Saturday, March 4, 2017

CA guilty of professional misconduct as he failed to highlight suspicious book entries during audit

Facts:

a) The respondent (CA) was a partner of the partnership firm which was the Statutory Auditor of Pertech Computers Ltd (PCL). CA was incharge of the audit team.

b) A complaint was received by the Council from the Assistant General Manager, State Bank of India, against CA alleging that while carrying out the audit the respondent was guilty of various acts of commission and omission and, thus, action was to be taken against the CA for professional misconduct.

c) Council of ICAI noted that huge payments were made by PCL on behalf of its subsidiary, Altos India Ltd. (AIL) but no disclosure of the same was made by the auditor. Further, there were suspicious adjustment entries between AIL and PCL which ought to have raised a doubt about the genuineness of the transactions and ought to have been detected and reported by the CA.

d) Council held CA guilty of professional and other misconduct and removed his name from the register of members of the ICAI for a period of 5 years.

e) CA filed appeal before the High Court.

High Court held as under:

1) In its report the Committee highlighted the modus operandi adopted by PCL and AIL to form a loop with no cash flow coming in, but sales, stocks and receivables increasing.

2) It was the obligation of the auditor to comment on the internal control procedures of the company. The duty to enquire into whether the transactions were prejudicial to the interest of the company being not discharged by the auditors.

3) Keeping in view the scam which had taken place and the seriousness of the indictment of the CA the recommendation of the Council was accepted and the penalty of removing the name of the CA from the register of members of the ICAI for a period of 5 years was levied. - [2017] 78 taxmann.com 286 (Delhi)
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