Shrikrishna (S) Arjun, Congrats. You got possession of new flat. When are you shifting?
Arjun (A) I will shift in two or three weeks. That way I got possession in March itself. But children’s exams were there.
S – Ok. But it is far away from the city. That area has just started developing. A – Yes. But it is a spacious flat. That way, in Mahabharata, we had stayed even in exile. I don’t mind staying away from city.
S – There also, rates may be too high. How did you manage the funds? You are always crying that there is not much earning in the profession.
A – It is true. You can’t earn much unless you compromise on principles. Anyway, I took housing loan. Then I also took some gold loan against Subhadra’s ornaments. But now the gold rates have fallen. They may demand additional security. Still there was a shortfall. Then I borrowed some amounts from 2-3 clients. 5 to 10 lakh each.
S – Very good. But how will you repay all these loans? EMI will be pretty high.
A – See, I am giving my old flat on leave and licence. That rental will come. And clients I will adjust against their audit fees. As it is, they never pay my fees in time.
S – Oh! You do their audit?
A – Yes. How can I repay loans in lakhs from their meagre tax fees? Even audit fees are not very high. But there are 3-4 concerns in each group. So somehow I will make it.
S – But how can you do their audit?
A – Why? What happened? Why can’t I do their audits? They are not my relatives. After you told me once, I gave up the audits of Bhima’s business.
S – Oh dear Arjuna, you cannot be the auditor when you are indebted to a client. There are the Council’s guidelines.
A – When did the Council issue these guidelines?
S – They were very old. But on 8th of August, 2008, the Council issued them afresh.
A – What do they say?
S – They cover many topics. Chapter X says you cannot accept appointment as auditor of a concern if you are indebted to it for more than Rs.10,000/-.
A – Oh My God! Then I will shift these loans to my partner’s name, and show that I borrowed from my partner! So simple!
S – No Arjuna. Even your partner cannot be a borrower of that concern.
A – Just Rs.10,000/-? Such a ridiculous limit!
S – Council’s limit is Rs.10,000/-. But in Companies Act, it was just Rs.1,000/-. They may increase it in the new Law.
A – Then, what I will do is that I will ask my friend to sign these audits. Actual work I will do myself. He will just sign.
S – Is he close to you?
A – Of course! He is a guarantor to my loan.
S – Then he also cannot accept the audit. If you are guarantor to a borrower of a concern, then also you can’t accept that audit.
A – This is too much!
S – See, if you are in debt or under obligation of someone, you are likely to compromise with your duties as an auditor. You may tend to accommodate him.
A – Then I will get another friend to sign it. He has given his property as a collateral security for my loan.
S – Again a problem! An auditor to be independent, should not have provided any security for any loan given by that concern to any third person.
A – Two of the concerns are private limited companies. You mean, the limit is then just Rs.1,000/-?
S – Yes. Then the limits fixed in the relevant statute will apply.
A – O God! Serious problem! These clients are so useless. They are thoroughly disorganised. They don’t maintain their accounts properly. I have to literally spoon feed them! Their record is in a complete mess! Somehow, I have been signing. But I cannot expose it to a stranger.
S – Arjun; you are cursing a client who has lent you money when you needed it.
A – That’s true. But he is thoroughly indisciplined. I have always overlooked the blunders in his accounts and accommodated him.
S – Shall I ask you one thing? Do you keep your own accounts properly? And up-to-date?
A – Ah! But I adjust it myself at the year end, while filing my return.
S – Then remember. Chapter V of the Council guidelines says a practicing CA shall maintain and keep proper books of account! – Cashbook, ledger, etc. It is a disgrace to you that the Council had to issue such a guideline. Please introspect my dear! Are you disciplined yourself?
A – Let it be. Tell me about that indebtedness again. I have taken a housing loan from the Dadar branch of a bank. I am getting the audit of Thane branch of the same bank. Then what is the position?
S – Still you can’t accept. The bank as a whole is one concern. You are a borrower of the Bank; and which branch you are auditing is immaterial.
A – Oh. This is very harsh!
S – This is to ensure auditor’s independence. And remember, it is not restricted to mere statutory audit but covers all audits.
A – Actually, I am giving my old flat on leave and license basis to a bank and I will be taking a security deposit of Rs. 1 lakh. I think, that should not be a problem. It is not a loan as such. Can I then do that bank’s audit?
S – No dear. The word used is indebtedness. Security deposit is also a debt.
A – I must caution my friends. I am sure, they are not aware of all this. Tell me, can we take advance fees? It is a dream for a CA; as they don’t pay until the next year’s audit starts. But hypothetically —
S – Taking advance fees is also indebtedness.
A – Hey Bhagwan, good that you made me aware well in time. I am really indebted to you.
The above dialogue is with reference to Chapter V and Chapter X of the Council General Guidelines, 2008 Issued On 8th August, 2008 which read as under:-
Chapter V: Maintenance of books of account :
A member of the Institute in practice or the firm of Chartered Accountants of which he is a partner, shall maintain and keep in respect of his/its professional practice, proper books of account including the following:-
(i) a Cash Book
(ii) a Ledger Chapter X: Appointment of an auditor when he is indebted to a concern.
A member of the Institute in practice or a partner of a firm in practice or a firm shall not accept appointment as auditor of a concern while indebted to the concern or given any guarantee or provided any security in connection with the indebtedness of any third person to the concern, for limits fixed in the statute and in other cases for amount exceeding Rs.10,000/-.
Further, readers may also refer pages 313 to 323 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).
