ICAI and its members

In this case, Mr. G.K. used to audit the accounts of certain group companies and give statutory audit reports from 01-10-2005 to 26-09-2009. He did not reveal to the company management that his name was removed from Register of Members maintained by ICAI. It was further alleged that he had connived with one of the Directors of the company to defraud the other Directors.

The D.C. found that the name of Mr. G. K. was removed from the Register of Members for non payment of Fees and therefore he was not entitled to audit or give statutory audit reports. Therefore, Mr. G.K. had contravened the provisions of sections 8 and 24 of the C.A. Act. Section 24 provides for prosecution of such person and court can levy fine upto Rs. 5,000/- and under certain circumstances award punishment by way of imprisonment upto 6 months.

However, under the present proceeding, Mr. G.K. was held to have committed other misconduct under Clause (2) of Part IV of First Schedule and Clause (1) of part II of second schedule of C.A. Act on the first charge. As regards the second charge the D.C. held that this was not proved. The D.C. awarded punishment of removal of the name of Mr. G.K. from membership for 3 months (Reported on Pages 20 – 27 of Part I of Vol.I)

(ii) Case of V.K.

In this case, the member advised his client that capital gains tax of Rs. 6.91 lakh was payable as Advance Tax for A.Y. 2007-08. The member undertook to deposit Advance Tax on behalf of his client. The client paid Rs. 6.91 lakh to the member who deposited the cheque in his account. The member deposited only Rs. 0.91 lakh as Advance tax on behalf of his client. He, however, added the figure of Rs. 6 lakh in the Bank Challan to defraud the I.T. Dept. In other words, the member had misappropriated Rs. 6 lakh and cheated his client. When this fact came to the knowledge of his client, the member refunded the amount to his client with interest. He has also paid interest charged by the I.T. Dept.

The D.C. has found the member guilty of professional misconduct under Clause (10) of part I of second schedule of C.A. Act. The D.C. has held that amount collected from client for payment of Advance Tax was used by the member for his personal purpose in violation of the above clause. The fact that the member has returned the amount with interest can not absolve the member from his guilt.

On the consideration of the facts of this case, the D.C. has awarded punishment to the member and directed that his name be removed from the Register of Members for a period of 2 years. Further, the D.C. has imposed a fine of Rs. 50,000/- to be deposited within 90 days. (Reported on pages 28 – 36 of Part I of Vol.1).

(iii) Case of Mr. V. K. D.

In this case, the Reserve Bank of India (RBI) reported to ICAI that the member (Statutory Auditor of NBFC Company) has submitted a certificate on 12-04-2007 stating that the company continues to undertake the business of NBFC requiring it to hold the certificate of registration u/s. 45-IA of the RBI Act. The RBI has stated that according to company’s letter dated 26- 03-2007 it had informed RBI that it had yet to start the commercial business. Hence, according RBI the Certificate of the Member was wrong. The charge against the Member was about gross negligence under Clause (7) of Part I of second schedule of CA Act.

The defence of the member was that he issued the certificate dated 12-04-2007 in response to the request letter from Company, whereby, he was requested to certify whether the company continues to carry on principal business of NBFC as on 31-03-2007. As per RBI press release No. 1998-99/1269 dated 08-04-1999, the Company’s financial assets should be more than 50% of its total assets and income from financial assets should be more than 50% of gross income. Both these tests are required to be satisfied as the determinant factor. It may be appreciated that the Respondent was not required or intended to verify and certify generally whether the Company has commenced the commercial business of which Respondent denies any knowledge or involvement.

The D.C., after hearing the Member and after verifying the documents produced by him, held that the company was meeting with criteria of NBFC as prescribed by RBI. It was also noted that the company was a private company and did not require to obtain business commencement certificate. Therefore, when the criteria of investment in Financial Assets and income from such assets was met and the Member gave the certificate keeping in mind the going concern concept. No mala fide intention was established. Therefore, giving benefit of doubt to the member, it was held that he was not guilty of professional misconduct. (Reported on Pages 6-12 of Part II of VoL-1).

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues. These are published on Pages 1171 – 1172 of CA Journal for February, 2014.

(i) Issue No.1

Whether an auditor is required to provide to the client or to main auditor of the Head Office of the same enterprise access to his audit working papers?

Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors, except in case it is required by the Regulatory norms.

(ii) Issue No.2

Whether Joint Auditors can demand the working papers of one another?

The working papers are the property of an auditor. Therefore, no joint Auditors can demand the working papers of the other Joint auditor.

(iii) Issue No.3

Whether a joint auditor will be responsible for the work done by other joint auditor?

Council direction under Clause (2) of Part 1 of the Second Schedule to the C.A. Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severely responsible for the work which is not inter se divided among the auditors.

(iv) Issue No.4

Whether the statutory auditor can accept the system audit of same entity?

The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

3. EAC Opinion:

Treatment of Mark to Market Losses on Principal only Currency Swap:

Facts:

A company is engaged in providing port and related infrastructure services (including SEZ) to various port and SEZ users.

The company has stated that when it approaches banks for long term loans to fund the capital expenditure for port project, it has the option of seeking a foreign currency loan (FCL) or a Rupee loan. In case FCL is not readily available, the company agrees to borrow Rupee loan. The sanction letter of bank could also provide the company the option to convert the undrawn portion of Rupee loan into FCL at a later date. Further, along with the sanction of Rupee loan, banks also sanction derivative limits so that the company could utilise the same for swapping drawn and outstanding Rupee loan amount into foreign currency facility. According to the company, it enters into derivative transaction by way of Principal Only Swap (POS) to the extent of outstanding Rupee loan in its balance sheet. As per the company, though POS transaction is an off balance sheet item, the same cannot be entered into unless there is an underlying outstanding loan in the balance sheet. Hence, it is clearly inter-linked to a balance sheet item.

The company has further stated that POS transaction with bank involves notional swap of the company’s Rupee loan with USD. As a result, the company has USD exposure through POS. The tenor of underlying Rupee loan of POS contract is same and notionally, the company swaps the Rupee loan with the USD loans. The bank which enters into the POS actually buys Rupee from the company and sells it USD. However, no cash flow takes place,  no entries  are passed in books and details of outstanding transaction are disclosed in the financial statements. Thus, effectively, what was a Rupee obligation of the company becomes a USD obligation with the POS.

According to the company, all POSs are monitored on a regular basis and, periodically, the company has interest inflow on account of differential interest rate on Rupee and USD borrowings. As per RBI directives, POS contracts are cancellable but once cancelled, cannot be renewed during tenure of the term loan and, hence, it is possible to have POS till the maturity of Rupee loan.

The   company   has   also   stated   that   for   such transactions, bank pays Rupee interest rate of, say 11% and the company pays USD interest rate of, say, 5%.  The difference is called ‘carry’. This means that if Rupee interest rate goes below 11% the company gets  benefited  as  ‘carry’  remains  same  and  vice versa, but the company has exposure on account of variation in INR/USD exchange rate. Effect of USD increase is still exchange rate difference and is still to be accounted for by way of Mark to Market (MTM) loss/gain. But, this is, again, only a memorandum (notional),  because,  just  as  the  exchange  rate differences  on  External  Commercial  Borrowings (ECBs), this also does not actually materialise till the loan is actually paid off.

The question arises about accounting for MTM losses/gains on such POS transaction along with receipt  of  ‘carry’  income  at  regular  intervals  in accordance with the Ministry of Corporate Affairs (MCA). Notification dated 7th December, 2006 and subsequent extension vide Notifications dated  31st March, 2009 and 29TH December, 2011.

Query:

On these facts, the company has sought the opinion of the Expert Advisory Committee as to whether the mark to market losses on POS can be treated as exchange rate difference and, accordingly, can be recognised as per paragraphs 46 and 46A of AS11, notified by the Central Government.

EAC Opinion:

The Committee is of the view that the issue raised by the Company requires examination from two angles – firstly, whether the Rupee loan taken by the company becomes a foreign currency liability by the existence of POS transaction or whether it should, in substance, be treated as a foreign currency loan by the existence of POS transaction and, secondly, whether the POS transaction can be considered to be a foreign currency transaction within the scope of AS11.

A reading of AS11 indicatesthataccountingtreatment for only those forward exchange contracts which are entered into for hedging foreign currency risk where the underlying transaction is denominated in a foreign currency, or for trading or speculation purpose. The Committee notes from the Facts of the Case that the underlying transaction is a Rupee loan that does not give rise to any foreign currency risk. It is the POS transaction in the Company’s case that exposes the company to foreign currency risk rather than mitigating the same. Thus, the purpose of the POS is not hedging any foreign currency risk. The POS is not held for trading because the company is not a trader in foreign exchange. There may be speculation, if there is no underling transaction or if there is an underlying transaction but the intention is to speculate the movement in foreign exchange rate and to cancel the POS for booking profit at the opportune time. In the Company’s case, the POS has an underlying transaction viz., Rupee loan. But, the company’s intention is not to speculate the movement in foreign exchange rate and to cancel the POS at the opportune time for profit booking. This basic purpose of the POS transaction in the Company’s case is to take advantage of the difference between Rupee interest rate and USD interest rate. Its purpose is saving in interest cost though it exposes the company to foreign risk. The mere fact that the company might have considered likely foreign exchange loss in making the decision to enter into the POS  transaction,  in  itself,  does not make the POS as held for speculation purposes. Thus, the POS is not held for hedging any foreign currency risk or trading or speculation purposes. Hence, the POS is not a forward exchange contract within the scope of AS11 and therefore, is not a foreign currency transaction within the scope of AS 11,

4.    ICAI News

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

(i)    Extension of Last date for complying with CPE Hours

ICAI has notified that the last date for complying with requirement of CPE hours for the Block Period of 2011-2013 has been extended from 31-12-2013 to 31-03-2014 (ICAI Website).

(ii)    C A Examination Results

The Results of CA examination which have been recently declared are very strict. This will be noticed from the following comparative figures. (ICAI Website).

(iii)    New Branches of ICAI

Following New Branches of ICAI have been opened on 3rd January, 2014 (P.1280-1282).

(a)    Dibrugah (EIRC)
(b)    Tinsukia (EIRC)
(c)    Karimnagar (SIRC)
(d)    Warangal (SIRC)
(e)    Ongole (SIRC)

(iv)    Get CA Journal on Mobile

CA Journal will be available on ios (I pad/I Phone etc) and Android Devices from 01-03-2013 (Refer P.1279).