1 Disciplinary Cases
(i) ICAI vs. Ved Prakash Verma (2014) 48 Taxmann. com245 (Delhi)
In this case, the member (CA) was an auditor of a Company. He was in possession of the records of the Company. The Disciplinary Committee (DC) of ICAI found the member guilty of professional misconduct on charges of filing of Bogus Forms 2,32 etc., with ROC appointing certain persons as Directors of the Company. Further, it was found that he was taking undue interest in the company’s matters after he resigned as its Auditor. The Council accepted the report of the DC and referred the matter to the Delhi High Court with a recommendation that the name of the Member be removed for a period of six months.
On appeal, the Delhi High Court has held that the DC and the Council of ICAI was justified in holding the member guilty of professional misconduct. The Court also held that such findings by members of the DC and the Council had to be given weightage, as they are experts with regard to the matters pertaining to CA Profession and they knew the intricacies of the professional matters due to their knowledge and personal experience. Hence, the High Court held that the name of the member be removed from the membership of ICAI for a period of six months.
(ii) SATYAM CASE:
On p. 451 of C.A. Journal for October, 2014, the President of ICAI has stated that soon after the SATYAM SCAM was exposed, disciplinary action was initiated against the Statutory Auditors, CFO and Head of Internal Audit Department of the Company. The Disciplinary Committee (DC) found the CA Members guilty of professional misconduct and awarded maximum punishment of removal of their names from the Register of Members of ICAI permanently and also imposed a fine of Rs. 5 lakh on each of them. The Appellate Authority has decided all cases, except one, and has upheld the decision of the DC of ICAI.
Considering the importance of this case and other similar cases, the Council of the ICAI should publish the orders of the DC and the Appellate Authority in the C.A. Journal for the information of our Members. By such publication, the Members will become aware of the facts of such cases and the reasoning adopted by the DC to award punishment. This will also ensure that our members become cautious while performing their professional activities and do not make similar mistakes in the future.
(iii) Case of Shri SB.
(Reported in Disciplinary cases Vol.I Part II published by ICAI – Page 239 – 242).
In this case, the Member was the owner of a flat which he agreed to sell to the Varanasi Branch of the ICAI. He collected Rs. 5,75,000/- from the said Branch and agreed to get the flat transferred to the name of the Branch. There was a delay of more than 10 years in getting the transfer of the flat to the Branch. However, during this period, the Branch was in possession of the flat and carried on its activities from there without payment of any charges. In the Disciplinary proceedings, the DC noted as under:
(a) The member had explained the difficulties in registration of the flat in the name of the Branch.
(b) I n the meantime, the member had entered into an agreement with the Council of the ICAI that in view of the difficulty in getting the registration in the name of the Branch, the member should take possession of the flat and pay Rs. 11 lakh (Rs. 5,75,000/- advance plus interest) to the ICAI.
(c) The member had paid this amount to the ICAI.
In view of the above, the DC was of the opinion that since the member had paid the above amount with interest to ICAI there was no mala fide intention on the part of the member. Therefore, the DC held that the member was not guilty of professional or other misconduct.
2 Some Ethical Issues
The Ethical Standards Board of ICAI has given some answers to some Ethical Issues on Pages 462 – 464 of CA Journal for October, 2014. Some of these issues are as under:
(i) Issue No.1: A Chartered Accountants firm issued circulars to non-clients that a Chartered Accountant who was the former partner in-charge of Taxation of one of the largest accounting firms of the world had joined them as partner. Can they do it?
Response: Clause (6) of Part 1 of the First Schedule to the C.A. Act prohibits solicitation of clients or performing work either directly or indirectly by circular, advertisement, personal communication or interview or by any “other means”. The issuance of circular to persons who are not clients but may require services of a chartered accountant would be tantamount to advertisement, since it is solicitation of professional work by making roving enquiries. As per Clause (7) of Part I of the First Schedule, the usage of the words “one of the largest accounting firms of the world” and the specification of specialisation in “taxation” would also amount to advertisement and, thus, constitute professional misconduct.
(ii) Issue No.2: Whether the word “Chartered Accountants” and name of city after the name of the members of the Institute be mentioned in the articles contributed by such members and published in the Institute’s Journal?
Response: There is no restriction in the Code of Ethics for mentioning the word “Chartered Accountant” and also the name of the city in an article contributed by a member in the Institute’s Journal as well as in newspapers and other periodicals.
(iii) Issue No.3: Whether the information contained in the website of the Chartered Accountants and /or Chartered Accountants’ firms can be circulated on their own or through e-mail or by any other mode or technique?
Response: Sub-Para (3) & (4) of Para (m) under Clause (6) of Part 1 of the First Schedule to the C.A. Act, as appearing in the Code of Ethics, 2009 prescribes that the Chartered Accountants and/or Chartered Accountants’ firms should ensure that none of the information contained in the website be circulated on their own or through e-mail or by any other mode or technique except on a specific “pull” request. The Chartered Accountants and/or Chartered Accountants’ firm would ensure that their websites are run on a “pull” model and not a “push” model of the technology, to ensure that any person who wishes to locate the Chartered Accountants or Chartered Accountants’ firms would only have access to the information and the information should be provided only on the basis of specific “pull” request.
3 Financial Reporting Review Board (FRRB)
ICAI has published a “Study on Compliance of Financial Reporting Requirements”. Some of the observations from this publication relating to “Inventories” are given below for information of Members.
(i) Treatment of MODVAT Credit Receivable on Inputs (p. 18)
It was noticed that in Financial statement, while showing the item of Inventories, it has been stated that the Cost of Raw Materials includes amount of MODVAT as per past practice consistently followed.
Observation of FRRB
As per Para 34 of the Guidance Note on Accounting Treatment for Excise Duty, the Inventory of inputs should be valued at net of input duty. In other words, specified duty paid on inputs will not form part of the cost of inventories. The debit balance of MODVAT/CENVAT Credit Receivable (inputs) Account should be shown as an asset under the head “Advances”. Therefore, including MODVAT Credit in the Cost of Inventories is not in accordance with the ICAI Guidance Note.
(ii) Treatment of Excise Duty in Inventory valuation (p. 18 – 19)
In the Annual Reports of some companies, certain noncompliances were observed with respect to treatment of Excise Duty in Inventory valuation as under
In respect of stocks lying in factory, in respect of which State Excise Duty is not determinable as the rates vary depending on places from where dis-patches are made, the excise duty is accounted on clearance of such goods. This method of accounting has no impact on results of the year.
Excise Duty has been accounted on the basis of those goods which are cleared on payment of Excise Duty.
The Company has not provided for Excise Duty on closing stock of Finished Goods and accordingly, the said amount has not been included in the valuation of Finished Goods.
No provision is made for estimated liability on unsold finished goods lying in the factory premises on the reporting date.
Observation of FRRB
Referring to Para 7 of AS-2 (Valuation of Inventories) and Para 18 of the Guidance Note on Accounting Treatment for Excise Duty FRRB has observed as under:
The liability for excise duty arises when the goods are manufactured. Hence, it is necessary to create a provision for liability of unpaid excise duty on stock lying in factory or bonded warehouse.
Therefore, liability for Excise Duty should be provided when the goods are manufactured rather than when the same is paid or at the time of clearance of goods from the factory/bonded ware house.
For determining cost of finished goods in stock on reporting date, the amount of Unpaid Excise Duty should be included in the valuation of such goods.
Therefore, in cases of companies whose Annual Reports were reviewed as stated above, the accounting policies followed for valuation of invento-ries of finished goods were not as per AS-2 as well as the above Guidance Note.
4. EAC Opinion:
Accounting Treatment of Raw materials sent to Manu-facturer by the Company for getting Finished Product
Facts
A Government Company is engaged in the business of transmission of power from the generating units to different State Electricity Boards (SEBs) through its transmission network. The company owns and operates more than 90% of India’s inter-state power transmission system (ISTS). It operates a network of 96,229 circuit kilometers of interstate transmission line, 158 EHV AC and HVDC sub stations. The company intends to continue rapidly increasing its capacity to maintain and grow its leadership position and adding more transmission lines and substations. For the construction of transmission lines, one of the ma-jor material is the conductor. The company is not manu-facturing the conductor. It is being purchased from the various manufacturers in India. Aluminium is the main raw material to manufacture the conductor.
The Company purchases aluminium from an aluminium manufacturer. The aluminium is being supplied directly to the manufacturer of conductor on endorsement in favour of manufacturer by the company. The company also raises the invoice for sale to the conductor manufacturer. The company does not collect any payment from the manufacturer of conductor at this stage against the aluminium supplied and shows it as trade receivable in its books.
The company has stated that the manufacturer, after processing aluminium along with some other raw materials and consumables (purchased by manufacturer at its own cost) like steel, wire, grease etc., manufactures the conductor and supplies it to the company and raises the invoice with full value of conductor as per the contract entered with the company. The company pays the invoice amount after deducting the cost of aluminium already supplied to the manufacturer for the conductor.
Query:
On the basis of the above, the opinion of the EAC is sought by the company on the question as to whether procurement of aluminium from the supplier be accounted for as ‘purchase of goods’ and aluminium given to the manufacturer may be accounted for as ‘sale of goods’ in the statement of profit and loss, or procurement of aluminium may be accounted for as input raw material as ‘construction stores’ in the balance sheet. Additional cost charged by the manufacturer for conversion of aluminium into conductor may be included under ‘construction stores’ as and when charged or simply as contract cost as and when incurred.
Opinion:
The Committee notes that the basic issue raised by the querist is whether the supply of raw material (viz. aluminium rod) by the company to the manufacturer for manu-facturing conductors to be supplied back to the company should be regarded as sale by the company. In other words, whether the supply of raw material to the manufacturer can be considered as an independent transaction from the transaction of purchase of the conductors from the manufacturer, given the fact that such conductors would be manufactured only by using the raw material supplied by the company.
The Committee noted that in the case of the Company, the aluminium rods are procured by the company and supplied to the manufacturer of conductor for conversion into finished product, i.e., the conductor.
The Committee after considering substance over form is of the opinion that transactions and events are account-ed for and presented in accordance with their substance i.e. the economic reality of events and transactions and not merely in accordance with their legal from. In other words, it is the ‘economic reality’ that is important in ac-counting and not only the ‘legal reality’.
From the Facts of the Case, the Committee notes that al-though the legal form of the transaction is that the company is raising invoice on the manufacturer has also taken an insurance policy in its name for the goods supplied to it, the substance of the transaction is that the company still retains effective control on the aluminium rods transferred to the manufacturer and significant risks and rewards relating to ownership of raw material (aluminium) are not transferred to the manufacturer.
Therefore, in view of the Committee, there is no sale to the manufacturer. In fact, the company pays to the manufacturer only for conversion of aluminum rod into con-ductor. Accordingly, the Committee is of the view that no revenue from sales should be recognised on dispatch of raw materials to the manufacturer. Rather, the company should treat them as its own inventory and should ac-count for it accordingly. The company should also make adequate disclosures so as to clearly disclose that such inventory is lying in the premises of the manufacturer for finished product, conductor.
[Pl. Refer page nos. 492 to 498 of C. A. Journal – October, 2014]
5. ICAI News
(Note: Page Nos. given below are from CA Journal for October, 2014)
C.A. Regulations
Draft Notification dated 10.09.2014 published on P. 567 – 568 proposes to amend CA Regulations 28E, 39, 39A and 48. The same will come into force on the date to be notified hereafter.
CA Intermediate (IPC) MAY/JUNE 2014 Examina-tion Results (p. 573)
Our Greetings and best wishes to all the above three and other candidates who have cleared the IPC Examination.
