1. Disciplinary Cases Disciplinary Committee (DC) of ICAI has decided the following cases and held the concerned members as guilty of professional or other misconduct. These cases are reported in the publication of ICAI “Disciplinary Cases” VOL-1. Page Nos. given below are from this Book. The names of members are not given in order to maintain confidentiality.
(i) Case of Mr. A.J.
In this Case, member has been held to be guilty of professional misconduct in respect of following four charges.
(a) Member accepted the position as auditor of NCP Ltd (Company) for 2006-07 without first communicating with the previous auditor in writing. In this case the member was appointed as auditor by the company on 01-10-2006. The member stated that he had informed the previous auditor about this fact by letter dated 14-08-2007 Under Certificate of Posting. This was considered by DC as not sufficient communication.
(b) The member accepted the appointment as auditor of the Company without first ascertaining from it whether the requirements of sections 224/225 of the Companies Act have been complied with. The DC found that the member could not establish whether these provisions were complied with.
(c) The member failed to exercise due diligence and was grossly negligent in the conduct of his professional duties while carrying out the Audit for 2006-07. The DC has noted that there were serious mistakes and grave irregularities in the Financial Statements audited by the member. The member could not produce his working papers to explain his view point.
(d) The member accepted the appointment as Auditor of the Company although payment of the undisputed audit fee of the previous auditor was outstanding. The DC has found that the undisputed audit fees payable to previous auditors were outstanding. No satisfactory evidence for payment of the outstanding fees was produced by the Member.
The D.C. has, after due consideration of the submissions of the Member, awarded punishment by way of removal of the name of the Member from the Register of Members for a period of one year. (DC- Pages 57-66).
(ii) Case of Mr.MKJ
In this case the complaint against the member was that he accepted Tax Audit assignment of a partnership firm without first communicating with the previous Tax Auditor. Further, the complainant (previous Tax Auditor) had stated that the member accepted the tax audit although his undisputed audit fees were outstanding.
The D.C. found that the member sent letter to the previous auditor Under Certificate of Posting. Although this was not sufficient compliance with the requirement for communication, the member could prove that the Postal Department had delivered the letter of communication to the previous auditor. Therefore, this charge was not proved.
However, the D.C. has held that the member was aware of the fact that undisputed audit fees of the previous auditor was outstanding and no satisfactory evidence were produced as to why this was not paid. Therefore, on this count the member was held to be guilty of professional misconduct.
The D.C. has issued a letter of caution to the member advising him to be more careful in future in complying with the provisions of C.A. Act and Code of Ethics. ( DC Pages 74 – 81).
(iii) Case of Mr.S.A.
In this case, the member was found guilty of professional misconduct in respect of the following charges.
(a) The member accepted position as Auditor of Six Entities without communicating with the previous auditor in writing. The defence of the member was that he had verbally communicated with previous auditor and no objection was raised. This was not accepted as proper communication by D.C.
(b) The second charge was that the member accepted the audit of six entities although audit fees and other fees for Tax consultation due to previous auditor was outstanding. The member could not produce any evidence for the payment of outstanding fees. The D.C. held that the member was not required to ensure payment of fees for Tax consultation but as regards outstanding Audit Fees due to the outgoing auditor no effort was made to clear the same.
The D.C. held the member guilty on both counts and awarded the punishment of Reprimand to the Member.
2. Some Ethical Issues
The Ethical Standards Board of ICAI has given answers to some Ethical Issues as under on Pages 1008 – 1010 of the CA Journal for January, 2014.
(i) Issue No: 1:
Appointment of another Auditor at Adjourned A.G.M without Special Notice.
If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company. In terms of section 190(1) of the Companies Act, 1956, special notice should be given to the Company at least fourteen clear days before the meeting in which the subject matter of the notice is to be considered. The meeting contemplated in section 190(1) undoubtedly is the original meeting.
(ii) Issue No: 2:
Charge of Fees by C.A in practice based on percentage of Turnover.
In terms of Clause (10) of Part I of First Schedule to the C.A. Act, it is not permitted for a Chartered Accountant or a firm of Chartered Accountants to charge fees on a percentage of turnover, except in the circumstances provided under Regulation 192 of the CA Regulations, 1988.
(iii) Issue No:3:
Whether a member in practice can be a director of company?
A member in practice is permitted generally to be a Director simpliciter in a Company provided he is not a Managing Director or Wholetime Director and is required to attend only the Board Meetings of the company and not paid any remuneration except sitting fees for attending the meetings.
(iv) Issue No: 4:
Whether a Chartered Accountant in practice is entitled to accept teaching assignment?
A Chartered Accountant in practice is allowed to accept teaching assignment in university, affiliated colleges, educational institution, coaching organisation, private tutorship, provided the direct teaching hours devoted to such activities taken together do not exceed 25 hours a week.
(v) Issue No: 5:
Undercutting Fees:
It is now possible for a C.A. in practice to accept a position as Auditor previously held by some other C.A. in such conditions as to constitute undercutting.
3. Rotation of Auditors:
ICAI had successfully objected to the introduction of the system of Rotation of Auditors for the last over six decades. Several Commissions and Parliamentary Committees had agreed that rotation of Auditors was not in the interest of the Accounting Profession as also for the Corporate Sector. Inspite of this, provision for rotation of auditors has now been introduced by enactment of new section 139 of the Companies Act, 2013.
Detailed procedure for Rotation of Auditors as contained in section 139 has been stated in November, 2013 (Page 107), issue of B.C.A. Journal. Briefly stated, a firm of Chartered Accountants cannot continue as auditor of listed companies and other specified companies for more than 10 years. This period for sole proprietary concern is five years. After the expiry of this period, the same audit firm or its associate cannot be reappointed for a period of 5 years.
As stated earlier, the system of Rotation of Auditors u/s. 139 is to be applied only in Cases of Listed Companies and other Companies as may be prescribed by Rules. It may be noted that Draft Rule 10.3 provides that this system of Rotation of Auditors will apply to all Public and Private Companies, other than Small Companies and One-Person Companies. This provision is very harsh and almost of all Small and Medium sized Audit Firms will lose their medium sized Audit Clients. If a reference is made to section 149(4) it will be noticed that the requirement for appointment of Independent Directors on the Board of Companies applies to Listed Companies and other companies as notified by Rules. Draft Rule 11.2 provides that this requirement will apply to any Public Company having (i) paid-up capital of Rs.100 cr. or more, or (ii) Turnover of Rs. 300 crore or more or (iii) Aggregate Loans, Deposits etc. exceed Rs. 200 crore. There are similar other sections where similar powers are given to the government and the Draft Rules have equated Listed Companies with large Public Companies. ICAI should suggest that Draft Rule 10.3 should provide that the system of Rotation of Auditors should apply, besides listed Companies, to only large Public Companies having paid up capital exceeding Rs. 100 crore or so.
The Draft Rule 10.4(4)(i) is the most damaging rule in as much as it provides that for the purpose of rotation the period for which the auditor is holding office as auditor prior to commencement of the New Act shall be taken into account for calculating the period of 5 or 10 years. If this is implemented the existing small and medium sized Audit Firms will lose almost all their Audit Clients. They will cease to be auditors in almost all the companies where they have been auditors for 5 or 10 years during the next 3 years. This will put their Audit Staff, Articled Assistants and others in the most precarious position. Most of these firms will have to close down their Audit Practice. In some cases such firms will have to adopt unhealthy practice of canvassing for audit work. ICAI should strongly represent for amendment of this Draft Rule 10.4 (4) (i) so that it is specifically provided that period prior to enactment of section 139 is not counted for the limit of 5 or 10 years for reappointment of statutory auditors. It may be noted that Explanation below section 149
(11) dealing with Independent Directors who can hold office for 10 years specifically provides that the period prior to enactment of the section is not to be considered for counting the period of 10 years.
4. EAC Opinion:
Recognition of Distribution Network Acquired in a Business Acquisition as an Intangible Assets
Facts:
Company X (Company) was incorporated in February, 2011 as a wholly owned subsidiary of company Y. During the year 1st April, 2011 to 31st March, 2012, the company X acquired a business from company Z, an unrelated party, on a slump sale basis for an arm’s length consideration. Company Z is a leading manufacturer of kitchen appliances. The acquisition of business has led to company X becoming a leading player in this segment. As part of the acquisition, company X has acquired a large network of distributors, service centres, service points, retailers and manufacturing points.
The company operates through different channels, such as, the distributors, retailers, direct dealers, etc. More than 80% of the sales in the past were effected through the network of distributors (The distribution network).
The management of company X engaged a valuer to carry out the purchase price allocation. The intangible assets identified by the valuer for the purchase price allocation included brands and the distribution network. As per the valuation report, the distribution network was identified as an intangible asset and considering the time period over which the current distribution network was expected to contribute to the revenue of company X, the economic life of the distribution network was considered to be indefinite. However, the agreement appointing the distributor was valid till 31st March, 2012 and was renewable on mutual terms.
Query:
The querist has sought the opinion of the Expert Advisory Committee as to whether the distribution network acquired as part of the business acquisition in the case of the Company qualifies for recognition as an intangible asset as per AS 26.
EAC Opinion:
After considering paragraphs 6.1, 6.2 and 31(a) of AS 26 the Committee is of the view that for recognition, an intangible asset, even if acquired as part of a business purchase, should meet both the definition and recognition criteria specified in AS 26. The Committee notes from the Facts of the Case that the distribution network, being an arrangement for the marketing of the company’s product, is a non-monetary item without physical substance held for the purpose of supply of goods. Further, it appears from the Facts of the Case, that the existence of the distribution network is a factor for the acquisition of the business. So, while allocating the purchase consideration the valuer is able to identify the distribution network separately and also assign a value to it. This indicates that (i) the distribution network is identifiable; (ii) it is probable that future economic benefits attributable to the distribution network will flow to the company; and (iii) the cost of acquisition of the distribution network can be measured reliably.
Further, considering paragraphs 16 and 17 of AS 26 the Committee is of the view that the key terms of the distribution agreement mentioned by the querist indicate that the distribution network is controlled by the company at the time when it acquires the business, but the distribution agreement is valid only upto 31st March,2012 and the exchange (market) transactions for the same or similar distribution network are not available. In other words, there does not appear to be any control on distribution network either through legally enforceable rights or in any other way beyond 31st March,2012.
Hence, distribution network acquired as part of the business acquisition in the Company’s case qualifies for recognition as an intangible asset as per AS 26 only upto 31st March,2012.
[Refer page nos. 1038 – 1044 of C. A. Journal – January, 2014]
5. ICAI news:
(Note : Page Nos. given below are from C.A. Journal for January, 2014)
(i) Empanelment of CA Firms on C& A.G. Panel for the year 2014-15
Applications are invited online from the firms of Chartered Accountants who intend to be empanelled with the office of C & A.G. for appointment as auditors of Government Companies/Corporations for the year 2014-15. The format of application will be available on the website www.saiinida.gov.in from 1st January, 2014 to 15th February, 2014. (P. 1118)
Campus Placement Programme – February – March, 2014
The Committee for Members in Industry of the ICAI is organising Campus Placement Programme for newly qualified Chartered Accountants at various centers all over India. Campus Placement Programme will be organised at various centres viz. Ahmedabad, Bangalore, Bhubaneswar, Chandigarh, Chennai, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi and Pune from 17th February, 2014 to 15th March, 2014. (For details refer Page 1122)
