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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 5TH DAY OF MARCH, 2015

PRESENT:

THE HON'BLE Mr. JUSTICE VINEET SARAN

AND

THE HON'BLE Mrs. JUSTICE S.SUJATHA

CIVIL PETITION No.191 OF 2012

BETWEEN:

CHARTERED ACCOUNTANTS OF INDIA INDRAPRASTHA MARG NEW DELHI

... PETITIONER

(BY SRI.S.S.NAGANAND SR. COUNSEL A/W SRI.VIKRAM UNNI ADV. FOR M/S JUST LAW ADVS.) AND:

SHRI S GIRIDHARAN CHARTERED ACCOUNTANT 136/1, I FLOOR NADI GRUHA, 5TH MAIN CHAMARAJET BANGALORE-560018

... RESPONDENT

(BY SRI. K.KASTURI SR. COUNSEL FOR M/S KASTURI ASSOCTS, ADV. SRI.K.L.SHREENEVASA, CGC/ADV. (ABSENT))

*****

®

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THIS CIVIL PETITION FILED U/S.21(5) OF THE CHARTERED ACCOUNTANTS ACT 1949, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: PASS NECESSARY ORDERS IN ACCORDANCE WITH SECTION 21(6) OF THE CHARTERED ACCOUNTANTS ACT, IN THE INTEREST OF JUSTICE AND EQUITY.

THIS PETITION COMING ON FOR FINAL DISPOSAL,

THIS DAY, VINEET SARAN J., DELIVERED THE FOLLOWING:

O R D E R

This is a reference case filed by the Council of the Institute

of Chartered Accountants of India (for short ‘the Council’)

under Section 21(5) of the Chartered Accountants Act, 1949 (for

short ‘the Act’) for consideration of the recommendation made

by the Council for removal of the name of the respondent

S.Giridharan, a practicing Chartered Accountant, from the

register of members, maintained by it, for a period of one year.

2. The brief facts of this case are that with regard to

the audit report and the balance sheets signed by the respondent

a Statutory Auditor of M/s.Great Western Industries Ltd., (for

brevity ‘M/s GWIL’), as on 30.09.98, 30.09.99 & 30.09.2000 a

complaint was filed by the Superintendent of Police, CBI EOW,

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Chennai on 18.08.2006 before the Council alleging certain

charges against the respondent. To the said complaint, the

respondent submitted his written reply on 26.02.2007. To the

said reply, the complainant filed a rejoinder on 16.04.2007, to

which the respondent submitted his reply on 21.06.2007. The

complainant as well as the respondent were heard by the

disciplinary committee of the Council. After concluding the

hearing on 24.03.2010, the disciplinary committee submitted a

report dated 10.06.2010 and recorded a finding that the

respondent was guilty of professional misconduct within the

meaning of Clauses (5), (6), (7), (8) and (9) of Part 1 of II

Schedule to the Act read with Sections 21 and 22 of the Act.

Vide Communication dated 11.10.2010, copies of the report of

the disciplinary committee were given to the complainant and

the respondent, to which the parties were required to submit

their response. Adjournments were granted by the Council and

finally on 11.04.2011, the respondent submitted his written

representation on the report of the disciplinary committee and

the complainant also filed his written representation on

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26.04.2011. On 01.09.2011, the petitioner informed the

respondent as well as the complainant that the report of the

disciplinary committee would be considered in the meeting of

the Council to be held from 19th to 21st September 2011. The

respondent submitted a written representation on 12.09.2011.

As per the extract taken from the minutes of the 310th meeting

of the Council held from 19th to 21st September 2011, the

Council decided to accept the report of the disciplinary

committee holding the respondent guilty of professional

misconduct and recommended to refer the matter to the High

Court for removal of the name of the respondent from the

register of members maintained by the Council, for a period of

one year.

3. In the complaint lodged by the Superintendent of

Police, Central Bureau of Investigation on 18.08.2006, the

allegation against the respondent primarily were that he, as a

Chartered Accountant of the company GWIL, had connived

with the Directors of the Company and for the years 1997-98,

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1998-99, did not disclose in the Balance Sheet of the company

that the company had availed credit facilities from the Times

Bank Limited (subsequently HDFC Bank) and that the balance

sheet for the period ending 30.09.2000 was signed without

verifying the correct facts and without preparing the audit report,

though mentioned to have been annexed. The relevant

paragraphs 5, 6, 7, 8 & 9 of the said complaint are re-produced

below:

“5. Investigation also revealed that the Director

of GWIL and Shri.S.Giridharan had signed the audited

balance sheet as at 30.09.2000 on 7.12.2000 and the

same was submitted to Canara Bank, AF Branch,

Bangalore. During 2001, Canara Bank came to know

about the credit facilities availed by GWIL from Times

Bank Ltd., and sought clarification from

Shri.S.Giridharan. For the same, Shri.Giridharan had

replied to Canara Bank that the audit of M/s GWIL has

not been completed and disowned the balance sheet

submitted by the Director of GWIL to Canara Bank

stating that it was an unaudited balance sheet. This clearly

proves that he had signed the balance sheet without

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conducting proper audit of books of accounts of M/s

GWIL.

6. In this regard, an expert was examined and he

has stated that the Balance Sheet and Audit Report are

very vital document, which reflects the status, financial

background, etc. of a company. It is the primary duty of an

auditor to verify the books of account of the company before

qualifying the Balance Sheet and Auditor’s Report.

Bankers are mainly depending upon the Balance Sheet to

process and recommend the credit proposals submitted by the

company. Credit facilities are released by the Bank based on

the performance and past experience, which are to be clearly

furnished in the Balance Sheet. He has also stated that

signing the balance sheet and later disowning the same is

unethical to the profession of Chartered Accountancy.

Expert opinion proved that

(i) if Shri.Giridharan had conducted proper

audit, he would have been definitely

aware of the banking transactions with

Times Bank Ltd.,

(ii) if the company has deliberately hiding the

transactions with Times Bank Ltd., and

maintaining separate books of account,

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the auditor may not be knowing the fact,

but this can be done only by a highly

qualified and professionally skilled

Chartered Accountants. It is very

difficult for the company to maintain

separate books of account pertaining to

the banking transaction for more than 3-

4 years.

(iii) Both the company and auditor would

have colluded and committed

irregularities. Moreover, there is also a

chance that he auditor himself would

have guided the company to prepare such

type of Balance Sheets to defraud the

banks.

7. Investigation has clearly established that

Shri.Giridharan had colluded with the Director of M/s

GWIL and suppressed the details of the credit facilities

availed from Times Bank/HDFC Bank, Chennai in the

balance sheets. Shri.Giridharan had suppressed these facts

in order to misguide the Canara Bank and enable M/s

GWIL to enjoy dual finance fraudulently.

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8. From the above facts, it is clear that

Shri.Giridharan had indulged in generation of incorrect

balance sheets and audit reports for M/s GWIL Bangalore

which is an unprofessional and unethical conduct

unbecoming of a licenced Chartered Accountant.

9. It is requested that the Institute of Chartered

Accountants of India (ICAI) may take such action as

deemed fit against the said individual. The case has already

been charge sheeted and all the original documents were

deposited before the Hon’ble Court of XVII Addl. Chief

Metropolitan Magistrate, Court Complex, Bangalore and

photocopy of the documents are available in this office.”

4. After considering the reply of the respondent, the

following charges were framed against the appellant.

“The charges alleged against the respondent, as per

the complaint, are as under:

The respondents was the Statutory Auditor of Great

Western Industries Ltd., (hereinafter referred to as the

“Company”) from 1995-96 to 2000-01. Great Western

Industries Ltd was availing credit facilities with Canara

Bank, Hi-Tech Agriculture Finance Branch, Bangalore

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and Times Bank Ltd., Chennai from 1994-2001 and

1997 to 2001 respectively. The respondent had audited the

books of accounts of Great Western Industries Ltd., and

signed the Auditors’ Report, Balance Sheets as at

30.09.1998, 30.09.1999 and 30.09.2000. Investigation

conducted by CBI revealed that the Balance Sheets for the

year 1997-98 and 1998-99 did not reflect the credit

facilities availed from the Times Bank Ltd., Chennai.

Investigation also revealed that the Director of Great

Western Industries Ltd., and the respondent had signed the

audited Balance Sheet as at 30.09.2000 on 07.12.2000

and the same was submitted to Canara Bank, Agriculture

Finance Branch, Bangalore. During 2001, Canara Bank

came to know about the credit facilities availed by Great

Western Industries Ltd., from Times Bank Ltd., and

sought clarification from the respondent. The respondent

replied to Canara Bank that the audit of Great Western

Industries Ltd., has not been completed and disowned the

Balance Sheet submitted by the Director of Great Western

Industries Ltd., to Canara Bank stating that it was an

unaudited Balance Sheet. The fact clearly proves that he

had signed the Balance Sheet without conducting proper

audit of books of accounts of Great Western Industries Ltd.

In this case if the respondent had conducted proper audit, he

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would have been definitely aware of the banking

transactions with Times Bank Ltd.

Investigation had clearly established that the

respondent had colluded with the Director of Great Western

Industries Ltd., and suppressed the details of the credit

facilities availed from Times Bank/HDFC Bank

Chennai in the Balance Sheets. The respondent had

suppressed these facts in order to misguide Canara Bank

and enable Great Western Industries Ltd., to enjoy dual

finance fraudulently.

The respondent indulged in generation of incorrect

Balance Sheets and Audit Reports for Great Western

Industries Ltd., Bangalore which is unprofessional,

unethical and conduct unbecoming of a Chartered

Accountant.”

After following the prescribed procedure, the Disciplinary

committee submitted its report which was accepted by the

Council.

5. In the recommendation made by the Council, it was

noted that the respondent had signed the Balance Sheet for the

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period ending 30.09.2000, which was countersigned by only one

Director, in violation of Section 215 of the Companies Act,

1956, which provides for at least two Directors to sign the

Balance Sheet.

6. The Council also found the respondent guilty of

professional misconduct relating to non-disclosure of loan taken

by the Company from Times Bank. It was also noted that the

Balance Sheet and Profit and Loss account were signed by the

respondent on 7.12.2000 with the endorsement that ‘the same was

as per audit report annexed’, whereas, the audit report was not filed.

On the aforesaid main grounds, as well as certain other grounds,

the Council made the recommendation for removal of the name

of the respondent from the register of members for a period of

one year, which matter is placed for our consideration.

7. We have heard Sri.S.S.Naganand, learned Senior

counsel appearing for the petitioner along with Sri.Vikram Unni,

as well as Sri.K.Kasturi, learned Senior counsel appearing on

behalf of the respondent and perused the records.

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8. The contention of the learned counsel for the

petitioner is that the charges against the respondent have all

been proved and the same are very grave as the respondent did

not exercise due care expected from a professional auditor, by

signing the Balance Sheet for the period 30.09.2000 or even

signing the said Balance Sheet without there being a proper audit

report and mentioning that the same was as per the audit report.

It is contended that the respondent himself accepted that the

final audit report had not been prepared at the time when the

Balance Sheet was signed by the respondent on 07.12.2000, and

the endorsement made was that the same was as per the audit

report annexed. Meaning thereby that the respondent did not

adhere to the professional norms expected from an auditor. It is

further submitted that the signing of the Balance Sheet, without

two Directors of the Company having signed the same, was in

violation of the provisions of Section 215 of the Companies Act,

1956, regarding which also the respondent did not take due care.

The submission of the learned counsel for the appellant also is

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that the company had taken a loan from the Times Bank Limited

(subsequently, HDFC Bank), which was not reflected in the

Balance Sheet, and the same was also a case of gross negligence

and according to the petitioner, the same was done in collusion

with the Directors of the Company. Besides this, the learned

counsel for the petitioner has pointed out other discrepancies in

the Balance Sheet prepared by the respondent to the extent that

the ‘secured loans’ and ‘unsecured loans’ taken from the

Companies in which Directors were interested was not reported

and there was no provision made for payment of interest on the

loans so taken. Sri.S.S.Naganand, learned Senior Counsel has

thus submitted that in the facts and circumstances of the case,

the punishment recommended by the Council is perfectly

justified.

9. On the other hand, Sri.K.Kasturi, learned Senior

counsel for the respondent has tried to justify the conduct of the

respondent by stating that the respondent, as an Auditor, could

only audit the accounts on the basis of the papers that were

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placed before him and he was not supposed to act as a detective

to investigate into the accounts. He has contended that the

respondent was never informed about the loan which was taken

by the company from the Times Bank Limited, as the same may

have been taken by the Directors of the Company, which was

not brought on record. Sri.K.Kasturi, learned counsel submits

that the Company in question has its head office in Bangalore,

whereas, the loan from Times Bank Limited was taken from its

Branch in Chennai of which the respondent-auditor did not have

any knowledge. Learned counsel for the respondent has further

submitted that though the respondent had signed the Balance

Sheet in good faith but since there was suspicion in his mind, he

did not prepare the audit report and the mention in the Balance

Sheet that ‘the same was as per the audit report annexed’’ was on a set

format, and signed by the respondent in good faith. Learned

counsel has submitted that immediately thereafter, on

29.12.2000, on the respondent having learnt of the said loan

taken by the company from Times Bank Limited vide a

communication made by the HDFC Bank, (which had taken

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over the Times Bank Ltd.,) and thereafter also on 14.02.2001,

the respondent wrote to the Company enquiring as to whether

the said loan was taken by the company or not, and seeking

other clarifications also. He thus submitted that the respondent

had acted in good faith and did not sign the audit report after

coming to know of the aforesaid shortcomings. As regards the

other discrepancies with regard to non-signing of the Balance

sheet by two Directors and instead by only one Director, learned

counsel has submitted that the law on this point is not clear as to

whether the Directors have to first sign the audit report and then

the Auditor or vice versa. He has contended that the same was

also done in good faith and could not be held against the

respondent. He further submitted that in the complaint, the

Superintendent of Police CBI has himself stated that the

information was withheld by the Company from the respondent-

auditor. He has thus submitted that the information regarding

the other loans, secured and unsecured, which had not been

specified in the Balance Sheet was because of non-disclosure of

the said information by the Company to the respondent and

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there was no suppression at the hands of the respondent. It is

also been submitted that immediately after the submission of the

Balance Sheet for the period ending 30.09.2000, in January 2001,

the company had changed the Auditor and did not retain the

respondent thereafter as the respondent refused to finalise and

sign the audit report.

10. Having heard the learned counsel for the parties and

perusing the records, we are satisfied that the findings recorded

by the disciplinary committee are fully justified in law and that

the Council has rightly accepted such findings.

11. The main reason for coming to this conclusion is

that an Auditor is expected to sign the Balance Sheet only after

the audit report has been prepared, as in the Balance Sheet itself

it was mentioned by the respondent that ‘the same was as per the

audit report annexed’. The explanation of the respondent that the

audit report was not finalized at the time when the Balance Sheet

was signed by him on 07.12.2000 cannot be accepted as the

respondent has himself mentioned in the Balance Sheet that the

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audit report was annexed. Later on, the respondent had taken

the plea that the final audit report was not prepared because

certain further facts had come to the knowledge of the

respondent-auditor. However, this makes it clear that the

Balance Sheet was signed by the respondent without the audit

report being there. Balance Sheet merely gives the summary of

the audit report which can be read and understood by a common

man. There cannot be a Balance Sheet without the audit report

being prepared. In having done so, the respondent had

committed grave irregularity as the same cannot be said to be a

bonafide mistake but a deliberate act of the respondent. The

other charges against the petitioner can be condoned as the same

could be said to be because of the Company not providing full

facts and particulars to the respondent-auditor. However, the

charge of preparing the Balance Sheet without all the records

having been perused by the respondent, it is certainly a very

grave misconduct, which cannot be condoned.

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12. More than half a century back in the year 1956, a

Division Bench of the Calcutta High Court in the case of

Deputy Secretary to the Government of India vs. S.N.Das

Gupta reported in AIR 1956 Cal 414, after considering the duties

of the statutory auditor under the general rules and after holding

that the auditor may not be required to begin with suspicion and

to proceed in the manner of trying to detect a fraud or a lie, has

held that “if the auditor does not take reasonable care and skill

before he comes to believe that what he certifies is true or even

when he generally displays the highest degree of care and skill

but fails short of the strict duty of an Auditor even in one

instance, he must be held to have been negligent, if not worse”.

13. It is true that an auditor is not required to perform

the functions of a detective as it has been said that an auditor is a

watch-dog but not a blood hound, however, in the present case,

the gravity of negligence of the respondent in not questioning

the company with regard to the accounts and signing the Balance

Sheet even prior to preparation of the audit report, without

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verifying the correctness of the same, is grave enough to hold

him negligent and impose punishment. In such view of the

matter, we are of the firm opinion that the findings recorded by

the disciplinary committee and so accepted by the Council are

perfectly justified in law and do not call for interference.

14. We may now consider the question of quantum of

punishment which has been recommended by the Council i.e.,

removal of the name of the respondent from the register of

members maintained by the Council, for a period of one year.

For this, what we have to consider is the gravity of the

misconduct as well as take into consideration the time which has

lapsed since the audit report was submitted and the

recommendation for punishment made by the Council. The

matter relates to the conduct of the petitioner for the Balance

Sheet which he had prepared and other lapses said to have been

committed by him in the year 2000. The complaint was filed in

the year 2006. The disciplinary committee made its

recommendation to the Council in the year 2010. The order was

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passed by the Council recommending the punishment in the year

2011. The same was filed before this Court in the year 2012 and

has been placed for hearing in the year 2015. One and a half

decade has passed since the year 2000, i.e., the year when the

incident took place.

15. The Apex Court in the case of Institute of

Chartered Accountants of India vs. P.K.Mukherjee reported

in AIR 1968 SC 1104 in para 8 of the said judgment has held as

under:

“For these reasons we hold that the charge of

professional misconduct is established against respondent

No.1 falling under Cl (o) of the Schedule to the Act. The

only question which now remains is the final order to be

passed against respondent No.1. In our opinion, the conduct

of respondent No.1 is wholly unworthy of a Chartered

Accountant who is expected to maintain a high standard of

professional conduct. The proper punishment would have

been the removal of the respondent No.1’s name from the

Register for a limited period but in view of the fact that the

proceedings have been pending against respondent No.1 for

a long time, we think that the ends of justice will be serviced

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in this particular case if respondent No.1 is severely

reprimanded for his misconduct under S.21 (2) of the Act.

We also direct respondent No.1 to pay the cost of the

appellant in this Court and in the High Court. We

accordingly set aside the order of the High Court dated

December 5, 1962 and allow this appeal with costs.”

16. A Division Bench of the High Court of Karnataka

in the case of Council of the Institute of Chartered

Accountants of India vs. Y.N.Jaisimha reported in 2014 (4)

KAR L.J. 398 has also considered the matter regarding to the

passage of time while awarding the punishment. In para 7 of the

said judgment, the Court has held as under:

“Though the respondent denied the allegations made

in the complaint, we find that the Council on the basis of

the materials placed before it by the complainant and also

after considering the written representation made by the

respondent, rightly held him guilty of the professional

misconduct. In the circumstances, we are inclined to accept

the recommendation made by the Council, for the reasons

recorded in the order under Section 21 of the Act. We do

not find any reason to interfere with the findings of fact

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recorded by the Council holding the respondent guilty of

misconduct. Thus, we confirm the findings recorded and

accept the recommendation made by the Council against the

respondent. However, having regard to the nature of

allegations and the passage of time, the recommendation for

removal of the respondent’s name for one month from the

Register of Members maintained by the Council, in our

opinion, is harsh. Hence, we are inclined to reduce the

quantum of punishment from one month to reprimand.

Order accordingly. The civil petition is accordingly disposed

of. No costs.”

17. In our view, discretion of the Court while awarding

punishment has to be exercised in a judicious manner. We have

already held that the respondent is guilty of professional

misconduct. However, balancing the equities and keeping in

view the fact that even though the irregularities committed by

the respondent are very grave in nature and have been proved

beyond reasonable doubt, but the fact remains that 15 years time

has lapsed since when the said irregularities had been committed

by the respondent and the respondent has been continuing to

function as a Chartered Accountant, hence the punishment of

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removal of the name of the respondent for one year from the

Register of Members maintained by the Council would, in our

opinion, be too harsh at this stage, which is after a gap of 15

years.

18. We are thus of the view that the recommendation

made by the Council directing removal of the name of the

respondent from the register of members for a period of one

year is excessive in the facts and circumstances of this case, we

reduce the quantum of punishment to removal of name of the

respondent from the register of members for a period of one

month from the date of Notification.

This petition is accordingly disposed of. No order as to

costs.

Sd/- JUDGE Sd/- JUDGE SS*