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(Negligence)
Shrikrishna (S) — Arjun, I met your friend the other day. The one whom you introduced to me last Sunday.
Arjun (A) —Oh! He came to my office yesterday and was very much under tension.
S — Why? Any love letter from your Institute?
A — Yes! How do you know?
S — I guessed it. He was enquiring about some formalities under the Company Law, asking me how serious it is! I could make out that he was worried about it.
A — Actually, he has a client which is a private limited company. There was a dispute between two groups of shareholders and directors.
S — That is very common. When two persons come together for business, one should take it for granted that they are bound to quarrel between themselves one day or the other.
A — You said it! Nowadays, no relation is cordial forever! It is bound to break.
S — Not even matrimonial! Ha Ha Ha! We are in kaliyug. But what happened to that company?
A — The two groups separated. The outgoing group had some loans given to the company. They started demanding it back.
S— But how was your CA friend involved?
A — The continuing group played a trick. They showed a backdated allotment of shares to the outgoing shareholders at a very high premium; and loan was adjusted.
S — Just to ensure that their shareholding does not become a majority holding. Right?
A — Absolutely. And they got the return of allotment prepared in Form No. 2. The form was certified as correct by this CA friend of mine; and uploaded to ROC!
S — Oh! But didn’t he verify the requirements?
A — He checked things like the resolution in the Board meeting, entries in the books of account and so on.
S— But did not check the share application form. Correct?
A — Yes. And I tell you Lord, in a private limited company, no one is really bothered about share application form. Everything goes on good faith. Oral understanding.
S — But when the allotment is backdated, that too at a high premium and especially in the name of a disputing group, your friend should have been more cautious.
A — The real story is that the dispute between the two groups has gone to the CLB and the CLB also has pointed out the same flaw. All other things may be there; but the basic factor is the application or consent of the allotttees.
S — Obviously. Such small things have great importance. Actually, you people tend to take it lightly, thinking that it is an internal document, not required to be submitted any where!
A — You are right. Previously, none of us used to take any appointment letter for audit assignments of small organisations. But now, for filing the forms to the ROC, we have started taking it. It’s a good thing, we now realise!
S — Actually, you feel irritated when the Regulators ask you to upload more and more things. But that brings discipline in corporate functioning; and indirectly can protect you as auditor.
A — Same is the case with Board meetings. They are just shown to have been held on paper; and minutes are written. But in reality, there are no notices on record, no signatures of attendance, no circulation of minutes.
S — Everything is doctored later on! But it is dangerous to leave such loose ends. I understand the practical realities; but one has to cover them up by timely paper work. Otherwise, it could be fatal.
A — Till the time everything is smoothly going on, nobody bothers. But once there are disputes or when any third party enters – like when you are selling out a company, all these things come to surface.
S— Especially in the case of your friend, he should have been on the guard since he was obviously aware of the dispute. It should trigger suspicion.
A — Fortunately, at the time of separation, there was a Memorandum of Understanding signed by both the parties that the unsecured loans would be covered by allotment of shares at a premium.
S— Good! Something to fall back on. So what did CLB say on this?
A — The complainant is disowning his signature on MOU. Now it is with handwriting expert; and disputed in court.
S — It is a good lesson to all of you; even the certificates required for your tax audit are not actually taken from the management.
A — True! We just say –‘Yes- certificate is obtained’. But in reality ………
S — So the Regulator is actually helping you by framing a specific question in form 3CD but you take it lightly. Many times clients disown any such confirmation given by them if it is not taken in writing.
A — I agree. Henceforth, I will also start insisting on such documents. My poor friend is being held guilty for negligence. We should, henceforth, also verify the signatures.
S— And it also brings disrepute to the profession. It is a lack of due diligence.
A — Lord! Now, you only save my friend.
S— You know that God helps only the diligent! Now, leave it to Destiny.
Don’t take things for granted.
Om shanti !!!!!
