By P. N. Shah
H. N. Motiwalla | Chartered Accountants
ICAI and Its Members1.
Disciplinary Case :
In the case of ICAI V/s Shri K.K. Gupta, a complaint was
filed by the RHO Welfare Association against the member. It was alleged that the
member was grossly negligent in the conduct of the audit of books of the
association on the following counts:
(i) The member had written the books of accounts for the
two years under audit and also audited and given audit reports for these two
years. This was against the code of conduct of ICAI.
(ii) In spite of several requests, he did not return the
books of accounts, vouchers, statements, etc., to the association.
(iii) The member did not give effect to various decisions
of the General Body of the Association while preparing and auditing the
accounts.
(iv) When the association managed to collect the books of
accounts for one of the years, it was noticed that some of the balances, as
per the accounts, did not tally with the figures in the audited accounts.
(v) The member did not come forward to explain the above
discrepancies in the accounts and audited statements.
(vi) No provision was made in the accounts for outstanding
liabilities for salaries, wages, electric charges, water charges, etc., and
the audit report was not qualified for this non-provision.
The Disciplinary Committee, after examining the evidence,
held that the member was grossly negligent in the performance of his
professional duties and was also guilty of other misconduct. He had not complied
with the requirements of the Code of Conduct. The council accepted this decision
and recommended to the High Court that the name of the member be removed from
the Register of Members for one year.
The Delhi High Court has held that the member was guilty of
professional misconduct and other misconduct and confirmed that his name be
removed from the Register of Members for a period of one year.
(Refer P. 1065
of the C.A. Journal for January, 2010)
2.
Some Ethical Issues :
The Ethical Standards Committee of the ICAI has clarified
about the publication of a CA’s expertise, specialisation and knowledge in any
particular field when he is appointed as a director on the Board of Directors of
a company as hereunder:
The Council’s attention has been drawn to the fact that more
and more companies are appointing chartered accountants as directors on their
boards. The prospectus or public announcements issued by these companies often
publish descriptions about the chartered accountant’s expertise, specialization
and knowledge in any particular filed or add appellations or adjectives to their
names. Attention of the members in this context is invited to the provisions of
Clause (6) and (7) of Part I of the First Schedule to the CA Act.
In order that the inclusion of the name of a member of the
institute in the prospectus or public announcements or other public
communications issued by the company in which the member is a director, does not
contravene the above noted provisions, it is necessary that members take
necessary steps to ensure that such prospectus or public announcements or public
communications do not advertise his professional attainments; and also that such
prospectus or public announcements or public communications do not directly or
indirectly amount to solicitation of clients for professional work by the
member. While it may be difficult to lay down a rigid rule in this respect,
members must use their good judgement, depending on the facts and circumstances
of each case, to ensure that the above noted provisions are complied with both
in letter and spirit.
It is advisable for a member that as soon as he is appointed
as a director on the board of a company, he should specifically invite the
attention of the management of the company to the aforesaid provisions and
should request that before any such prospectus or public announcements or public
communication mentioning the name of the member concerned is issued, the
material pertaining to the member concerned should, as far as is practicable, be
approved by him.
(Refer P.1052 of the C.A. Journal for January, 2010)
3.
Some instances of non-compliance with reporting obligations
The Financial Reporting Review Board (FRRB) has, during their
review of some published accounts, come across the following instances of common
non-compliance of reporting obligations by our members. These are published on
P. 1158 – 1160
of the C.A. Journal of January, 2010.
(i) AS – 22 – Certain enterprises disclose advance income
tax paid (current tax asset) and provision for income tax (current tax
liability) separately in their balance sheets, i.e., they do not offset the
amounts. This is contrary to AS 22, Accounting for Taxes on Income. Paragraph
27 of AS 22 requires that an enterprise should offset assets and liabilities
representing current tax if the enterprise:
(a) Has a legally enforceable right to set off the
recognised amounts ; and
(b) Intends to settle the asset and the liability on a net
basis.
(ii) AS – 22 – It has been observed in the case of a few
enterprises that the balances of unabsorbed depreciation and/or losses are
being carried forward under tax law, due to which the deferred tax asset has
been recognised in the financial statements. However, it omits to disclose the
nature of evidence that supports the recognition of such deferred tax assets
with virtual certainty.
(iii) As – 22 – In case of the financial statements of a
few enterprises, it is observed that it has disclosed only the opening
balance, addition during the year and the closing balance of the deferred tax
assets and liabilities,. Also thereis no disclosure of the break-up of the
deferred tax assets and liabilities into their major components which is not
as per the requirements of AS 22.
(iv) Schedule VI to the Companies Act
a) In case of the financial statements of a few enterprises, it was noted that the opening balance of certain specified reserves do not tally with their closing balance of the last year. Neither the notes to accounts nor the schedules contain any information regarding the
differences in such balances. It may be noted that pursuant to the instructions given in Part I of Schedule VI to the Companies Act, 1956, under the head “Liabilities”, the additions and deductions since the last balance sheet are to be shown under each of the specified heads. Therefore, such differences should not arise in the financial statements.
Paragraph (xi) of Part II of Schedule VI of the Companies Act, 1956 requires that the amount of income tax deducted from the gross income from investments and interests should be disclosed. Some enterprises in their financial statements do not disclose the amount of income tax deducted from the gross income from investment and the interest. This is not in compliance with the requirements of Schedule VI of the Companies Act, 1956.
Paras 10 and 11 of the above note relate to some discrepancies noticed in audit reports on financial statements. The requirements, AAS28
(The Auditors’ Report on Financial Statements), have been explained.
Paras 12 to 15 of the above note relate to some discrepancies noticed in reporting under CARO
– 2003.
Members are requested to take note of these discrepancies and ensure that they are not repeated.
4. Corporate Governance Task Force Report
The CII had appointed a “Task Force” under the chairmanship of Shri Naresh Chandra on Corporate Governance Code. The Task Force has submitted its draft report to the Corporate Affairs Ministry. The ministry has published this report for the comments of the general public. (Refer the Chartered Secretary Journal for December, 2009, Pages 1768 – 1778). In dealing with “Role of Directors”, this report states:
i) Auditor – Company Relationship
The report of the Naresh Chandra Committee on Corporate Audit and Governance has suggested that auditors refrain from providing non-audit services to their audit clients. It has also recommended an explicit list of prohibited non-audit services. The Task Force noted that the recommendation has been endorsed by the Ministry of Corporate Affairs and has also been proposed under the Companies Bill, 2009. It concurred with the recommendation that the legislation should expressly prohibit auditors from rendering certain services to their audit clients. Audit firms should have to mandatorily disclose network agreements between audit firms and non-audit companies, pecuniary interests exceeding 2% between the audit firm and its affiliate non-audit
service firm or company, and Chinese wall and data protection /confidentially measures that are in place between them. The Task Force noted the existing practice in this regard and found it to be sufficient.
ii) Auditors’ Revenues from the Audit Client
Not more than 10% of the revenues of an audit firm, singly or taken together with its subsidiaries, associates or affiliated entitles, should come from a single corporate client or group with whom there is also an audit engagement.
iii) Certificate of Independence
Every company must obtain a certificate from the auditor certifying the firm’s independence and an arm’s length relationship with the client company. The Certificate of Independence should certify that the firm, together with its consulting and specialized services, affiliates, subsidiaries and associated companies or network or group entities have not /has not undertaken any prohibited non-audit assignments for the company, and are independent vis-à-vis the client company, by reason of revenues earned and the independence test are observed.
iv) Audit Partner Rotation
The Task Force considered the on- going debate on the requirements of rotation of audit versus rotation of audit partner after a specified period of time. The view that audit firms should be changed after 9 or 10 years was discussed. In line with the international practice, the Task Force considered it expedient to recommend mandatory rotation of audit partners after two terms of three years each. This would help discourage creation of any affinity between auditors and controlling shareholders or promoters or the management and may help to prevent “capture” of the audit process by corporate insiders. An initial experience of the impact of rotation of the audit partner should be studied. If this measure does not improve or prevent “capture of audit process by corporate insiders”, then the alternative of rotation of auditor’s after nine years should be made mandatory. Therefore, it is recommended that:
The partners handling the audit assignment of a listed company should be rotated after every six years. The partners, and at least 50% of the audit engagement team responsible for the audit, should be rotated every six years.
A “cooling-off” period of three years should elapse before a partner can resume the same audit assignment.
v) Auditor’s Liability
The firm, as a statutory auditor or internal auditor, has to confidentially disclose its net worth to the listed company appointing it. Each member of the audit firm is liable to an unlimited extent.
vi) Appointment of Auditors
The Audit Committee of the Board of Directors shall be the first point of reference regarding the
appointment of auditors. The Audit Committee should have regard to the entire profile of the audit firm, its responsible audit partner, his or her previous experience of handling audit for similar sized companies and the firm and the audit partner’s assurance that the audit clerks and/or understudy chartered accountants or paralegals appointed for discharge of task for the listed company, shall have done a minimum number of years of study of Accounting Principles and have a minimum prior experience as audit clerks.
In order to discharge the Audit Committee’s duty, the Audit Committee shall:
- Discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by the auditor, with the auditor;
- Examine and review the documentation and the Certificate for Proof of Independence of the audit firm, and
- Recommend to the board, with reasons, the appointment / reappointment or removal of the external auditor, along with the annual audit remuneration.
vii) Qualifications introduced by Statutory Auditors or Internal Auditors in their Audit Reports, Tax Audit Reports or CARO Reports
The Task Force recommended that the ICAI appoint a committee with a significant membership of government directors, and invited management professional and lawyers having an understanding of accounts to standardise the language of disclaimers or qualifications permissible to audit firms. Anything beyond the scope of such permitted language should require the auditor to provide a sufficient explanation and should not create a new escape route for avoiding responsibility for discharging the audit function diligently, as the public relies upon them to do a thorough job.
5. WIRC – Elections
The following members have been elected to WIRC for a 3-year term, from 2010 to 2012.
Sarvashri (i) Agarwal VK, (ii) Apte DM, (iii) Bhandari AS, (iv) Chhaira JA, (v) Gandhi DB, (vi) Hegde NC, (vii) Joshi MM , (viii) Joshi SY, (ix) Kabra DK, Khandelwal DK, (xi) Kinare MP, (xii) Lalan SD, Majithia NP, (xiv) Patel BK, (xv) Patodia SK, Pawar CV, (xvii) Raval PR, (xviii) Shah JM, Shah RN, (xx) Shah SD, (xxi) Shah SJ, and Sharma UR.
ICAI News
(Note : Page nos. given below are from the C.A. Journal of January, 2010)
Accounting Standard (AS – 4) (Revised) Exposure Draft – Events after the Reporting Period
The Exposure Draft of this Standard has been published from Pages 1188 – 1192. Members are requested to send their comments by 1.2.2010. This standard corresponds to IAS 10. When finalized, this standard will supersede existing AS – 4 dealing with “Contingencies and Events Occurring After the Balance Sheet Date”.
ii) Campus Placement Programme
A Campus Placement Programme for newly qualified CAs has been organized by ICAI for those members who have passed the final CA Examination held in May, 2009 and November, 2009. The dates for the programme as reported on Page 1176 are as follows:
iii) Admission of IA & AS Officers in CA Profession
The ICAI Council has decided that Indian Audit and Accounts Service (IA & AS) officers working in C & AG offices can take up the CA course by complying with the prescribed requirements. Any IA & AS officer desiring to acquire CA membership will have to pass CPT, IPCC & CA Final Examination. He will also have to undergo three years Articleship. His service with C & AG office for one year will be considered as industrial training and he will have to undergo two years of Articleship with a practicing CA. (Refer Page 1038)
iv) New Guidelines for opening new branches of ICAI
At present, a branch of ICAI can be opened at a city if there are 150 members or more in that city or within a distance of 50 kms. from the city limits. Now, a new branch can be opened if there are more than 100, but less than 150 members, and there are more than 250 students in the city or within 50 kms. from the city. Further, if there is no branch in any district, a branch can be opened in any city of that district if there are at least 100 members in that district. (Refer Page 1038)
ICAI New Publication
Compendium of Opinions of EAC – Vol. XXVI. (Page 1171).
