Gross negligence – Clause 7 of Part I of Second Schedule (contd.)
Series 4
Shrikrishna (S) – My dear Arjuna, you are looking very tired today. It seems the 30th September fever is on.
Arjuna (A)– I have lost my sleep! Anything can happen, our profession is so vulnerable!
S – I agree. Your Institute’s motto is ya esha suptesju jagarti – You have to be constantly awake.
A – That refers to mental awakening, but I have even lost physical sleep.
S – Why? You only need to be diligent—and vigilant. Is it that difficult?
A – In the last few meetings, you have been telling me about due diligence and gross negligence. But what exactly should one do? Tell me specific things…
S – In the eleventh chapter of the Geeta, I showed you my ‘vishwa-roop’ – no end to the forms in which I manifest myself. I mean the forms in which I appear before you. In the same way, there cannot be an exhaustive list of instances of negligence!
A – I understand that, but today I heard a story— so alarming, I don’t know whether it is negligence or misfortune! It is beyond imagination.
S – What did you hear?
A – What to tell you. The story is like a nightmare!
S – Arjuna. In this month of September, you don’t have much time. So, be quick. What happened?
A – My friend was the auditor of a company for six years. He left the audit 3 years back. Big Company. Turnover 600 crores!
S – What was its business?
A – It had some mines in Bihar. Suddenly, he received a complaint filed by a bank.
S – What was it about?
A – That big company had turned into an NPA. And the auditor was being made a scapegoat.
S – This is very common. It is strange that the auditor is blamed for such things, as if the company’s performance depends on the auditor! But that auditor must have committed some blunder.
A – Actually, the company’s corporate office was in Mumbai; the auditor says he used to do 100% audit.
S – But did he ever visit the business site?
A – Of course! During six years, he visited the mines on two to three occasions.
S – Then what is the problem? Why did he give up the audit?
A – There was some issue about his fees.
S – Ok. But what is the problem? He has to simply show how he conducted the audit. He has to show working papers, audit programme, noting, management representation, etc.
A – All that, he has done. He has taken everything on record. Stock statements, bank statements, bank’s certificates, copies of other important documents.
S – Then he need not worry. If the business has failed, what can he do?
A – Actually, the management was thinking of an IPO!
S – Very good. At least common investors will be saved.
A – But the real story is that there was a CBI raid on the company. The auditor was also summoned, and interrogated.
S – This is also common. But the auditor has to answer it without fear if he has done the job properly.
A – The shocking revelation was that the company did not have any real business at all! Everything was fake and fabricated. Bank statements, correspondence, banks certificates, contracts, licences, bills, invoices, vouchers and practically all records were false!
S – But what about those mines?
A – God alone knows. They showed some mines. What does an auditor understand about mines? When we go for stock taking, we are really not capable of understanding anything. It is a futile exercise. Even about machinery, what do we know?
S – Strange. Really intelligent, what massive planning!
A – I feel banks should have known this earlier. If there are no business transactions through a bank, they should know immediately. Yet they keep on renewing the facilities.
S – Actually, that underlines the importance of third-party evidence. Middle-level audit firms avoid writing directly to debtors, bankers, suppliers, and other concerned parties. They don’t verify records of other laws—like VAT, excise, labour laws.
A – But a fraudster can produce any fabricated documents.
S – Leave this extreme case alone. The fact remains that third party evidence can reveal so many things that are important for audit.
A – The moral of the story is that we should suspect everything. There is no use acting merely as a watchdog. We should becomebloodhounds only.
S – Times have changed. Bad elements are becoming stronger. Proportion of truth in every walk of like is reducing. This calls for ‘professional scepticism’ —don’t act too much in good faith.
A – The story is a real eye-opener. We must train our staff, try to follow all that we learnt in audit books, be more assertive with clients.
S – You said it! Ganesh festival is approaching. The Lord will save you only if you are alert and diligent. God bless you.
Om Shanti !
The above dialogue between Shri Krishna and Arjuna is a continuation of earlier dialogues published in BCA Journals of May 2013 and June 2013. It deals with the terminologies ‘gross negligence’ and ‘lack of due diligence’ used in Clause (7) of Part I of Second Schedule. This is the most important and serious charge of misconduct. Discussion on this clause will continue.
