ICAI and its members

fiogf49gjkf0d

1. Disciplinary Cases:

The Disciplinary Committee (DC) of ICAI has decided that some cases have been awarded punishment for professional or other misconduct. These cases are reported in the publication of ICAI “Disciplinary Cases” Vol-I. The Page Nos. given below are from this Book. The names of members are not given in order to maintain confidentiality.

(i) Case of Mr. O. P. P.

In this case the member had obtained a Tax Audit assignment of 13 Societies of Sahakari Banks in a particular District in the name of M/s RRCO, a C. A. Firm in which he was a partner. This was without informing the other partners of the firm. He prepared the letter heads of the Firm on his computer and prepared the seal of his firm. He submitted the Tax Audit Reports, using the above letter heads and seal etc. and affixed the signature of his partner on Audit Reports and related documents.

The above bogus Audit Reports and related documents were submitted to the Bank and the Income-tax Department. He collected the fees from the Bank and issued receipts. The amount was also collected by him personally without informing the Firm and other partners.

At the time of hearing before the D.C. the member did not appear. He also did not submit a written statement. The D.C., after considering the records held him guilty of professional misconduct under Clause (2) of Part IV of First Schedule to C. A. Act. On consideration of the facts of the case D.C. awarded punishment by way of Removal of the Name of the Member for a period of 3 months (P. 89-95 Vol. I Part I).

(ii) Case of Mr. J. L. K.

In this case the ROC informed ICAI that the Inspection u/s. 209A of the Companies Act was carried out in the case of R. L. Ltd. During the course of this inspection it was noticed that the member (Statutory Auditor) had failed to point out the following violations of the Companies Act:

(a) He did not report about Impairment of Investments;

(b) He did not report about non-provision of loss on Investment.

At the time of hearing before the D.C. the member stated that he had made an application u/s. 621A of the Companies Act for compounding the offence before the R.O.C. He also made submissions and tried to explain that AS-26 was not applicable in this case. However, on further questioning by the D.C., the member admitted his guilt and requested that D.C. may take a lenient view in the matter.

On consideration of the information received from the R.O.C. and submissions made by the Member, the D.C. held that the Member was guilty of professional misconduct under Clause (7) and (9) of Part 1 of the Second Schedule to the C. A. Act. With regards to the facts of the case the D.C. awarded punishment by way of “Reprimand” to the Member. (P. 96-103. Vol. I Part I).

(iii) Case of Mr. R. K. K.

In this case the Member was a full-time employment of CB Ltd. Simultaneously, he was also holding a Certificate of Practice (COP) and was carrying on the C. A. profession in the name of R. K. & Co. The Complainant alleged that during the course of his C. A. practice, he was also carrying on the Attest Function. This was not permitted under the C. A. Act and Regulations.

Before the D.C., the Complainant did not attend. The Member attended and submitted that it was his mistake which happened inadvertently. As soon as he came to know that he cannot do the attestation work under Regulation 190A he stopped doing attestation work.

The D.C. noted that the Member had taken permission of the Institute to hold COP while in fulltime employment. Therefore, it was his mistake to have done attestation work. However, the D.C. accepted the explanation of the Member that the said attestation work was undertaken due to the ignorance of the amendment in Regulation 190A and no mala fide intention on his part was proved. In view of this, the D.C. gave the benefit of doubt to the Member and held him Not Guilty of Professional Misconduct. (P. 33 – 36 Vol. I Part II).

2. Some Ethical Issues:

The Ethical Standards Board of ICAI has given answers to some Ethical Issues on Pages 1325-1326 of C. A. Journal for March, 2014. Some of these issues are as under:

(i) Issue No: 1

Whether a statutory auditor is eligible for appointment u/s. 217(6) of the Companies Act with the duty of seeing that the provisions of s/s. (1) to (3) of section 217 are complied with, particularly with regard to “Directors Responsibility Statement?”

The Companies Act, 1956 requires the Directors to prepare the Directors’ Responsibility statement regarding the fulfillment of their responsibilities to prepare the financial statements of the company in accordance with the applicable accounting standards and other generally accepted accounting policies and principles. The auditors’ responsibility is to express opinion on the financial statements, based on their audit. In view of the above, the question of asking the statutory auditor to certify the Directors’ Responsibility Statement does not arise.

(ii) Issue No: 2

Whether a member in practice will be liable in a case where he was alleged to have signed two balance sheets on two different dates for the same financial year, the first one with a clean report and the second one with a qualified report?

The action of the Chartered Accountant in signing the two Balance Sheets on two different dates for the same financial year will constitute as a professional misconduct under Clause (7) of Part I of Second Schedule to the C. A. Act which states that a member in practice shall be deemed to be guilty of professional misconduct, if he is grossly negligent in the conduct of his professional duties.

(iii) Issue No: 3

Can a Chartered Accountant receive his professional fees in advance partly or in full?

There is no bar in the C. A. Act or in the C. A. Regulations as well as Code of Ethics in taking the fees in advance.

3. EAC Opinion:

The consolidation of ESOP Trust in the stand-alone financial statements, the treatment of investment in their own shares for EPS calculation in the stand-alone financial statements and the treatment of ESOP Trust in the financial statements for tax audit purposes:

Facts:
A listed Company “A” Ltd., has the statutory year ending on 31st December. In the year 2011, the company started the new Employee Stock Option (“ESOP”) Scheme, whereby, the employees would be granted options (directly linked to individual, team and company performance) at an exercise price equal to the face value of the share (currently at INR 5). The company has created a Trust for this purpose, as the “ESOP Trust” or “ESOPT”. The ESOP Trust obtains its fund through a loan from the company, which it utilises for the purchase of the company’s shares. It receives shares from the company by way of fresh allotment. The ESOP Trust then allocate shares to employees for exercise of their right in exchange of cash and repays its loans.

The Company has drawn attention to Paragraph 45 of the “Guidance Note on Accounting for Employee Share based Payments” issued by the ICAI which states that as per the Accounting Standard (AS)- 21 “Consolidated Financial Statements,” the Trust created for the purpose of administrating the employee sharebased compensation should not be considered for consolidation. Therefore, the consolidation of gratuity trust, provident fund trust, etc., is not required. While Clause 22A.1 of SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 requires that the accounts of the Trust should be included in the stand-alone financial statements of the company as if all the transactions of the Trust are those of the company. Therefore, the loan given by the company to the ESOPT will not appear in the company’s stand alone financial statements. Further, the shares held by the trust at the year end, the face
value of the shares should be shown as a deduction from the share capital and excess amount paid, over and above the face value, should be shown as deduction from security premium with details explaining the facts.

Further, the company has to prepare a separate
financial statement u/s. 44AB of the Income -tax Act,
1961 for the year ended 31st March. The company
being listed has also to follow the SEBI Guidelines.
Therefore, while preparing the annual accounts it
will follow the SEBI Guidelines and, while preparing
financial statements for 31st March, it will follow ICAI
Guidance Note

On the basis of above facts, the company has sought
the opinion of the EAC on the issues (i) whether, in
the stand-alone financial statements of the company
for the year ended 31st December, the loan given by
the company to ESOPT should be shown as “Loans
to ESOPT” under “Assets” or operations of the
ESOPT should be included in the stand-alone financial
statements of company. If the operations of ESOPT
are included in stand-alone financial statements
of the company, then, how to disclose shares of
the company held by ESOPT? (ii) In the stand-alone
financial statements of company, for the purpose of
calculating basic and diluted earnings per share, how
do we consider investment in their own shares? (iii) Will
the above treatment also be followed in the financial
statements prepared u/s. 44AB of the Income-tax Act,
1961 for the year 31st March, i.e., the company requires
to follow the requirements of the ICAI’s Guidance
Note or the SEBI Guidelines?

The Committee is of the view that, in case of listed
companies, if there are certain differences between
“ the Guidance Note “ issued by ICAI and the “SEBI
Guidelines” then to what extent will the requirement
of the SEBI Guidelines differ from the Guidance Note,
the SEBI Guidelines will prevail?

Though the ESOPT itself may prepare its own financial
statements, e.g., to meet the regulatory requirements,
the stand-alone financial statements of the company
should portray the picture as if the company itself
is administrating the ESOP Scheme The Committee
is of the view that this has two reasons viz; (i) the
company should recognise any expense arising from
the employee share based payment plans , and the
operations of the ESOPT are included in the standalone
financial statements of the company in so far
as the ESOP is concerned. In such a situation, in the
stand-alone financial statements of the company, the
“Loans to ESOPT” will not appear at all, i.e., loans to
ESOPT in the books of company should be eliminated
against the loan from the company as appearing in the
books of Trust. (ii) The amount representing the grant
date, intrinsic value of the options yet to be exercised
by the employees, will be added to the “Investment in
shares of the company” and the sum may be described
as “Shares held in trust for employees under ESOP
Scheme”. This should be presented as a deduction
from the share capital to the extent of face value
of the shares and Securities Premium to the extent
of amount exceeding the face value of shares. The
company should give a suitable note in the Notes to
Accounts to explain the nature of this deduction.

As per the facts of the case, the Committee notes, that
the employees would be granted stock options which
are directly linked to individual, team and company
performance. Therefore, the Committee is of the view
that such performance base employee stock options
should be treated as contingently issuable equity
shares under AS 20 and the principles enunciated in
AS 20 in respect of options and contingently issuable
equity shares are equally applicable for shares allotted
to ESOPT which, in turn, will be allotted in the future
to employees on exercising their options. For the
purpose of calculating basic EPS in the stand-alone
financial statements of the company, the shares
allotted to the ESOPT should be included in the shares
outstanding, only when the employees have exercised
their right to obtain shares, after fulfilling the requisite
vesting conditions. The shares allotted to the ESOPT
are treated as potential equity shares for the whole
or part of a particular reporting period depending on
the conditions. If the requisite-vesting conditions are
not fulfilled, the shares allotted to the ESOPT against
granted options should be considered for calculating
diluted earnings per share. When the shares are
allotted to the ESCOPT are considered for calculation
of basic and diluted EPS in both the situations, they are
weighted.

Lastly, the Committee is of the view that, for the
accounting year, the financial statements should be
in accordance with the SEBI Guidelines, while the
financial statements for the financial year should be
in accordance with the Guidance Note of ICAI. The
financial statements for the financial year should
adopt the same accounting policies and accounting
standards that have been adopted for preparing the
annual accounts that were laid at the AGM.

Shri K. Raghu (Bangalore) has been elected as our
President and Shri Manoj Fadnis (Indore) has been
elected as our Vice-President for 2014-15 on 12th
February, 2014. We convey our greetings and best
wishes to both for a successful term of office.

4 New Standing Committees and 36 other Committees
of the Council of ICAI have been constituted as per
details on Pages 1404-1407 of the March, 2014 C. A.
Journal.

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

Reference is invited for Announcement on Page 1414-
1416. On Pages 1415-1416 the following amendment is
suggested.

“Report on Other Legal and Regulatory Requirements
As required by Section 227(3) of the Act, we
report that:

(a) ………………………………………..

(b) …………………………………………

(c) …………………………………………

(d) In our opinion, the Balance Sheet, the Statement
of Profit and Loss, and the Cash Flow Statement
comply with the Accounting Standards notified under
the Companies Act, 1956 read with the General Circular
15/2013 dated 13th September ,2013 of the Ministry
of Corporate Affairs in respect of section 133 of the
Companies Act, 2013.”

Reference is invited to the following Announcement
on Page 1422.

Reference is invited to Announcement on Page
1424. As members are aware Para 46-46A has been
introduced in AS-11 applicable to Companies. Now ICAI
has announced that these Para 46 and 46A shall be
deemed to be introduced in AS 11 as applicable to noncorporates
also.

The following New Branches of ICAI have been opened
on 10-02-2014 (P. 1419-20)

(a) Bharatpur (CIRC) (b) Kurnool (SIRC)(c)
Ranigunj (EIRC)

(vi) New Publications of ICAI:

(a) Educational Material on Indian Accounting
Standard (Ind AS 7) Statement of Cash Flows
(P.1425)

(b) Technical Guide on Internal Audit of
Petrochemical Industry (P. 1425)

(c) Technical Guide on Internal Audit of
Beverages Industry (P. 1426)

(d) Guidance Note on Audit of Banks (P. 1429)
(vii) Revision in Fee of Expert Advisory
Committee:The Fees to be paid for obtaining
Opinion of Expert Advisory Committee have
been increased. Revised Fees w.e.f. 01-04-2014
will be as under: (P.1429)

(a) Listed Companies Rs. 75,000/-

(b) Any Enterprise having
Annual Turnover exceeding Rs. 75,000/-
Rs. 50 Cr.

(c) Any other case Rs. 37,500/-

Council of ICAI has
increased the limit on Tax Audit assignments u/s.
44AB of the Income-tax Act from 45 to 60 w.e.f 01-
04-2014. This increased limit will apply to Tax Audits
to be conducted during F.Y: 2014-15 and onwards.