2026 (3) TMI 1585 - HC - Indian Laws

Due diligence in concurrent audit: failure to promptly report banking irregularities amounted to misconduct, but penalty was reduced to reprimand.

Failure by a chartered accountant to promptly report material banking irregularities during concurrent audit constituted professional misconduct, because ... Disciplinary Jurisdiction - failure to exercise due diligence and grossly negligence - failure to promptly report material banking irregularities in the course of concurrent audit - Guilty of professional misconduct of chartered accountant - violation of natural justice - Limited judicial review in disciplinary findings - Validity of penalty of removal from membership for six months. Due diligence as independent ground of professional misconduct - Failure to promptly report serious banking irregularities, despite being required to do so in the course of concurrent audit, constituted professional misconduct under Clause (7) of Part I of the Second Schedule. - HELD THAT: - A close reading of the provision of Clause-7 will depict that the same is divided in two parts by “,”(coma) and word “or”, i.e, “does not exercise due diligence,” or “is grossly negligent in the conduct of his professional duties”. The use of ‘coma’ before word “or” used in Clause 7 is a disjunctive particle to express an alternative. The intention of Clause 7 in the first part of failure to exercise due diligence forms a separate class of misconduct, and cannot be read as “and” to connect with gross negligence. Both the words “diligence” and “negligence” are forms of conduct/behaviour and hence are used in a single sentence instead of making a separate clause. Therefore, the respondent, who has not shown due diligence in highlighting the deficiencies/irregularities promptly, can be said to have committed professional misconduct. The Court found that the respondent did not dispute his appointment obligations, the existence of the irregularities, or the fact that the flash reports were not made immediately and were submitted only after the bank's internal inspection. The explanation founded on family circumstances was rejected as unacceptable, since the events relied upon had occurred earlier and did not explain the continued inaction thereafter. On interpretation of Clause (7), the Court held that the expressions 'does not exercise due diligence' and 'is grossly negligent' are disjunctive and constitute separate alternatives; therefore, absence of mala fides, dishonesty or ill-motive does not exclude misconduct where due diligence was not exercised. The Court also held that non-supply of the inspectors' report caused no demonstrated prejudice and did not alter the admitted position that the respondent had failed to act diligently. [Paras 27, 28, 29, 30, 33] The finding of professional misconduct was upheld on the ground that the respondent had failed to exercise due diligence in the conduct of his professional duties. Limited judicial review in disciplinary findings - HELD THAT: - The Court noted that the respondent had participated in the inquiry, was given adequate opportunity, and had not established any irregularity in the conduct of the disciplinary proceedings. Applying the settled principle from decisions State Bank of Bikaner and Jaipur vs. Nemi Chand Nalwaya [2011 (3) TMI 1839 - SUPREME COURT], State of Karnataka vs. N. Gangaraj [2020 (2) TMI 1757 - SUPREME COURT], governing judicial review of disciplinary matters, the Court held that it could not reassess adequacy of evidence or disturb concurrent findings fairly reached by the disciplinary authorities where no violation of statutory procedure, natural justice, or reliance on extraneous material was shown. [Paras 21, 32] The concurrent findings of the Disciplinary Committee and the Council were not interfered with on merits. Modification of disciplinary penalty - Reprimand in lieu of removal from membership - HELD THAT: - While holding the recommendation to be appropriate in principle, the Court considered that nearly two decades had passed since the Council's decision. Having regard to that delay, the Court held that subjecting the respondent at such a belated stage to removal from membership, even for a limited period, would not be justified. It therefore considered a reprimand under Section 21(6) sufficient to meet the ends of justice. [Paras 34, 35, 36] The proposed penalty of removal from the register for six months was modified to a reprimand. Final Conclusion: The Court upheld the finding that the respondent was guilty of professional misconduct for failure to exercise due diligence in discharge of his audit duties. However, considering the long passage of time, it modified the recommended punishment of removal from the register for six months to a reprimand. Issues: (i) whether the respondent's failure to promptly report material banking irregularities in the course of concurrent audit constituted professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949; and (ii) whether the proposed penalty of removal from membership for six months should be sustained or modified.Issue (i): whether the respondent's failure to promptly report material banking irregularities in the course of concurrent audit constituted professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.Analysis: The governing framework treated a chartered accountant as guilty of professional misconduct if he did not exercise due diligence or was grossly negligent in the conduct of professional duties. The respondent was under a duty to detect and report serious irregularities promptly, yet the record showed that the irregularities were not reported until after the bank's internal inspection and after a substantial delay. The explanation based on family circumstances was found unacceptable on the facts, and the contention regarding non-supply of the inspectors' report did not displace the admitted lack of prompt reporting. The absence of a proved mala fide intention did not exclude the application of the clause, because failure to exercise due diligence was itself a distinct ground of misconduct.Conclusion: The respondent was guilty of professional misconduct under Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.Issue (ii): whether the proposed penalty of removal from membership for six months should be sustained or modified.Analysis: The finding of misconduct was upheld, but the Court took note of the long lapse of time consumed in the proceedings. In exercising its power under Section 21(6) of the Chartered Accountants Act, 1949, the Court considered that a lesser sanction would adequately meet the ends of justice at that stage, and that continued exposure to removal from membership after such delay would be unduly harsh.Conclusion: The proposed penalty of removal from membership for six months was modified to reprimand.Final Conclusion: The misconduct finding was sustained, but the disciplinary consequence was reduced to a reprimand, resulting in a substantially lesser penalty than the one recommended by the Council.Ratio Decidendi: A chartered accountant's failure to exercise due diligence in promptly reporting material audit irregularities constitutes professional misconduct even without proof of mala fide intention, and the disciplinary sanction may be moderated by the court where the delay in proceedings renders a lesser punishment just and proportionate.