1964 (1) TMI 75 - HC - Indian Laws

Court Upholds Accountant's Conduct, Finds No Misconduct; Stresses Timely Disciplinary Action in Professional Audits.

Union of India Versus R.N. Rajam Iyer

The court dismissed the civil revision petition, supporting the Council of the Institute of Chartered Accountants' decision that the respondent was not ... - Issues Involved:1. Professional Misconduct under Section 21 of the Chartered Accountants Act, 1949.2. Gross Negligence in Performance of Duties as an Auditor.3. Compliance with Articles of Association and Companies Act.4. Reasonable Care and Skill Required of an Auditor.5. Timeliness and Validity of Complaints and Proceedings.Issue-wise Detailed Analysis:1. Professional Misconduct under Section 21 of the Chartered Accountants Act, 1949:The Union of India, represented by the Department of Company Law Administration, filed a revision petition under Section 22-A(2) of the Chartered Accountants Act, 1949, challenging the Council of the Institute of Chartered Accountants of India's decision that the respondent was not guilty of professional misconduct under Section 21. The Disciplinary Committee had found the respondent grossly negligent, but the Council disagreed, stating there was no gross negligence. The Council concluded that the payment to the managing agents, who were not holding office in accordance with the law, was not evident even to the directors, thus reversing the Disciplinary Committee's findings.2. Gross Negligence in Performance of Duties as an Auditor:The first respondent, a Chartered Accountant, audited the accounts of Little's Oriental Balm and Pharmaceuticals Ltd. and approved the balance sheet as of 31-12-1951. The issue arose when it was discovered that the managing agency agreement had expired, and the managing agents continued without a new agreement. The Disciplinary Committee found the respondent grossly negligent for not reporting this to the shareholders. However, the Council of the Institute of Chartered Accountants found that the respondent's actions did not amount to gross negligence, citing that even the directors were unaware of the irregularity.3. Compliance with Articles of Association and Companies Act:The respondent argued that the managing agents' continuation in office was not opposed to the provisions of the Indian Companies Act or the Articles of Association of the company. He stated that the managing agency agreement had been renewed periodically since 1920, and there was no indication it would not be renewed. The managing agents continued to perform their duties and were accepted by the company directors, who ratified their actions. The Disciplinary Committee, however, found that the continuation was contrary to Section 87-B of the Companies Act, as there was no resolution by the company's General Body meeting.4. Reasonable Care and Skill Required of an Auditor:The judgment referenced several precedents to define the duties and reasonable care expected of an auditor. The court cited Lord Justice Lindley's opinion in In re London and General Bank, emphasizing that an auditor must be honest and take reasonable care and skill, which depends on the circumstances. Similarly, Lord Justice Lopes in In re Kingston Cotton Mill Co. stated that an auditor is not a detective but must exercise reasonable care and caution. The court examined whether the respondent exercised reasonable care and skill and found no evidence that he was aware of the managing agents' expired agreement during the audit.5. Timeliness and Validity of Complaints and Proceedings:The court noted the significant delay in initiating proceedings against the respondent. The audit was conducted in 1952, but the Registrar of Companies only called for an explanation in 1957, and the proceedings concluded in 1959. The court emphasized the importance of prompt action in such cases, referring to previous judgments that criticized delays in disciplinary proceedings. The court agreed with the observations that the Council and Disciplinary Committee must act responsibly and not become tools of oppression against professionals.Conclusion:The court dismissed the civil revision petition, upholding the Council of the Institute of Chartered Accountants' decision that the respondent was not guilty of professional misconduct. The court found no sufficient evidence to prove that the respondent was aware of the managing agents' expired agreement during the audit and concluded that the respondent's actions did not amount to gross negligence. The court also highlighted the need for prompt and responsible action in disciplinary proceedings. The petition was dismissed without costs.