ICAI and its members

In a recent order by ITA Tribunal in the case of Shri Vijay V. Meghani vs. DCIT, where there was a delay of 2,984 days in filing appeal against the order of CIT (A) due to misleading advice of a C.A. firm, the Hon’ble Members of the Tribunal have commented about the falling professional standards of ICAI Members. The author of this order being a Senior Chartered Accountant, the contents of this order should be an eye opener for all members of the C.A. profession and need introspection by our members. The relevant portion of the order in Para 9.6 is as under:

“9.6 However, if it is considered for a moment that the above said C.A. firm has really given such advice to the assessee herein and accordingly it has furnished the letter and affidavit, then, in our view, it may be showing signs of deteriorating standards with some of the Chartered Accountants in profession, which needs to be stopped on war footing by the ICAI. We have already noticed that the assessee is having connection with many tax professionals and, in all probabilities, the assessee might have had consultation with any one or more of them on the impugned problem. It is inconceivable that all the Chartered Accountants, whom the assessee might have had consultation or availed services, would have concurred with the view expressed by the above said C.A. firm. If it is presumed for a moment that all the C.A.s have concurred with the said view, then it only shows that the C.A. profession is losing its grip over the Income tax matters, which is another cause of concern for ICAI. The self study model with ‘on-site articled clerk training’ embedded in the Chartered Accountancy course aims to achieve high quality education and training through undergoing practical training, inculcating the habit of thinking, self introspection, application of mind, analytical ability etc. and they enable the C.A. students to have strong grip over the subjects and also to attain expertise in them. The commendable feature of the C.A. course is that, as stated earlier, the C.A. students are trained by the practicing Chartered Accountants during their articled clerk training program. Thus, the methodology adopted by the ICAI enabled the C.A. students to become a thorough professional with versatile knowledge and innovative mind. We notice that, in the recent past, the methodology of self study is given a go-by by some of the C.A. students and they have started depending more and more on the Commercial Coaching Centers, who undertake coaching of various subjects in the class room model. We notice that the ICAI does not appear to have taken steps to contain mushrooming growth of such coaching institutes, which indulge in manufacturing of Chartered Accountants through class room model, which may ultimately have undesirable effect on the quality of Chartered Accountants, since the habit of thinking, introspection, application of mind is replaced by spoon feeding, which kind of teaching discourages independent thinking. There should not be any controversy on the fact that the Chartered Accountants, till date, have occupied pioneer position vis-a-vis their counterparts in other parts of the World. They also contribute a lot to the building, sustenance and growth of our National economy. Any compromise on the quality of Chartered Accountants would not only affect our Country very badly, but is also expected to endanger the pioneer position enjoyed by the C.A. fraternity vis-a-vis their counter parts in other parts of the world. In our view, the ICAI should seriously taken note of these alarming practices emerging in our Country and should take appropriate corrective steps, lest the confidence reposed in C.A.s by the public should get diluted.”

Further, in Para 10 of the order it is observed as under

“Thus, it is seen that the advice claimed to have been given by the C.A. firm has been given without analysing the facts prevailing in the instant case and also without clear understanding of the provisions of the Act and their implications. We have also noticed that a C.A firm could not give such kind of advice, since it cannot forecast the outcome of an appeal filed before the Tribunal.We have already noticed that the CPE programmes have been designed by ICAI with the noble objective of enlightening the Chartered Accountants with current topics, current developments and such programmes are also aimed to continuous updating or refreshing of the knowledge of Chartered Accountants. The advice claimed to have been given by Chartered Accountants, if considered to have been really given, would create doubt about the efficacy of the CPE programmes, since such kind of advices is not expected from a Professional. Further these kind of advices claimed to have been given by a C.A. firm clearly give signals that the CPE programmes might have failed to achieve the desired objectives with some of the Chartered Accountants. It is high time that the ICAI should take note of these practicalities and should take corrective steps in order to maintain/restore the high standards and quality expected from a C.A professional.”

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues on pages 316 to 317 of C. A. Journal for September, 2014. Some of these issues are as under:

(i) Issue:

Can goodwill of a Chartered Accountant firm be purchased?

The Council of the Institute considered the issue whether the goodwill of a proprietary firm of a Chartered Accountant can be sold/transferred to another eligible member of the Institute, after the death of the proprietor concerned and came to the view that the same is permissible. Accordingly, the Council passed the Resolution that the sale/transfer of goodwill in the case of a proprietary firm of Chartered Accountants to another eligible member of the Institute, shall be permitted.

(ii) Issue: Can a Chartered Accountant in practice share his fees with the Government in respect of Government Audit?
The Institute came across certain Circulars/Orders issued by the Registrar of various State Co-operative Societies wherein it has been mentioned that certain amount of audit fee is payable to the concerned State Govt. and the auditor has to deposit a percentage of his audit fee in the State Treasury by a prescribed challan within a prescribed time of the receipt of Audit fee.

In view of the above, the Council considered the issue and while noting that the Government is asking auditors to deposit such percentage of their audit fee for recovering the administrative and other expenses incurred in the process, the Council decided that as such there is no bar in the Code of Ethics to accept such assignment wherein a percentage of professional fees is deducted by the Government to meet the administrative and other expenditure.

3. Financial Reporting Review Board (FRRB)

ICAI has published a “Study on Compliance of Financial Requirements.” Some of the observations from this publication are given below for information of Members.

(i) Contingencies and Events occurring after the Balance Sheet Date (AS-4)

From one of the Notes to Accounts given in the Annual Report of a company, it was noted that Advances were given to certain companies which had incurred losses and their net worth had eroded. These Advances were included under the heads of “Sundry Advances” or “Sundry Debtors” on the pretext that the management was confident of recovering these dues. Therefore, no provision was made.

Observation of FRRB (P. 37)

The erosion of net worth of the companies to whom advances were given itself indicated that the amounts due may not be fully recoverable. further, future events should be considered to confirm impairment of the asset rather than expecting its recoverability. If the net worth of the companies had eroded and they were incurring losses, provision should be made unless such companies have already entered into contracts to confirm profitability in future. Non-creation on provision in these cases is contrary to the requirements of AS-4.

(ii)    Provision for Taxation for Earlier years (AS-5)

From the statement of Profit and Loss given in the Annual report of a Company, it was noticed that the provision for taxation  for  earlier  years  was  adjusted  under  the  head “appropriations.”

Observation of FRRB (p42)

Adjustments arising due to prior period items should be included in the determination of net Profit or Loss for the current period instead of showing the same as “appropria- tion” of Profits. Income tax expense relating to prior years cannot be disclosed as appropriation of profits. Hence, the profit of the Company for the year is over stated and the Statement of Profit and Loss cannot be considered to be providing true and fair view of the profit of the busi- ness. accordingly, the company has not complied with the requirements of AS-5.

4.    EAC opinion

Accounting Treatment of Liquidated Damages on Unex- ecuted Portion of Contract.

Facts
A Central public sector enterprise, registered under the Companies act, 1956 was established for manufacturing of weapon systems required for Armed Forces.

The customers of the company recover liquidated damages for delayed delivery of goods, i.e., when goods are delivered after due date. the company makes provision for liquidated damages for the unexecuted portion of contract for the period of delay from due date of delivery till the date of the accounts. the company is following this practice as a prudent policy as liquidated damages amount is quantifiable and is a definite known liability. In most of the cases, the customer extends the due date, however, with levy of full liquidated damages. At the time of payment, the customer recovers the liquidated damages amount and pays the balance amount only.  Then, the company reverses the liquidated damages provision and debits to liquidated damages recovered account (ex- pense account).

Query
from  the  above  background,  the  Company  has  sought the opinion of the expert advisory Committee of the ICAI on the following issues:

(a) Whether the provision for liquidated damages should be made or not in respect of unexecuted portion of the contract for the period of delay from the due date of delivery till date of accounts? (b) Whether such provi- sion for liquidated damages is also required to be made in case the due date falls exactly on the last date of the accounts of the financial year, viz. balance sheet date, i.e., whether one day delay is to be reckoned or not?
(c) Whether the practice is to be spelt out as a ‘major Accounting Policy’ in terms of AS1 or will it be sufficient if a financial note is appended to the statement of profit and loss or even financial note is not required to  be appended?

EAC opinion:
The Committee notes that  in the  case  of the  company, liquidated damages are recovered by the customers for the period of delay between the due date of delivery of goods  and  the  actual  date  of  delivery.   Further,  as  per the Company, there is no clause in the contact to exit from the sales contract(s) entered with the customer, with or without the payment of penalty and the past experience of the company shows that in most cases, although the customers extend the due date of delivery, the liquidated damages are recovered in full. Accordingly, the Committee is of the view that the terms and conditions of the sales contract(s) are binding and legally enforceable by the customers. In the company’s case, although it is stated that the liquidated damages are in the nature of compensatory payment, the Committee is of the view that the liquidated damages are akin to penalty and there is a contractual obligation on the part of the company to pay for liquidated damages as soon as there is a delay in the delivery of goods beyond the due date as per the delivery schedule. Further, this obligation can not be avoided by the company’s future course of actions as it does not have any realistic alternative but to settle the contractual obligation (i.e., making the payment of such liquidated damages).  Thus,  there  exists  a  present  obligation  arising from past event, viz., delay beyond scheduled delivery and settlement of which is expected to result in an outflow of resources embodying economic benefits. Accordingly, the Committee is of the view that the company should recognise a provision in respect of liquidated damages for the period of delay between the due date of delivery of goods and the expected date of delivery of the said goods and not only for the period of delay till the date of financial statements, in the light of evidence provided by events occurring after the balance sheet date, as per paragraph 36 of AS29.

The Committee is of the view that ‘matching concept’ does not preclude recognition of present obligations as liabilities at the reporting date. the Company should disclose its accounting practice in respect of liquidated damages, considering the materiality of the items and transactions and their impact on the financial statements from the perspective of users financial statements.

[Pl. Refer page nos. 344 to 348 of C. A. Journal – September, 2014]

 
5.    ICAI news

(Note: Page Nos. given below are from C.A. Journal for September, 2014)

(i)    Database of Independent Directors:
Section 150 of the Companies Act, 2013 provides for creation and maintenance of data Bank of independent directors by recognised bodies. iCai has joined with institute of Company Secretaries and Institute of Cost Accountants to operationlise a repository for independent directors. mCa has approved this initiative of ICAI.  The Repository (http://independentdirector.in) will provide opportunity to individuals who are willing to act as independent directors in Companies.  Further, it will be possible for companies which wish to select independent directors to make use of this data Bank. (P.303)

(ii)    Revised    Dates    for    Campus    Placement Programme (P. 432)

It may be noted that the revised dates for campus Placement Programme for October, 2014, are as follows:

(iii)    Revised Minimum recommended Fees for Professional Services:

ICAI has revised minimum recommended fees which members can charge for various professional services. The details are given in CA Journal for September, 2014 (P. 424 – 430).

(iv)    Scheme for Enrolment of Overseas Citizens of India:

The Scheme for enrolment of Overseas Citizens of India (OCI) as members of ICAI has been finalised by ICAI. Under this scheme, an oCi holding professional accountancy qualification shall be recognised as a member of ICAI on completion of such examination, training and modules as listed in schedule ‘B’ to C.A. Regulations. Details of the scheme are published on P. 412-415 of C.A. Journal for September, 2014.

(v)    New ICAI Publication

Revised  Guidance  note  on  tax audit  u/s.  44aB  of  the income-tax act, 1961 (2014 edition)