Delhi High Court endorses ICAI’s 3‑month removal of CA over RBI‑flagged audit irregularities

Background of the case

The Delhi High Court, in Council of The Institute of Chartered Accountants of India Vs S.N. Shivakumar, dealt with a reference under Section 21(5) of the Chartered Accountants Act, 1949. The Institute of Chartered Accountants of India sought judicial confirmation of a disciplinary penalty imposed on a chartered accountant – removal of his name from the register of members for three months.

The proceedings originated from a regulatory alert by the Reserve Bank of India (RBI) regarding the statutory audit of Escorts Finance Limited for the financial year 2004–05. The company, a finance entity involved in accepting deposits and advancing loans, was audited by M/s N.M. Raiji & Co., where the respondent, S.N. Shivakumar, was a partner.

RBI, by a communication dated 20.10.2006, alleged that the audit report did not faithfully reflect:

  • The company’s true liability towards public deposits, including interest; and
  • Alleged “ever-greening of assets” in the financial statements.

This prompted ICAI to initiate disciplinary action against the respondent.

Initiation of disciplinary proceedings by ICAI

RBI’s communication and ICAI’s first response

On receipt of RBI’s letter dated 20.10.2006, ICAI examined the contents and treated the matter as serious, given the implications for depositors and regulatory supervision.

  1. ICAI issued a notice to the respondent on 04.06.2008.
  2. A reply dated 08.08.2008 was submitted at the firm level by M/s N.M. Raiji & Co..
  3. ICAI found the firm’s explanation inadequate and treated the matter as an “information case”.
  4. Consequently, a further notice dated 30.12.2008 was served upon the respondent in his capacity as a member.

Reference to Disciplinary Committee

In August 2009, ICAI formed a prima facie opinion that there was material to proceed further. The case was referred to the Disciplinary Committee under the mechanism prescribed in Section 21 of the Chartered Accountants Act, 1949.

Despite service of notice, the respondent:

  • Did not file any written explanation,
  • Did not submit any reply before the Disciplinary Committee, and
  • Ultimately did not contest the charges on merits.

Thus, the Disciplinary Committee proceeded to adjudicate the matter on the basis of:

  • RBI’s communication,
  • The firm’s earlier replies, and
  • The documentary material on record.

Findings adverse to the respondent were recorded.

Charges framed against the respondent

Three specific charges were framed against the respondent. These charges, as reproduced by the High Court, were:

Charge no 1: It appears that the Respondent-firm as the auditors have not verified the exact liability of the Company on account of public deposits at the time of auditing Company’s accounts as on March 31, 2005. Subsequently, it transpired from the Respondent-firms’ reply that liability towards accrued unpaid interest on public deposits for earlier period up to March 31, 2005 was not made available to them by the Company.

Charge no 2: The Respondent-firm as the auditors could not detect ‘ever-greening of assets’ by the Company while finalizing the Company’s Balance Sheet as at March 31, 2005.

Charge no 3: The Respondent-firm’s explanation that issuing auditor’s certificate for the year ended March 31, 2005 at this stage as required in terms of Para 8(2) (Part Ill- Special Provisions) of Notification No.DFC.118/DG(SPT)-98 dated January 31, 1998 issued by RBI will not serve any purpose, is in contravention of the provisions of RBTs directions as it is obligatory on the part of the auditors to submit such certificate.