing his name from the register for one year was too harsh. The court referred to previous judgments emphasizing the high standards expected from Chartered Accountants and the reliance placed on their reports by various stakeholders. The court held that the penalty was appropriate given the nature and number of mistakes in the audit report. The decision was not found to be arbitrary or unreasonable, and the court declined to interfere with the quantum of penalty imposed by the Disciplinary Committee and confirmed by the Appellate Committee.Conclusion:The court dismissed the petition, upholding the decisions of the Disciplinary Committee and the Appellate Committee. The petitioner failed to demonstrate any violation of natural justice or that the penalty was excessively harsh. The court emphasized the importance of due diligence and the high standards expected from Chartered Accountants, affirming the penalty as commensurate with the misconduct.