Disciplinary Cases:
The Disciplinary Committee (DC) of the ICAI has decided on some cases about professional or other misconduct. These are reported in the publication “Disciplinary Cases” Vol -1. The page numbers given below are from this book. The names of the members are not given, in order to maintain confidentiality.
(i) Case of RBK:
In this case, the Bank had complained that the member has issued financial statements to 97 persons from the same place. The Bank had given loans to these persons on the basis of these statements. On inspection by the Bank, it was found that these persons had no business activity or source for repayment of loans.
During the inquiry, the DC found as under:
(a) T hat the member had issued projection statements which were signed by him without putting any date;
(b) T hat the projection statements did not disclose the exact years and instead stated years I, II, III, IV and V, creating ambiguity for the reader about the years for which projections were given;
(c) T hat in a number of cases, the member had issued two/three projection statements for the same individual certifying different figures;
(d) T hat the basis on which the said statements were issued were not disclosed by the member.
The explanation given by the member was that he had issued the certificates based on the information given by the parties. He could not produce any documents on which reliance was placed.
The DC also noticed that the Branch Managers who gave the advances had not made any inquiries about the capacity of the parties and loans were sanctioned without authority.
On the basis of the above, the DC held that the member allowed his name to be used in the projection statements, giving the impression that he vouches for the accuracy of the information. It also held that he failed to carry out his duties in a diligent manner and failed to obtain sufficient information for expression of his opinion. Therefore, the DC held the member guilty of professional misconduct under clauses (3), (7) and (8) of Part I of the Second Schedule to the C.A. Act.
The DC further noted that all the loans were given in contravention of the prescribed rules of the Bank and some officials at the Branch Level were involved in it. Moreover, all loans were recovered by the Bank and all accounts were closed. In view of this, the DC has taken a lenient view and awarded punishment by way of “Reprimand” to the Member (pages 126-134).
(ii) Case of R.P.R:
In this case, R.P.R. had conducted the Audit of a Cooperative Housing Society for the years 2003 to 2007 and given one Audit Report for all the four years. The allegation against him was that the Income & Expenditure Account for any of the years was not prepared and only the Balance Sheet as at 31-03-2007 was attached to the Audit Report. It was further alleged that the notes to the Audit Report were highly damaging. Therefore, he could not have stated that the accounts give a true and fair view of the state of affairs of the Society.
During the inquiry by DC the member explained as under:-
(a) T hat he prepared the Balance Sheet and Audit Report for the limited purpose of addressing litigation amongst the members of the Society;
(b) T hat he had relied on the audit done by the previous auditor and followed in the period covered under the Audit;
(c) That he had pointed out the deficiencies in his report by way of Annexure to the report;
(d) That no Income & Expenditure Account was prepared as the Project was under construction;
(e) T hat he had carried out the assignment to the best of his ability. However, he admitted that due to lack of experience, there could be some technical mistakes, but the same could not be said to be due to negligence on his part. He further stated that there was no malafide intention. It was admitted that he had not done audit of similar works earlier and therefore there could be some mistakes.
The DC noted that there were several mistakes in conducting the Audit and the member had not followed Auditing Standards i.e. AAS-28. Further, the member had admitted that there were mistakes in giving Audit Report due to lack of experience of similar audit. Therefore, the D.C held that the member was guilty of professional misconduct under clauses (7), (8) and (9) of Part I of the Second Schedule to the C.A. Act.
Looking to the facts of the case, the DC awarded punishment of “Reprimand” as the DC found that the mistakes were of technical nature and that the member had also shown remorse for his mistakes in the written representation (page 67 to 73).
2. Financial Reporting Review Board (FRRB)
ICAI has constituted FRRB with the objective to improve the Financial Reporting Practices. Observations of FRRB after examining the Accounting Policies followed by Companies in their published financial statements have been published in the publication “Study on Compliance of Financial Reporting Requirements” Vol – II. Some of the observations of FRRB are given below. Page numbers. given below are from this publication.
(i) AS-2 (Inventory Valuation)
In the Annual Reports of some Companies, the accounting policy for valuation of Inventories simply states that Raw Materials, Stores and W.I.P are valued at the lower of cost and the net realisable value.
Observation of FRRB: It may be noted that Companies have disclosed the policy for Valuation of Inventories, but they have not disclosed the cost formula used for Valuation of Inventories, which is required to be disclosed as per Para 26(a) of AS-2 (Page 11-12)
(ii) AS-2 (Inventory Valuation)
From the Schedule of “Inventories” given in the Annual Reports of some Companies, it has been noted that Inventories were described “As taken, Valued and Certified by the Management”.
Observation of FRRB: I t may be noted from the clarification given in the Guidance Note on “Audit of Inventories” that the use of the expression “As valued and certified by the Management” may lead the users of Financial Statements to believe that the auditor merely relied on the management’s certificate without carrying out any other appropriate audit procedures to satisfy himself about the existence and valuation of Inventories. Further, use of this type of wording indicates that there is a disclaimer for Inventories which should be avoided (page 12).
(iii) AS-2 (Inventory Valuation)
From the Schedule of Current Assets given in the Annual Report of a Company, it is noted that stock-in-trade also includes the stock of DEPB Receivables as well as Plant and Machinery retired from active use.
Observation of FRRB: It may be noted that under Para 4 of AS-2, Inventories include finished goods, WIP, Raw Materials, Consumables, Loose tools etc. Therefore, DEPB Receivable should be treated as part of Loans and Advances and Plant & Machinery retired from active use should be included as part of Fixed Assets. Hence, they should not be included in Inventories (page 16-17).
3. Some of the Ethical Issues:
The Ethical Standards Board has given answers to some Ethical Issues on Pages 1612-1614 of C.A, Journal for May, 2014. Some of these issues are as under:-
(i) What is the Conceptual Framework Approach?
It is a framework that requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules.
Professional accountants are required to apply this conceptual framework to identify threats to compliance with the fundamental principles, to evaluate their significance and, if such threats are other than clearly insignificant, then to apply safeguards to eliminate them or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised.
(ii) What are the threats involved while complying with the fundamental principles?
Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. these are (a) Self-interest threats (b) Self-review threats (c) advocacy threats (d) familiarity threats and (e) intimidation threats.
(iii) What are the available safeguards that may eliminate or reduce the threats at an acceptable level?
Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories, viz.,
(a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment.
(iv) What is Ethical Conflict resolution?
Ethical conflict resolution means to resolve a conflict in the application of Fundamental Principles while evaluating compliance with the fundamental principles.
4. EAC Opinion
Accounting treatment of Subsequent expenditure on technological Upgradation/Improvements on Capital Assets:
Facts:
T company is a wholly-owned Government of india enterprise incorporated in the year 1965 with the main objective of setting up cement plants in deficit areas to cater to the needs of that area and other neighbouring States. The company has stated that though it is the only Government of india enterprise in the country in the cement sector, its market share is less than 1% of the total market share in the country, thereby leading to severe competition from private entrepreneurs in the market. the company has one of its cement factories in one of the districts of Andhra Pradesh, that was commissioned in the year 1987. The plant has been in operation for more than 25 years after its commissioning and most of its major equipments have outlived their lives.
Now the company having been declared sick by the Bifr in the year 1996, due to erosion of its net worth, no technological upgradation/modernisation could take place as was called for the cement industry due to fast technological changes. however, normal maintenance was carried out to keep the plant running. as many new cement plants with higher capacity and latest technology have been set up by private entrepreneurs in the vicinity of the plant of the company in Andhra Pradesh and Karnataka, the company had been facing severe competition from private entrepreneurs in the industry and the company is finding difficulty to operate the plant economically without modernisation/technology upgradation.Therefore, in place of changing the vital equipments with latest technology which entails substantial investment, the company made an endeavour to upgrade/improve icertain equipments with certain amount of expenditure with a view to increase the standard efficiency of the vital equipments, increase its useful life and reduce the operating cost to the extent possible. The company has, therefore, undertaken modernisation/upgradation of vital equipments, keeping energy efficiency and environment friendly technology in mind, to increase their standard performance with increase in overall productivity and standard operating efficiency of the plant.
Query:
In view of the above, the opinion of the eaC of ICAI is sought on the following issues: (a) Whether the cost of above modifications/upgradation/improvements can be capitalised along with the cost of concerned equipments and depreciation charged accordingly; or (b) Whether the cost of above modifications/ upgradations/improvements should be amortised/depreciated over a period of 10-15 years as the benefit of the above works would result in further increase in useful life of the equipments by not less than 10 years.
Opinion:
After considering paragraph 23 of Accounting Standard (aS) 10, ‘accounting for fixed assets’, the Committee is of the view that expenditure on fixed assets subsequent to their installation may be categorised into (i) repairs and (ii) Improvements or betterments. repairs, implies “the restoration of a capital asset to its full productive capacity after damage, accident, or prolonged use, without increase in the previously estimated service life or capacity”. it frequently involves replacement of parts. On the other hand, betterment is defined as “ … an expenditure having the effect of extending the useful life of an existing fixed asset, increasing its normal rate of output, lowering its operating cost, or otherwise adding to the worth of benefits it can yield. The cost of adopting a fixed asset to a new use is not ordinarily capitalised unless at least one of these tests is met. A betterment is distinguished from an item of repair or maintenance in that the latter has the effect of keeping the asset in its customary state of operating efficiency without the expectation of adding future benefits.
Thus, the Committee is of the view that normally, expenditure on repairs, including replacement cost necessary to maintain the previously estimated standard of performance, is expensed in the same period. Similarly, the cost of adopting a fixed asset to a new use or modernisation of such asset without actually improving the previously estimated standard of performance is also expensed.
Accordingly, in the view of the Committee, only such expenditure that add new fixed asset units or that have the effect of improving the previously assessed standard of performance , e.g., an extension in the asset’s useful life, an increase in its capacity, or a substantial improvement in the quality of output or a reduction in previously assessed operating costs are capitalised. The Committee is of the view that ‘previously assessed standard of performance’ is not the actual performance of the asset at the time of repair/improvement etc., but the standard performance of the same asset in its original state.
From the facts of the case, the Committee notes that it has been stated that the expenditure has resulted in increased productivity, reduced operating costs and also enhanced the life of the equipments. however, the Company has not informed whether the increase in productivity or enhancing the life is beyond the previously assessed standard of performance of the concerned equipments. It is only the increase beyond the standard of performance of the concerned equipment in their original state, which is treated as betterment and related expenditure is capitalised.
After considering paragraph 23 of AS 26, the Committee is of the view that if the above upgradation/modernisation results into an increase in the useful life of the concerned asset the unamortised depreciable amount of the concerned asset along with the expenditure incurred on upgradation/modernisation should be charged over the revised remaining useful life subject to the useful life implicit from the specified rates as per Schedule XIV to the Companies act, 1956. The Committee wishes to point out that such depreciation should be charged with reference to the ‘useful life’ and not with reference to ‘physical life’ of the asset.
