2013 (12) TMI 1769 - HC - Indian Laws

Chartered accountant suspended six months for gross negligence in bank audit under s.21(5) and Second Schedule clauses

HC, on a reference under s.21(5) of the Chartered Accountants Act, 1949, affirmed the Council's finding that the respondent-chartered accountant, acting ... Professional misconduct - due diligence and gross negligence of a chartered accountant - disciplinary findings of Council and Disciplinary Committee - removal from register of members as disciplinary penalty - statutory reference under section 21(5) of the Chartered Accountants Act, 1949 Professional misconduct - due diligence and gross negligence of a chartered accountant - disciplinary findings of Council and Disciplinary Committee - Respondent found guilty of professional misconduct for specified charges relating to his role as concurrent auditor. - HELD THAT: - The Disciplinary Committee, whose report was considered by the Council, found that the respondent, while acting as concurrent auditor, failed to perform duties with due diligence and was grossly negligent in carrying out necessary checks in relation to the escrow account operations and margin maintenance for import related facilities. The High Court applied the settled principle that it will not ordinarily interfere with concurrent findings of fact by the disciplinary authorities unless such findings are based on no evidence or are perverse. The Court held that the findings of the Disciplinary Committee and the Council are supported by material on record and are neither perverse nor contrary to the evidence. The Court noted that Part I of the Second Schedule to the Act treats failure to exercise due diligence or gross negligence in professional duties as constituting professional misconduct, and accepted the Council's conclusion that the respondent's conduct fell within Clauses (7), (8) and (9) of Part I of the Second Schedule read with sections 21 and 22 of the Act. [Paras 5] Findings of professional misconduct upheld and respondent held guilty of charges 1.1[i] to 1.1[vi] and 1.4 within the meaning of Clauses (7), (8), (9) of Part I of Second Schedule to the Act. Removal from register of members as disciplinary penalty - proportionality of disciplinary punishment - statutory recommendation under section 21(5) of the Chartered Accountants Act, 1949 - Recommendation of the Council to remove the respondent's name from the register of members for six months accepted. - HELD THAT: - The Council, after considering the Disciplinary Committee's report and representations, recommended removal of the respondent's name for six months. The Court examined whether the penalty was disproportionate or called for interference and observed that no argument was advanced on behalf of the respondent that the punishment was unduly harsh. Having regard to the nature of the misconduct established and the statutory role of the Council to maintain professional standards, the Court found no reason to interfere with the recommended penalty and accepted the Council's recommendation. [Paras 5, 6] Recommendation accepted; respondent removed from membership of the Institute for a period of six months. Final Conclusion: The High Court upheld the Disciplinary Committee's and Council's findings that the respondent committed professional misconduct under Clauses (7), (8) and (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, and accepted the Council's recommendation to remove the respondent from the register of members for six months; the reference is disposed of with no order as to costs. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the respondent, acting as concurrent auditor of a bank branch, was guilty of 'professional misconduct' within the meaning of clauses (7), (8) and (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, read with sections 21 and 22, on account of failures and deviations in respect of specific banking transactions and accounts. 1.2 What is the scope of the High Court's interference under section 21(5) of the Chartered Accountants Act, 1949, with concurrent findings of fact and recommendations of the Disciplinary Committee and the Council of the Institute of Chartered Accountants of India. 1.3 Whether the penalty recommended by the Council, namely removal of the respondent's name from the register of members for six months, was liable to be interfered with as unjust, unwarranted, contrary to law, or disproportionate to the misconduct proved. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Professional misconduct of the respondent as concurrent auditor Legal framework (as discussed) 2.1 The Court referred to clauses (7), (8) and (9) of Part I of the Second Schedule, framed under sections 21(3), 21B(3) and 22 of the Chartered Accountants Act, 1949, which describe 'professional misconduct in relation to chartered accountants in practice'. Clause (7) covers failure to exercise 'due diligence' or 'gross negligence' in the conduct of professional duties. The Court noted, with reference to an earlier decision, that both 'gross negligence' and lack of 'due diligence' are relevant criteria in determining professional misconduct of a chartered accountant. 2.2 Sections 21 and 22 of the Act, and the scheme of the Second Schedule, empower the Disciplinary Committee and the Council to inquire into, determine, and recommend action for 'professional or other misconduct' of members, to be ultimately considered by the High Court under section 21(5). Interpretation and reasoning 2.3 The respondent was serving as concurrent auditor of a bank branch. On the basis of the complaint, inquiry, and record, the Disciplinary Committee and the Council held him guilty in respect of charges 1.1(i)-1.1(vi) and 1.4, relating principally to: (a) irregular opening and operation of an escrow account; (b) excess issuance of cheques over deposits; (c) sanction and use of overdraft against deposits; (d) operation of escrow account by branch officials without proper identification; (e) diversion of escrow account funds to a sister concern; and (f) non-reporting of margin shortfall and risk exposure in respect of foreign letters of credit for import of gold. 2.4 The Court noted that it was not disputed that, as concurrent auditor, it was the respondent's duty to verify the accounts and to report deviations and irregularities to the head office. His principal defence had been that he relied upon the branch officials. The Court, agreeing with the Council, held that the respondent's duty was to independently and diligently check and report irregularities to the competent authority, rather than merely rely on or trust the branch. 2.5 In relation to charge 1.1(i)-1.1(vi), the Court accepted the finding that the respondent failed to discharge his professionally assigned duties with best care and diligence in respect of the escrow account of Mahadev Associates, and was grossly negligent in carrying out necessary checks required of a concurrent auditor. Similar failures were found for charge 1.4, where a significant shortfall (around Rs. 3 crores) in required margin for letters of credit was not reported in the concurrent audit reports, thereby not bringing to notice the risk arising from the deviation from sanctioned margin norms. 2.6 The Court endorsed the Council's conclusion that the respondent had not performed his duties as concurrent auditor with due diligence; was grossly negligent in the performance of his professional duties; and that his conduct was unbecoming of a member of the Institute. This conduct squarely attracted professional misconduct within clauses (7), (8) and (9) of Part I of the Second Schedule, read with sections 21 and 22 of the Act. Conclusions 2.7 The Court upheld the concurrent findings of the Disciplinary Committee and the Council that the respondent was guilty of professional misconduct within the meaning of clauses (7), (8) and (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, for the proved charges 1.1(i)-1.1(vi) and 1.4, arising from lack of due diligence and gross negligence in the discharge of his duties as concurrent auditor. Issue 2 - Scope of High Court's interference under section 21(5) Legal framework (as discussed) 2.8 Relying on the decision in Chandra Shekhar Soni v. Bar Council of Rajasthan, the Court reiterated that, as a general rule, it would not interfere with concurrent findings of fact of a disciplinary authority unless the findings were based on no evidence, or proceeded on mere conjectures or unwarranted inferences. 2.9 With reference to an earlier judgment concerning the Institute, the Court emphasized that when an important statutory body like the Council finds a member guilty of misconduct and forwards the case with its recommendation under section 21(5), the Council's findings, based on material on record, would ordinarily not be disturbed unless found to be unjust, unwarranted, or contrary to law. 2.10 The Court also underscored the High Court's responsibility in disciplinary matters involving regulated professions: to protect the integrity of the profession, to safeguard public confidence, and to refrain from accrediting as fit for public confidence any person who cannot establish their right to such confidence. Interpretation and reasoning 2.11 Applying these principles, the Court found that the disciplinary findings were based on material gathered during the inquiry by the statutorily constituted Disciplinary Committee, and had been carefully considered and accepted by the Council. 2.12 It was neither shown nor demonstrable that the findings were perverse, based on no evidence, or contrary to the record. There was no material to suggest that the Council's conclusions were unjust, unwarranted, or contrary to law. 2.13 The Court recognized the Council as custodian of the interests of the chartered accountancy profession, charged with ensuring proper conduct of members and taking disciplinary action where conduct lowers the esteem of the profession. In this context, and given the evidence, there was no basis to interfere with the Council's assessment. Conclusions 2.14 The Court held that, under section 21(5), it would not disturb the concurrent factual findings and liability determination made by the Disciplinary Committee and accepted by the Council, as those findings were supported by evidence, were not perverse, and were not unjust or contrary to law. The Council's conclusions on misconduct were therefore affirmed. Issue 3 - Propriety and proportionality of the penalty of six months' removal Interpretation and reasoning 2.15 The Council recommended removal of the respondent's name from the register of members of the Institute for six months. The respondent, though duly served, did not appear before the Court and did not contend that the recommended punishment was harsh or disproportionate to the misconduct proved. 2.16 The Court considered the nature and gravity of the professional misconduct-continued failures in the discharge of duties as concurrent auditor, non-reporting of serious irregularities, and gross negligence exposing the bank to significant risk-and found that the misconduct adversely impacted the esteem and integrity of the profession. 2.17 In light of the established misconduct and its seriousness, the Court concluded that the punishment recommended by the Council was neither excessive nor disproportionate and required no intervention. Conclusions 2.18 The Court accepted the Council's recommendation on penalty and directed that the respondent be removed forthwith from membership of the Institute of Chartered Accountants of India for a period of six months. The reference was disposed of accordingly, with no order as to costs.