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Category: Ethics and U

Ethics and u

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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.

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Ethics and u

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Dear friends,

I hope you did not read my last month’s article. If you have read it, please try to forget it. Henceforth, we are going to listen to the dialogue between CA — Arjuna and Bhagawan Shrikrishna on the Code of Ethics (COE) of our Institute of Chartered Accountants of India — (ICAI).

Is it a coincidence that our ICAI Head Office is situated on ‘Indraprastha Marg’ — the capital of Pandavas? Anyway, CA Arjuna and Shrikrishna are present on the battlefield. War is yet to commence!

What a great idea! — Even the wars in those times were fought by following the rules of ethics! — Start at sunrise, close at sunset, not to harm women and children, not to attack anyone who is without a weapon; and above all, seek blessings from seniors even from the enemy side! — Poetic indeed — but at that time, a reality.

The dialogue begins: CA Arjuna

(A) — Hell with this profession! And that meaningless Code of Ethics (COE)! Lord Shrikrishna

(S) — What happened? Why are you so upset?

A — Last time, I was not willing to fight. You pushed me into the war. But then this COE ties my hands. I can’t freely accept audits, I cannot advertise, I cannot do any other thing! How can I fight now?

S — Who says? Have you read COE?

A — Yes. Of course! I read it 20 years ago for my exam.

S — Oh! You still remember it?

A — Not fully. I only remember that while auditing, I have to obtain an NOC, and I cannot advertise.

S — Only that much? Then why are you making such a fuss of it? Only a couple of restrictions!

A — But nowadays many of my friends are receiving love-letters from the Institute.

S — Do you remember, at that time it was called Code of Conduct; and now it is Code of Ethics?

A — The same nonsense. Only the name has changed. Unnecessary burden! Times are changing so fast — and they are sticking to those old so-called ethics!

S — Are you aware your CA Act of 1949 was amended in 2006?

A — What difference does it make to me? We elect the Council members and they harass us. I hate going for voting.

S — But do you know what the motto of the Institute is? What a CA really stands for?

A — Don’t tell me that. There is an eagle there and something scribbled in Sanskrit. Who cares to know it!

S — It is ‘Ya Esha Supteshu Jagarti’ — He who is awake when the others are asleep.

A — Yes. We are slogging round the clock, and our clients are relaxing and enjoying. Very apt motto! No wonder, I am suffering from insomnia! And on top of it this burden of Ethics.

S — No dear. You are in the slumber — only playing with numbers. You have forgotten your role. That’s what also happened in Mahabharata war. Ethics is not your burden. It is your shield. That is why you Pandavas succeeded.

A — Ah! Don’t give me the sermon. How can the restrictions imposed on me become my shield? Who will remember all those rules of ethics? Such a long list of dozens of items!

S — No. You are mistaken. Really speaking there are only 3 rules, which your Guru told you when you completed your education.

A — Yes. Something he told from Taittireeya Upanishad. S — Satyam Vada — Always speak the truth.
— Dharmam Chara — Follow the Religion — that means not the worship — or pooja path — But your duties. That time, duties as a Kshatriya (warrior); now as a CA — professional. — And third — Swadhyayat Ma Viramah — Never give up studies.

A — I know. That is that CPE! That is the only place where I can sleep in the auditorium.

S — Why? — Do you attend it or send your proxy?

A — But then, in that war, you gave us some ‘practical tips’ to circumvent the truth. Why these double standards?

S — No. That was not bypassing the truth; but temporarily masking it — Eventually to uphold the Truth — and Dharma.

A — I am again confused. Next time, explain to me all those nasty restrictions one by one — and tell me how it is a shield. Let us take a break. Om Shanti.

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Ethics and u

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Shrikrishna (S) – Arjunji, you are smiling. Khush Dikh Rahe ho!

Arjun (A) – Yes. Scrutinies are under control. MVAT audit is on 15th January. So December is a little relaxed.

S – I Know. You will start VAT audits only after 10th January – at 11th hour, and then expect further extension.

A – Can’t help it. Articles now go on leave from December itself for May exam!

S – Such a long leave? But what about Council’s rule about maximum leave?

A – That is only on paper. Articles always dictate their terms.

S – Anyway. But there must be something else behind your happy mood. Any plans for festival season?
A – Yes. Good news is that one of my client’s bank loan of Rs. 5 crores has been sanctioned !

S – So what?

A – He has agreed to pay me fees of 3% of the loan. I had also insisted on it, so there will be good collection.

 S – Hey! Talk softly. Somebody will hear.

A – I am taking my family on a long holiday. Wait. I will just call my office to raise an invoice. Sanction letter is in my hand. I should get fees as soon as the loan is disbursed.

S – If bill is not raised, please hold it. For God’s sake, don’t mention this to anyone and never ever mention it in the bill.

A – Why? What is wrong about it? I have slogged for the sanction. I spent so much time on preparing the project report; visited the bank so many times; had so many meetings. 3% is absolutely reasonable.

S – O dear. Please don’t do such foolish acts. A – I don’t understand. You only preached Karmayog in Geeta. I have performed Karma. I must get the fruit. It is my rightful reward.

S – Do you always charge like this? Based on the result of your work?

A – Of course! Now see, for client’s refunds, you know how many times we need to visit tax offices? It is common to charge 10% of refunds.

S – Before talking of 10%, please spend two minutes to read clause (10) of Part I of the First Schedule. Very simple.

A – What do you mean? Should we not charge?

S – You should always charge. But not linked with loan amount or refund amount. Are you a broker?

 A – Then how should we charge?

S – It should be based on your inputs in terms of time, paper work done, expense incurred, representation skills, seniority, experience and such factors.

A – But why? Client is benefited after all. What is wrong if he pays based on the benefit?

S – That is precisely what I preached in Geeta. Karmayog is – Just do your duty sincerely. You have no right in the reward in this manner.

A – You are confusing me. You mean, we should do social work in the profession?

S – No dear. I only mean you should not be attached to the fruit. If your percentage theory is accepted, will you not charge any fees if loan is not sanctioned? Or refund is not received?

A – This, I had never thought about. But clients don’t pay unless the client gets a beneficial result.

S – See, a doctor will charge you even if you are not cured; even if surgery is not successful. Why? Because rendering service is in his hands and not the result. His fees are quoted before the operation and he does not increase it when operation is successful; nor reduces it even if treatment fails.

A – But I am told lawyers charge on the result of the case especially in Western countries. S – Don’t quote these examples. It is not a standard of ethical behaviour. A – But what is the logic?

S – If your reward is dependent on results, you are likely to make many compromises; resort to unscrupulous means. You may try to give result by hook or by crook. Not necessarily by professional approach.

A – You said it is acting like a mere broker. I see a point in what you are saying.

S – It may impair your independence. Your dignity and grace will be lost. In fact, you will lose respect in the eyes of clients.

A – It will be like a gamble. Either a big fee or a big zero! And the result is never in our hands. Anything may happen between the cup and the lip. All efforts then go waste. That’s what you to mean to say.

S – Same is the case with assignments of investigation. You cannot say that fees will be a percentage of quantum of discrepancy or fraud detected; or on any other findings as such.

A – Yes. I agree. If nothing is found, that does not mean we should not get any fees. After all, we have worked diligently. Result is always uncertain. But tell me, is it always a misconduct? There could be situations where we need to charge based on some result.

S – Yes. Council has thought of this. See clause 192 of your Regulations.

A – What is that?

S – Basically, it is in respect of assignments where the Government decides the structure of fees. For example, a Liquidator’s fees may be based on realisation of assets or disbursement of assets; or audit of a cooperative society where fee is decided on the basis of capital or net profits; or that of a valuer under direct taxes.

A – I have seen some of my colleagues even entering into a regular written agreement for fees on a percentage basis. I must caution them.

S – Yes dear. Remember, yours is a profession; not a business. And certainly not a broking business or commission agency.

A – Thanks for opening my eyes in time. Your advice is always ‘invaluable’; and you also should not charge me a percentage of it! Indeed, You Are Bhagwan! Om Shanti This is based on Clause 10 of Part I of First Schedule and Regulation 192 Clause (10) – charges or offers to charge, accepts or offers to accept in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings, or results of such employment, except as permitted under any regulation made under this Act; Regulation 192 – Restriction on fees No Chartered Accountant in practice shall charge or offer to charge, accept or offer to accept, in respect of any professional work, fees which are based on a percentage of profits, or which are contingent upon the findings, or results of such work:

Provided that:

(a) in the case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets;

(b) in the case of an auditor of a co-operative society, the fees may be based on a percentage of the paid up capital or the working capital or the gross or net income or profits; and

(c) in the case of a valuer for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of the property valued.

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Ethics and u

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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).

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Ethics and u

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Eternal vigilance: (Cl. (7) of Part I of 2nd Schedule)

Shrikrishna (S) – Yes, My dear Arjun, how was your vacation? How was your Europe tour?

Arjun (A) – Well, my family had lot of fun there. It was quite smooth. But I was constantly worried.

S – Why?

A – So many things pending in office. Many articles on leave for exam. There were phone calls almost every two hours.

S – Oh! So sad! You mean to say, in your absence nobody can tackle the things here?

A – All are useless. Even the partners depend upon me for small decisions.

S – How many years are you in the profession now?

A – More than 25 years.

S – Still you have not built up a good organisation? Have you learnt to delegate work to juniors? Haven’t you established systems?

A – Off and on I try to; But the staff is not stable. They don’t want to learn. Qualified people are afraid of taking decisions. And about articles and trainees, the less said the better.

S – If such is the situation, how can you perform well even if you are here? CA Profession is essentially a team-work.

A – I feel, our profession is a continuous struggle. You never feel that you have settled down. Every now and then something new crops up.

S – But then, have you spared any time to train your staff and articles?

A – Where is the time to do all that? It is always a fire-fighting exercise. You should see our plight in September.

S – I know, you have to sign many audits.

A – This year, there is further fuel to fire.

S – Why? What is new this year?

A – All these years, we were just uploading the returns. Actual audit reports, we sign much later. Sometimes, even while doing next year audit. From this year, we need to upload the audit reports as well!

S – Oh! That means just as I told Bhagavad-Gita to you in Mahabharata, I need to spend a lot of time telling you about systems.

A – It is easy to preach all that philosophy. Same is the case with those Management trainers. Everything seems very sweet when they talk. But the worries come back as soon as the training session is over.

S – That only shows that you are not a professional. What I told in Geeta was not merely for that Mahabharata war. I told you that life itself is a continuous war. You need to equip yourself to fight it.

A – Tell me all those things after 30th September. Till then I have no time. I have to complete so many audits.

S – Arjun dear, precisely for that you need to work on systems. Otherwise, you will sign wrong balance sheets.

A – Who told you that the balance sheets we sign are correct? We only write that it is true and fair!

 S – That is why there are so many disciplinary cases for negligence.

 A – How to cope up with so much work? Everybody comes at the 11th hour.

S – That is why you need to plan. You need to be pro-active. You need to communicate and initiate things well in time. This is the appropriate time to plan the work to be completed in September.

A – I am told, they don’t take all the errors that seriously. They say even if there is some negligence, it does not matter. What is punished is only ‘gross negligence’! That means, there should be some blunder! A gross negligence?

S – You are mistaken. Now the trend is changing. In the year 2006, your CA Act was amended. Earlier, on the Second Schedule, Part one, Clause (7) mentioned only about gross negligence. But now, they have also added ‘lack of due diligence’.

A – My God! That makes it too wide! Many times, we just change the year and print the same audit report.

 S – Due to computers, there is a cut and paste. Very dangerous!

A – I am told, there are many misconduct cases for errors even in charitable trusts’ balance sheet. I don’t understand how does it matter? There is no tax liability. It may be a small school.

S – This is a common misconception. You are so much obsessed with the thoughts of taxation! You believe, there is nothing beyond taxation. Remember, you cannot forget your role and duties as an auditor. Audited balance-sheet is used for many things other than tax. It is used for giving grants in aid. It may have implications in service tax. Or ever TDS to be done by trusts.

A – I remember one case where a member signed a trust’s balance-sheet. It was correct. But the cash book showed negative cash balance on a few days in between! Addition made in income tax was also deleted.

S – Still he was held guilty. There is obviously a lapse in the role as an auditor. Your signature loses credibility. Whether revenue or any person is affected or not is immaterial.

A – Then you better explain to me all these things next month. I should not wait till September.

S – Yes. This year is 150th birth anniversary of my beloved disciple – Swami Vivekananda. He appealed to the people to wake up and act. Same way, there is special awakening required among professionals. And now there are grave consequences under new Companies Bill.

A – I will follow your advice, O Lord!

The above dialogue is with reference to Clause (7) of Part I of Second Schedule, which reads as under :

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he –

Clause (7): does not exercise due diligence, or is grossly negligent in the conduct of his professional duties.

[Note: This is the most important and serious charge of misconduct. Discussion on this clause may continue with few illustrations.]

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Ethics and u

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Shrikrishna (S) – My dear Arjun, how was your Diwali? Enjoyed?

Arjuna (A) – Yeah, it was cool. M-Vat date was extended. So I could relax.

S – But whenever I called, you were always out of your office.

A – Actually, my friend is contesting our Council’s elections. He used to take me along for canvassing.

S – Did you go for voting?

A – No. On the same day, we had a family gettogether. And after all, what is the use of voting!

S – Why? You should be concerned about who sits in your Council.

A – Our Council members do nothing except selfpromotion. They hardly care for the profession.

S – But then, that was all the more reason why all of you should have voted. It means you are yourself not serious about the profession. And then, what is the point in cursing the Council members? And have you enquired as to what they do in the council? I know a few of them who really slog for the members at the cost of their own practice?

A – I know, one should always vote. But the way the candidates were canvassing, it was nauseating. The less said the better!

S – Anyway! A few of my friends have received your Diwali greetings. But they said they don’t know you directly. How did they come on your mailing list?

A – While canvassing for my friend’s election, I thought, why not tap a few strangers for business. I took a few addresses from Satyabhama bhabhi.

S – But it is not permitted to write to such strangers. Don’t you know?

A – Why? What is objectionable about it? Other wise. How can you reach the potential client?

S – It is a misconduct for a professional.

A – This is too much! Whatever we do, you point out some misconduct. I think we should become Sanyasis. See, this is what our Council does. Then why should we vote for them?

S – Arey wah! Brilliant argument! Full of selfcontradictions.

A – Last time you told me, I should not do any business other than my practice. Now in practice, you are saying I should not even send greetings. Then how can I promote my practice?

S – See, your quality of service is your sole advertisement. Nothing else. You should build up reputation by your quality, sincerity and integrity.

A – Too idealistic! Remember, we are presently in Kaliyuga and not in Satyayuga. Who will listen to such orthodox thinking? In foreign countries, all this is permitted.

S – Are you sure about it?

A – I mean I have heard about it.

S – There were pressures on the Council too. But your Council in its wisdom rightly took a decision not to permit any form of advertisement. Unabashed publicity will ultimately work to your own detriment.

A – How?

S – Then resourceful firms will resort to rampant marketing. Can you afford to match that kind of spending?

A – That they are already doing. My friends are working there. They are fed up with the business targets.

S – To have such targets in itself is rather unethical. How can there be monetary targets for a professional firm?

A – Tell me then, what else is prohibited?

S – Just read clause 6 of the First Schedule. You should not solicit clients or professional work by circular, advertisement or even personal communication.

A – What if somebody does it for me?

S – No. The prohibition is for both direct as well as indirect publicity. Also, there is Clause 5 of the First schedule. It says, you cannot secure any work through the services of any person who is not your employee or partner. You cannot use any means which are not open to a CA.

A – Then how will a new entrant get any assignment?

S – You can approach another CA and request him for assignments. That is permitted. So also, you can respond to the tenders or enquiries issued by the users of professional services.

A – But why such restrictions?

S – Only then you can command respect. You can then be independent. Otherwise, you will be viewed by the society as a businessman. Remember, your profession is not a business.

A – It is a very slow process to build up confidence and reputation. Today’s world is so fast.

S – I agree. But your services are of personal and intimate nature. A satisfied client is the best advertisement. Quality alone will attract and retain clients; and not any other gimmick.

A – You mean to say, we should not advertise at all?

S – Not exactly. Certain ads are permitted – like changes in your partnerships; or dissolution; change of address or change in telephone numbers. But these should be in the nature of announcements. A bare statement of facts. Discretion should be used as to in which locality the concerned newspaper or magazine is circulated.

A – What about small classified ads?

S – That is also allowed. But only in the journal or newsletter of the Institute. Through this, you can give information about your services and seek work or even employment. It should contain only basic details like your name, address, phone, fax number and e-mail address.

A – But can we apply for empanelments?

S – Yes. But you cannot enquire whether any organisation is maintaining a panel. So also, having empanelled, you cannot make roving enquiries with such organisations.

A – I had heard that we cannot even quote our fees.

S – No. You can always quote your fees on enquiries being received or respond to tenders.

A – Some guys were after me, to have my name in their yellow-page directory. I refused since I was not very sure. Moreover, it was very expensive.

S – You can have it in the Directories published by Public Bodies or Private Bodies. But there are certain guidelines. Firstly, there should not be any extraordinary payment. It can be in the specified groups also. But it should be in your own town or city. It should be in normal print – but neither in bold font nor in a separate box.

A – Interesting. You mean, it should not be conspicuous.

S – That’s right. It should be in alphabetical or logical order. Not very prominent. No unreasonable payment. And any CA of that locality should be permitted to have his name in it. It cannot be exclusive for a few selected group of CAs. It can also be in electronic media.

A – What if you publish a book or an article?

S – You can mention your name but not the name of your firm. Even in your CVs when you deliver lectures, reference to your firm’s name should be avoided.

A – We started this discussion from my greeting cards. Can I not even mention the designation ‘chartered accountant’?

S – You can. In greeting cards or on invitation cards for marriages, other ceremonies, inauguration of your office, and so on. But remember, it should be sent only to your clients, relatives and friends!

A – I see CAs appearing on TVs, what should they do? Is it not their advertisement?

S – They have to use restraint. The details about themselves or of their firms should not be given in a manner that highlights their professional attainments.

A – And what about websites?

S – Websites are permitted; but I don’t have time to tell you so much in detail. Why don’t you refer to the detailed guidelines of your Council? There are as many as 22 points – about website!

A – In many journals, I see questions being answered by CAs. I feel, that is also a form of advertisement.

S – Yes. It is permitted. It can be in journals or magazines or newspapers or websites or TV channels. But remember, they should not mention anything beyond the fact that the person answering is a chartered accountant. No mention of his contact address; or his professional achievements.

A – My God! So many points involved! But I agree that I would not go to a doctor or a lawyer without any personal reference or recommendation. Certainly not by advertisement. It is futile for a professional.

S – Good. So better concentrate on quality. Growth will follow. More greeting cards will never fetch your clients.

A –  I agree; Bhagwan.

Om Shanti.

This is based on Clause nos (5) and (6) of First Schedule

Clause (5) – secure, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business:

Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this Part;

Clause (6) – solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means:

Provided that nothing herein contained shall be construed as preventing or prohibiting –

(i)    any chartered accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice; or
(ii)    a member from responding to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequences.

Further, readers may also refer pages 135 to 153 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

Ethics and u

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Gross negligence – Clause 7 of Part I of Second Schedule (contd.)

Series 5

Shrikrishna (S) –Arey Arjun, I am aware that this is the time of acute pressure of work for you. But why don’t you plan the work properly? Why such last minute rush every year?

Arjuna (A)– Hey Bhagwan! We are continuously into fire-fighting. There is no peaceful time at all! Every month, some deadline or the other. Our time-planning becomes a myth. The tax department also makes us dance to their tune any time.

S – Why? Don’t you have assistants? Why don’t you delegate some of the work?

A – Our trained articles always go on leave for exams exactly when we need them. Clients’ data is never ready when our staff is available.

S – Yours is a seasonal work due to common deadline for all tax-audits. So pressure is bound to be there. But in the Mahabharata War, it was fiercer. Death was constantly hovering around you. Still, you always looked fresh and cheerful.

A – True. But then, in that war, the fighting was only up to sunset. We could relax at nights. But in this war of tax-audits, we are fighting day and night.

S – But now everything is on computers. And there is e-filing. Then what is the problem?

A – This year, we need to upload our tax audit and other reports also. Upto last year, we were comfortable. After the returns were e-filed, we could peacefully complete the reports! Again, they are changing the forms and software every now and then. It is just chaotic!

S – You mean, fighting with a pen is more tiring than fighting with the bow and arrows. But, how do you ensure that the accounts you sign are alright?

A – Everything is Ram Bharose! Who has time to see all those things! Many of the audits we sign just like that! Now take these audits of other CA firms. All the partners of those firms are my good friends. Who has time to check their accounts? And it doesn’t look good also.

S – I remember, one Chartered Accountant signed another CA firm’s accounts in good faith like this. But unfortunately, in their scrutiny assessment, it was noticed that there was a small negative balance of cash on one day!

A – Oh God! Then what happened?

S – The tax officer simply forwarded it to your Institute as a case of negligence! Poor fellow suffered like anything.

A – But the regulation is too much. One friend of mine checked the accounts thoroughly. When that unit became NPA, the bank filed a complaint for negligence. It was revealed that he did not enquire about contingent liability. And there were many such liabilities of contingent nature. Taxation, labour litigations and what not!

S – Last time I told you, there is no end to the forms in which negligence takes place. Now, I am sure, all those company balance sheets you are signing now will carry a date of 31st August or 1st September. And I am also sure that in between, you must have sent e-mails about pending queries. That means you have created evidence of negligence against yourself!

A – No. You had once told me that a senior member of a very reputed firm was held guilty for such back-dating. So I take maximum care.

S – Good, another area of negligence is physical verification of fixed assets and stocks. Do you remember, in the Mahabharata, you used to take inventory of all weaponry—swords, bows, arrows, and also of horses, elephants, food grains and many other things. Are you doing it as an auditor?

A – We had studied all about stock-taking for the exam. In my friend’s enquiry of misconduct, there was no record at all of his ever visiting client’s office, or factory. No one from the auditor’s office ever went for stocks. And many items of machinery were not there. He used to just ‘rely on management’s certificate’.

S – I doubt whether he was obtaining any certificate. You people just mechanically mention in the report that you obtained certificates.

A – I agree. We are very much lax in taking the Management Representation Letter. I have heard stories of all such lapses being treated as misconduct.

S – Are you aware, nowadays, ROC’s inspection has been activated and there are many lapses in audit being reported? ROC is forwarding its observations directly to your Institute. And it is being treated as ‘information’ to initiate disciplinary proceedings.

A – Baap Re! I have heard many of my friends received notices from ROC’s office. They used to think that no one sees the audit reports of private limited companies. But what you say is alarming!

S – Another very important point—you people are under a sweet impression that if two directors sign the balance sheet, it is enough. But read section 215 of the Companies Act. It says what is necessary and important is the Board’s approval.

A – You had told me this once. But our friends sign in good faith, when even directors have not signed. And I know a case where the auditor signed it when only one director signed. Later on, the other director who was his brother, refused to sign the balance sheet. He wanted to take revenge on the CA since the CA had refused to take that director’s daughter as a ‘dummy’ article! So, one should never sign in good faith.

S – Quite strangely, many people argue that there was no mala fide intention. Remember, the Council is not concerned with your intentions but it wants to see whether you discharged the duties diligently. And quite often, those who claim to have clear conscience have a weak memory!

A – You started your philosophy again. Now I make a new year resolution from 1st October that I will prepare for next year’s audits right now!

S – That’s great! But let it not be the usual ‘New Year Resolution”!

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.

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Ethics and u

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Bhagwan Shrikrishna

 (S) — Hey you Arjuna, why are you looking so weary? In that Mahabharata War, you were so brave! What’s the matter? Arjuna
(A) — That war was much simpler. Either kill or get killed. Now as a CA, I am dying every day.

S — Where is your bravery gone? Where is that old uprightness? Why are you so depressed?

A — I don’t get time for regular exercise. Just sitting before the computer whole day. My spine is bent like my bow!

S — Are you still having a spine? Err-sorry — a bow?

 A — What do you mean? I wonder why people believe that CAs don’t have a spine! Anyway, you wanted to tell me something about ethics. Is it a long list?

S — No dear. Only a few rules of fair practice as a professional.

A — That reminds me. They say everything is fair in war. That made the war simpler. In practice, they expect us to be fair. True and fair! That is the difficulty. How can a thing be true as well as fair at the same time?

S — Yes I agree there are dilemmas. But in all fairness, one has to be true.

A — Actually, I left my bow and arrows and took up this pen. I separated from Bhima, Nakula and Sahadeva. Somehow, I was holding on to Dharma. But many situations compel me to go away even from Dharma. I feel insecure.

S — You are right. Remember, Dharma alone will protect you. Dharma is Yudhishthira — ‘yudhi’ means ‘in a war’. ‘Sthira’ means stable, unshaken. Dharma is nothing but ethics. That will make you stable in war-like situations.

 A — Our Council does not allow us any freedom. It thrusts those meaningless ethics on us. Even a little deviation, and there is punishment. I have lost my independence.

S — Arjuna, independence is always very costly. Its cost is nothing but ‘eternal vigilance’. Independence does not mean freedom of behaviour.

A — Then what it is?

S — It is freedom from fear. Fearlessness comes not merely by sword but by shield. Ethics is that shield. It is not a burden.

A — But if I do something wrong in the interest of my client, why should the Council punish me? How does a small wrong matter?

S — Remember dear. If you compromise on your principles, a client may pay you money but will never give you respect. Not only that, but he will treat all CAs alike — amenable to temptation — and willing to compromise.

 A — Oh, that will spoil the image of whole profession!

S — Precisely. The Council is more concerned with credibility of the profession. Therefore, the punishment to the wrongdoer. You remember, whenever Gopikas complained to my mother Yashoda, she used to scold me, beat me; and used to tie me up. Mother wants to uphold reputation of the child and also of the family.

A — But many times, complainants themselves are wrongdoers. They are even fraudsters. Why does our Council not do anything to them?

S — The Council is there to protect you and the profession. It just wants to see that its members behave properly. The Council is not so much concerned with the behavior of others.

A — This is not fair. So then the others go scotfree?

S — No. There are other forums to deal with such people. The Council only expects that you don’t become a party to the misdeeds.

 A — But if nobody is adversely affected by my mistake, then how and why is the Council concerned? S — For example?

A — I certify incorrect accounts of a charitable trust, its income is exempt any way!

S — Do you mean tax is the sole purpose of certifying the accounts? I think the tax consultant in you is overpowering the auditor in you.

A — But then tell me who else is affected?

S — All the users of your accounts, Members, beneficiaries of the Trust, Regulators, Lenders . . . . .

A — See, if anybody suffers due to my wrong certificate, I will compensate him. Or what if he pardons me on his own? Then what’s the issue? Unnecessary harassment! Where is the loss then?

S — Loss of respect, my dear! Loss of credibility. The sole foundation of your profession is its credibility. Can you leave a thief merely because he compensates you for the theft? Was it the practice in your Pandava’s Kingdom?

A — No. If a wrongdoer is let off, he will do more wrong. And that would tarnish the king’s image if he lets of a thief.

S — Unfortunately, though Government today does not understand this, the Council is very much conscious about it. Moreover it is like Paap (Sin) and Punnya (Bliss). The debit cannot be adjusted against credit. You cannot undo misconduct by doing good. Good may or may not be rewarded; but bad is punished. Same like Adhyatma (Spiritualism).

A — Many times, there are mischievous complaints. There is dispute between two parties and the auditor is made a scapegoat! He is victimised only to exert pressure on other party.

S — That is precisely why your work should be perfect in absolute sense — regardless of whether it suits someone or not. See, you were asking about the Trust. There could be dispute among Trustees or among members. And you would become vulnerable!

A — And what if the complainant wants to withdraw the complaint later on?

 S — See, this is a quasi-criminal proceeding. And so he cannot withdraw the complaint as a matter of right. That can be done only with the consent of the Board of Discipline or the Disciplinary Committee.

A — I think we were happy and at peace in the exile!

S — But man has destroyed jungles and has become junglee himself. Money has assumed supreme position. Society is looking upon you CAs to bring monetary discipline. But if you CAs prefer to be a part of the indiscipline, who will save the mankind ?

A — I am realising a little bit. You mean to say that we Pandavas should not become one like Kauravas!

S — You said it! Om Shanti! Important principles

The above dialogue between Arjuna and Shrikrishna is intended to bring out important principles in disciplinary proceedings. We can summarise the principles as follows :

1. The complainant need not come with clean hands. The Council is not concerned with, nor has jurisdiction over the complainant’s behaviour or conduct.

2. The fact whether the complainant or anybody else is aggrieved or has suffered any loss or not is of no consequence while holding a member guilty or otherwise.

3. It is of no avail even if the member compensates the complainant for any losses. It does not undo the misconduct.

 4. Even if the complainant pardons the respondent member, or offers to withdraw the complaint, or does not pursue it, or remains absent at the hearing, the member is not automatically absolved. The Council steps into the shoes of the complainant and takes it to the logical conclusion.

5. Complaint, once lodged, cannot ordinarily be withdrawn except with the permission of the Board of Discipline or the Disciplinary Committee [Rule 6 of The Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of cases) Rules, 2007].

6. Misconduct includes both professional misconduct as well as ‘other misconduct’. The latter is too wide; and goes beyond the ‘Code’. — i.e., beyond the items listed in the Schedules. It implies a behaviour unbecoming of a professional.

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Ethics and u

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(Engaging in Other Business………)

Shrikrishna (S) – Arey Arjun, Why are you looking so tired? Your pressure of September is still not over?

Arjuna (A) – September is over; but not our pressure.

S – I am sure, the Dandiya was keeping you busy late night.

A – Kaash! CAs were that fortunate!

S – Why? What happened?

A – By 30th September, returns were e-filed. But now we are signing all balance-sheets and reports. Besides, I have to do so many things for this Diwali.

S – Why? For CAs, what is special about Diwali?

A – Diwali has nothing to do with my practice. But that other business of mine! That consumes lot of my time.

S – What business?

A – Don’t you know? We are into trading of construction material. We have a few agencies.

S – We means who?

A – My wives Droupadi and Subhadra. They are directors but I only have to manage everything. It is our family business.

S – What do you mean by family business? Was it started by your father Pandu Chacha?

A – No. I only started it. I am also a director in Bhima’s company. Bhima runs a gym.

S – And what do you do in your business?

A – Get orders, procure material, manage the workers, look after Government authorities – and what not!

S – Have you sought your Council’s permission?

A – What for? In my business, I am just shown as a manager. My wives are directors and I draw only remuneration. In Bhima’s company, I look after administration. Actually, Nakula and Sahadeva want me to become a partner in their firm. They are into share-trading.

S – For Dharma’s sake, please don’t do that! Council does not permit all this.

A – I have already thought of it. I will become partner in my HUF capacity. Simple!

S – When you were a student in Guru Dronacharya’s school, you were very brilliant and focused. You could see only one single eye of the fish! But now, I find that you are simultaneously looking at so many things – except your profession and its ethics!

A – Why? What’s wrong?

S – Firstly, remember, an HUF as such can never be a partner. Only an individual or a company can be partners. – either a natural person or a legal person.

A – But HUF is also a person.

S – You are not able to think of any law except the Income Tax Act. Partnership is governed by Partnership Act and not by tax laws.

A – But I have formed firms where same individual is partner in both capacities – that is himself and also as Karta. None else.

S – Anyway, that’s a separate topic. Council will not recognise any activity under socalled HUF, if it is not a genuinely ancestral business.

A – This is very unfair. If I am serving my clients well and they don’t have any complaints, why should the Council come in the way? How is it concerned?

S – See, the council has two major concerns. Firstly, your profession is very demanding. It requires continuous update of knowledge. Council feels that you should pay undivided attention to the profession.

A – Ah! I can manage all things simultaneously.

S – If that is so, why are you signing the hard copies of balance sheet now, after the returns are e-filed?

A – OK. What is the other point?

S – Remember; as a businessman, you are likely to invite lots of risks and liabilities. Due to the financial or other worries, you may often compromise on your principles. That is most dangerous. Your quality of work then suffers. Moreover, doing certain businesses may hamper the dignity of your profession. And under the guise of promoting your business, you may even advertise your profession. This is unfair and not desirable.

A – Yes, Sometimes I also lose my patience and don’t feel like attending office, if I have to execute orders and manage the funds for business. But then, I have heard that the Council allows us to become a director in a company.

S – You are right. You can even be a promoter; and also a director in a board-managed company. But you cannot be an executive director.

A – What do you mean by that?

S – You can be only a ‘Director Simplicitor’. You may attend board meetings, participate in discussions; but cannot be involved in execution.

A – Can I sign cheques?

S – Council says, ‘no’. You should not sign any documents, bills, contracts, letters and the like.

A – This is strange. But I know many CAs who have a private limited company with only two directors – only husband and wife.

S – Then they must be signing the balance sheet also! – That is also not looked at with favour by the Council. Unfortunately, nowhere it is defined as to what amounts to ‘engaging in a business’.

A – And many CA friends of mine are doing regular trading in shares.

S – Blissful ignorance! You said you draw remuneration as Manager.

A – Yes. I am showing it in my income. What’s wrong?

S – You have to seek permission from the Council for any employment – be it full time or part – time. Even college lecturers have to seek permission.

A – And then what happens?

S – See, there is a prescribed application form, Council examines how much time you are required to devote for the other occupation. What are your financial stakes, and so on.

A – You mean I should have obtained permission?

S – Yes, obviously. And then, you will be treated as in part time practice.

A – So what?

S – You cannot then do attest function – cannot sign balance sheets as auditor! And cannot keep articled trainees.

A – Oh my God!

S – There is a recent real story. Mr. A was a CA who did active business in a private limited company in which his friend B, an engineer was the other director. There were the only two of them. B’s son completed articleship with A and passed his CA.

A – Then?

S – There was a serious dispute and litigation between A and B, and ‘B’s son filed a complaint against his own ex-boss ‘A’ that he was an executive director.

A – How ungrateful! Complaint against his own Guru!

S – Yes, And the Guru was held guilty of professional misconduct!

A – For each and everything, one has to approach the Council?

S – No, Council has announced certain general permissions and certain items require special permission. That is Regulation 190A.

A – Now, what do I do?

S – Better withdraw your name from everywhere. Stop signing any documents of business at once. And don’t join Nakula and Sahadeva as a partner.

A – Then who will sign the balance sheet of Bhima’s company?

S – Better induct someone. It always happens – many CAs start business knowingly or unknowingly. They avoid taking permission. Afterwards, when they come to know the seriousness, they are afraid of approaching the Council.

A – Then, what should they do?

S – Either stop the other activity; or approach the Council. Better late than never. Voluntary application may prove your bonafides.

A – Bhagwan, I forgot to mention one small thing. I have an agency of LIC ; but it is in Subhadra’s name; and a sub-brokership in Droupadi’s name.

S – Do they really do it themselves? Do they really know the business?

A – No, I have their Power of Attorney to do everything.

S – Then better take your own insurance! Also enquire about professional indemnity insurance. Dear Arjun, I saved you many times in Mahabharata War; But with your Council, I wonder whether I will be able to help.

A – How can you say so? You are God – Omni potent and Omniscient.

S – True. But I save only honest and righteous people. Not those who compromise on ethics.

‘Om Shanti’.

NOTE :
The above dialogue is with reference to Clause 11 of the First Schedule which reads as under:

Clause (11) : engages in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage:

Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a Company, (not being a managing director or a whole time director), unless he or any of his partners is interested in such company as an auditor;

Further, readers may also refer pages 211 to 225 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009)

Ethics and You

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Procedure of Enquiry (Continued) – Part IV

Arjun (A) — Oh My God! This heat is unbearable. And also this humidity.

Shrikrishna —Why don’t you go to some hill station? April must be a ‘cool’ month for you CAs.

A — Kaash, yeh sach hota!

S — Why? Isn’t the work load less now?

A
— Maybe, yes. No deadlines. But bank audits, service tax returns and
whatever nonsense tax assessments are completed in March, we need to
submit appeals, stay applications, and what not!

S — H ow was bank audit experience this year?

A—
T hat is a nightmare. Big branches to be completed in 4 to 5 days; with
just one or two assistants. Bank staff never co-operates. Bhagwaan ka
naam le ke hi sign karna padta hai.

S— I agree. Your profession is difficult.

A—
By the way, you have so far explained to me how a disciplinary case
starts. Apart from complaint, there could be suo moto ‘information’
cases as well. I have also understood upto the stage of ‘Prima facie
opinion’ and the types of punishments for various items of misconduct.

S— T oday, I wish to explain how the actual enquiry is conducted.

A— Y es, yes! I wanted to know that. It must be a dreadful experience.

S—
A ctually, it is not so frightful. It is not a police enquiry. It is a
plain fact finding exercise. No need to be nervous if you have acted
diligently.

A— But there are many mistakes that occur unknowingly. If they are exposed, it could be serious!

S—
Y es. It depends on the nature of offence. It is held in a conference
hall; not like a court where the judges sit on a raised platform.

A— So, it is across the table. Good.

S—
Y es. On one side of the table, the Members of the Board of Discipline
(BOD) or Disciplinary Committee (DC) sit. They are assisted by the
Secretariat. The complainant, his counsel, respondent and his counsel
sit in front of the BOD/DC on the other side of the table.

A— A nd how does it start?

S—
E verything is tape-recorded. Also, there is a stenographer. Everyone
has to speak into a mike. First of all, all parties are required to
identify themselves. Then, Complainant and Respondent are put on oath.

A— A re there witnesses?

S—
See, in the Misconduct Procedure Rules, for First Schedule Offence,
before BOD, there is no provision for witnesses. But for Second Schedule
items before DC, one can call witnesses.

A— Both the parties?

S— Y es. Not only the parties but even the Committee can call its witnesses.

A— Ohh!

S—
A fter this, the complainant is asked to explain his charges. Committee
asks him questions so as to define the exact charges. A— What next? S— R
espondent is asked whether he has understood the charges. He is asked
to state whether he pleads guilty or he wants to defend himself.

A— What is he expected to say?

S—
I f Respondent wants to accept his guilt, well and good. He has to say
so. If he wants to argue or defend, he can say accordingly.

A— T hen what happens?

S—
I f it is to be defended, the Respondent is allowed to speak and
explain his position. His counsel may also speak on his behalf.

A— D o they ask questions?

S—
O f course. Previously, it used to be formal like in a court. There was
examination, cross-examination and so on. However, cross examination is
permitted. Nowadays, they adopt a summary procedure.

A— What about witnesses?

S—
A s I told you, witnesses are called and examined. All parties can
question the witnesses. But one cannot ask leading questions except in a
cross-examination.

A— What about new evidences or new documents?

S—
See, Arjun. One must keep in mind that it is an enquiry into the
conduct of a member of the Institute. It is not a law suit – civil or
criminal. So ordinarily everything is entertained in a fair and
transparent manner. But complainant is not allowed to make a new charge
or allegation. One cannot enlarge the scope of the complaint.

A— What is the value of precedents?

S—
F rankly, in my opinion there is not much value to the precedents. Each
case is unique on its facts. There are so many shades of human
behaviour. Misconduct is to be viewed on the facts and in the
circumstances of each case.

A— I s it advisable to have a lawyer with us?

S—
I t depends. Sometimes, a respondent gets psychologically nervous. Many
times they cannot express themselves clearly and properly. So a
counsel’s presence does help.

A— But who can be a counsel?

S—
N ormally, any other member of your Institute; or a company secretary,
cost accountant or a lawyer is engaged as counsel. But lawyers need to
understand that a very legalistic approach does not help. It is a
fact-finding process.

A— Like what?

S— F or example,
while doing audit, you may take a view in respect of some provision of
company law or income tax. There, you may argue in a legalistic way. But
petty matters of procedures should not be given too much importance.
They allow you every reasonable opportunity to submit any documents,
information, explanation and so on. You are allowed to speak without any
pressure or tension.

A— H ow long does the hearing last?

S— R anging from half-an-hour to even 2 to 3 days! D epending upon the nature of allegation, number of witnesses and so on.

A— I need to know many more things about these proceedings. I will bring my friends also to listen to all this.

S—
R emember that all the proceedings are recorded and you get verbatim
minutes. These are called Notes of Hearing. One has to apply to the
Director Discipline to get these minutes.

Om Shanti !!!

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Ethics and You

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Procedure of Enquiry (Continued) – Part VI

Shrikrishna (S) —
Arjun, you are looking tired today. Actually, your deadline for
tax-returns is postponed to 31st August. Isn’t it?

Arjun (A) —Yes.

S — Then you should be relaxing. The CAs don’t take any tensions except at the11th hour!

A — Bhagawan, I am tired of these rains. It came after a long wait. And it is not stopping at all!.

S
— Ha!Ha!Ha! These are the blessings of Lord Varuna. You CAs are
expected to plan and phase out your work over the available period. But
you also accumulate and do it in only few days; And then complain of
pressure!

A — What you say is true. Anyway, you were to explain to me the final part of disciplinary proceedings.

S — Yes. Upto where we had come?

A
— A separate order is passed awarding the punishment. That is on a
fresh hearing given after the first report holding you guilty is issued.

S — Right! You are a brilliant ‘shishya’; and hence so dear to me.

A — Now tell me, once the order is received – say for one month’s suspension, do we have any remedy? Or it is final?

S — No, it is not final. You can prefer an appeal.

A — To the court?

S — There is an Appellate Authority constituted under your CA Act. It is presided over by a High Court judge.

A — Is he the single judge?

S — No, there are four other members. Two ex-Central Council Members and two Government nominees.

A — But how to go about it?

S
— There is a prescribed form. One has to pay a fee of Rs. 5,500/-.
Remember, it is to be submitted within 90 days from the date of receipt
of the order.

A — How do they decide?

S — The
proceedings are like that of your Income Tax Appellate Tribunal. Just as
in ITAT, even the IT Department is represented by a counsel, and here
also, there is a counsel from the side of Disciplinary Directorate.

A — Oh, my God! And what do they argue?

S
— See, the Respondent will try to plead ‘Not guilty’ or to lessen the
punishment. On the other hand, the DD will try to defend the order of
the BOD or DC.

A — That is alright. But can DD also prefer an appeal?

S — Yes. Section 22G states that the member aggrieved by the order of BOD/DC; or the DD can prefer an appeal.

A — And what about the complainant?

S — The section is silent about it. It is like prosecution of a criminal matter where the Government pursues the matter.

A — And where is the Appellate Authority located?

S
— Strictly, it is located at Delhi – in your ICAI’s Headquarters. But
occasionally, the hearings are held in cities like Mumbai.

A — And if AA’s verdict goes against us, what to do? Can we approach the High Court?

S — The CA Act does not contain any provision permitting you to approach the High Court; unlike in the Incometax Act.

A — That means, the AA is the end of it!

S — In a sense, yes. But you can always go in for a writ if you are so aggrieved.

A — OK. Now tell me, once such order is passed, the punishment is immediately effective?

S
— Not necessarily. Once the order of BOD/DC is received or the order of
AA is received, the DD after a few weeks may formally write to you
about reprimand or suspension.

A — And if it comes exactly around the time we sign maximum number of audits, then we are doomed!

S — Yes. And your name is published in your CA journal. That is a stigma.

A — After the suspension period is over, what is our status?

S
— You have to apply afresh for restoration of membership. And then your
seniority is lost. It is as if you were a new member. Back to square
one!

A — That means, it will matter in terms of getting bank audits, training articles and so on.

S
— But the real punishment is the mental agony and stress that you have
to carry from the date of receiving the complaint till the conclusion of
the proceedings.

A — But why do they disqualify us for bank and government audit even before we are held finally guilty? That is unjust.

S
— Actually, that is not your Council’s rule. It is the policy of C
& AG and RBI that they don’t want to allot audits to someone who is
held prima facie guilty.

A — Oh! And depriving of audit
assignments for so many years is also a punishment. I agree; that rather
than the prescribed punishments, the other consequences are much more
grave.

S — So, prevention is better than cure. Follow the code
scrupulously. Don’t resort to short-cuts, cultivate discipline and
professional habits.

A — He Bhagawan, please bless me so that I am not caught in this trap of disciplinary proceedings.

S — You are always Blessed, Arjun! Om shanti !!!!

Note:
This dialogue is based on the procedural rules contained in Chartered
Accountants (Procedure of Investigations of Professional and other
misconduct and conduct of cases) Rules, 2007 published in official
Gazette of India dated 28th February, 2007 (‘Enquiry Rules’).

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Ethics and u

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(This is one more example of alleged negligence or lack of due diligence)

Shrikrishna (S) — Yes, My dear Partha, what happened to those digital signatures misplaced in your office?

Arjun (A) — Oh Lord, you are Great and kind hearted. I realised that you were testing my devotion towards you, my Lord. I had very anxious moments; but thanks to your mercy, those small pen-drives were located in some working files! God saved me!

S — But then, did you take precautions that we discussed?

A — Of course, yes. Immediately, I obtained necessary letters from all clients who left their tokens with us. I returned most of them to the respective clients. I don’t want any more headache!

S — Good. But then, why are you again looking so tense?

A — Hey Bhagwan! It’s another true story that has frightened me.

S — What is that?

A — My friend is a company secretary. Earlier, he was in a corporate job; but now on his own. He is in deep trouble!

S — Why? What happened to him?

A — He had a client. A small private limited company. The promoters-directors were only a couple. Husband & wife.

S — It is very common. I have seen it in many CAs. But they are not aware that this may be a serious misconduct in terms of clause (11) of First Schedule.

A — Yes. We had discussed it once. But here, they were lay-persons; not CAs or CS’s. Otherwise, I know that it would amount to engaging in other business without seeking permission from the Council.

S — Ok. Then what next?

A — They inducted one more person as a director who promised them to bring some business from abroad.

S — Good. Then?

A — He remained a director for a couple of years; but nothing materialised as promised by him.

S — Then there must be unpleasantness.

A — Yes. The company spent a sizeable amount on exploring the potentials as advised by him. He was drawing a remuneration too!

S — Wasteful!

A — The company had engaged a company secretary as an adviser. He was not involved in the company’s activities on a day-to-day basis. One fine morning, the couple informed him that the third director had tendered his resignation.

S — As expected!

A — Yes. And the CS was asked to complete the formalities of ROC. He advised them that a board meeting should be held. Now that the only continuing directors were husband and wife – staying together (!) – he showed the meeting of the same date and uploaded form No.32 – recording the resignation of the third director.

S — Very normal. But in the so called Board meeting, was that third director invited?

A — No. According to the CS, there was no need. He had resigned and it was pointless calling him. It was a formality that the other directors accept his resignation. Relations were not smooth; but the reality was obvious that he did not contribute anything to the business.

S — You mean that the resignation was a natural consequence of the situation.

A — Exactly. But now that third director has turned around and says that he had not resigned! The signature on the letter is not his! He alleges that it was forged.

S — Oh! The CS had obviously not attempted to verify the signature.

A — True. In practice, we have to proceed in good faith. Everytime we cannot afford to be suspicious. We never consider it necessary to verify signatures of our clients – like a banker does.

S — So now, it is a lesson! But tell me, was the signature at least similar to that in the company’s records?

A — That’s the unfortunate part. There is a variation. But all this is revealed now. At that point of time, when a respectable business-couple produces a letter, and asks to complete the formalities, should the company secretary disbelieve them?

S — True. But this is ‘kaliyug’! Good faith has no place in today’s era. And, from a professional, expectations are more. It is perhaps the ‘professional scepticism’ that gives credibility to a professional’s work.

A — Agreed. Our CAs are also uploading company law forms. This is an eye-opener to all of us.

NOTE:
The above dialogue between Shri Krishna and Arjun is based on Clause (7) of Part I of Second Schedule which is reproduced below.

Clause (7)     of Part I of Second Schedule states that a CA in practice shall be deemed to be guilty of professional misconduct, if he – “does not exercise due diligence, or is grossly negligent in the conduct of his professional duties”.

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Ethics and U

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Procedure of Enquiry

Arjun (A) — Hey Shrikrishna! Hey Shrikrishna! Arey, where are you?

Shrikrishna (S) — Yes, yes, my dear. Why are you so panicky? I am here only.

A — Good Lord! Usually, you always arrive at the meeting place before me. Today, you were not to be seen.

S — I am omnipresent, present everywhere. I appear whenever a true devotee remembers me sincerely. Tell me, what is the matter?.

A — Y ou have so far explained to me many items of misconduct. I shared it with my friends. But today, my very close friend received a notice from the Institute. He was asking how to go about it.

S — T hen did you not refer the books?

A — I looked for the procedure in the CA Act as well as Regulations. But couldn’t get the detailed procedure.

S — Which Act you saw? That of 1949?

A — N o. I saw 2006 Act only. That much I know!

S — Good! Many of you may not have referred the CA Act and other books on Ethics ever since you guys passed your CA.

A — What you say is right. When we studied, it was Code of Conduct. Now, it is Code of Ethics. What really is the difference?

S — See, conduct is a generic term. Conduct may be good or bad; but ‘ethics’ denotes something positive. In the context of professionals, ‘ethics’ was thought to be a better word.

A — Y ou mean, the conduct may be ethical or unethical.

S — You are right. And remember; one is either ethical or not ethical. There is no in between stage! One cannot be contented that one is ‘by and large’ ethical!

A — Leave aside the philosophy. Tell me the procedure.

S — F or procedure, you must refer to Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in the official Gazette of India dated February 28, 2007.

A — Baap re! Such a long name! Better call it misconduct rules?

S — Y es. But before going to these rules, you should know that there are basically four authorities stated in the Act of 2006.

A — What are those?

S — F irstly, the Director Discipline. Then the Board of Discipline and Disciplinary Committee. And thereafter, the Appellate Authority.

A — T ell me the functions of all these.

S — You see, if somebody files a complaint ………..

A — H ow does one do so?

S — I f somebody is not happy with a CA’s work or other behaviour, he has to fill up a very simple form – called Form I. It is to be accompanied by a fee of 2,500/- rupees.

A — But who usually complains?

S — A nybody! Complaint can come from a variety of people and agencies.

A — Such as?

S — R egulators – Tax authorities, ROC, MCA authorities, SEBI, RBI, Registrar of Co-operative societies, then bankers, financial institutions, clients, other members of the Institute.

A — Who else?

S — F urther, even your staff, articles, partners, relatives, friends ………

A — But should he be connected with your work?

S — Not necessarily. Even an altogether stranger can file a complaint. These are quasi –criminal proceedings. Locus standi of complainant is not relevant.

A — Surprising! So anybody under the sun can file a complaint against a member.

S — Y es. There are even professional blackmailers. Beware of them. A — O h God!

S — M oreover, the Council can take suo moto cognisance of any misconduct, based on the information received by it. Information can be received even from public domain and media. So, always be cautious.

A — Y ou were telling me about the functions of those authorities.

S — D isciplinary Directorate, basically receives the complaints; The Director Discipline (DD) acts as a Secretary to the Board of Discipline (BOD) as well as to the Disciplinary Committee (DC). People working in the Directorate are bureaucrats.

A — Oh! S — T hey receive the complaint and forward it to the Respondent. The Respondent is required to submit his explanation. That explanation is sent back to the complainant. He is asked to write his views on the explanation in the form of a rejoinder.

A — T ill that time, they don’t process anything?

S — N ot really. It is only after these three documents are received, that they scrutinise the case. Thereafter, the DD forms a ‘prima facie opinion’ as to whether the Respondent is guilty or not guilty.

A — T hen what happens? It is only a prima facie opinion. Not final. Right?

S — N ow, if it is an item of misconduct stated in the First Schedule, the BOD has jurisdiction. On the other hand, if it is a Second Schedule item, it is within the scope of DC.

A — A nd a mixed one?

S — T hen the DC’s jurisdiction. The prima facie opinion is placed before the BOD or DC as the case may be. BOD or DC may concur with and endorse the views of the DD; or they may disagree. If BOD/DC feel that there is no prima facie guilt, the fact is communicated to both the parties and file is closed.

A — And if they find him prima facie guilty, what next?

S — T hen they direct that a detailed enquiry be conducted. This is the point of time when the disciplinary proceedings are deemed to be commenced.

A — Bhagwan, excuse me. Let me first digest all that you told me just now. We will meet some other time as I wish to understand the whole process. Just now, I am in a little bit of a hurry.

S — Sure. But your friend has to send his explanation in 21 days.

A — See. We CAs never do anything well in time. Can he get extension of time?

S — I was sure, you would ask this question If there is a valid reason, you can get extra time; but not more than 30 additional days.

A — O h! Then I must hurry up. We will meet soon. Bye, Bye. ….. (To be continued)

Note:
This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated 28th February, 2007 (‘Enquiry Rules’).

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Ethics and u

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Shrikrishna (S) — Arjun, you are looking worried today.

Arjun (A) — Yes. This is September. Virtually a killing month for all CAs.

S — This is every year’s ‘crying’. Why don’t you plan well in advance?.

A — Very easy to say so. But in reality, every month there is some compliance or the other. And consequences of defaults are very harsh. You have to be on your toes constantly.

S — But the tax-audit date has been extended? Isn’t it?

A — T rue; but I am not sure whether the deadlines for filing returns will be extended. Then what is the use? I wonder why the Government does not clarify things well in time.

S — A ll CAs are sailing in the same boat. Granted that it worries you. But you are rather tensed up today. What is the matter?

A — A ctually, nowadays all the returns and other forms are to be submitted on-line. They are to be uploaded.

S — So what?

A — F or this, all the clients are keeping their digital signatures in our custody only.

S — Why?

A — Because all the returns are completed only in the last two days only. And when we are slogging, the clients are enjoying themselves abroad or at hill-stations.

S — Oh, I see. So you take all their tokens of digital signatures in your custody and use them! Is it not?

A — Exactly. And just now, my office informs me that two such signatures are misplaced. Not traceable!

S — O h! It is very risky. But why do you take such a risk? Is there any documentation for keeping it with you? Do you have any written instructions to use them? Otherwise, under the IT Act, it is an offence.

A — I didn’t come across any such provision in Income Tax Act. Is it in DTC?

S — N o Arjun. IT means Information Technology Act, 2000.

A — I have never read it.

S — Actually, using another person’s digital signature in his absence and without his specific consent is a serious offence. It is like a forgery. See section 42 of Information Technology Act. It says that the digital signature can be used only by the subscriber or person authorised by him to affix it.

A — O h, my God! Then what should we do?

S — E very time, you should take a letter from the client that he is handing over the token or the CD of digital signature to you. And there should be a specific instruction authorising you to use it. And when you return it, take his acknowledgement. It may be misused or wrongly used and the blame may come on you.

A — But now what should I do? Their returns are to be filed now. Fortunately, there is no proof that they have handed over to my office.

S — I t is embarrassing. Actually, you should have not only proper documentation but all signs should be kept under lock and key; under the control of a very responsible person.

A — What are the consequences under that Information Technology Act?

S — Penalty is in the form of compensation upto Rs. 25,000 to be paid to the affected person.

A — Baap Re!

S — N ot only that. But it amounts to negligence or lack of due diligence in discharging your duties.

A — I t is a double jeopardy.

S — Y es. And the tension that the misplaced digital signature may be misused is all the more disturbing.

A — I wonder how I will tell those clients that their digital signatures are not traceable! It is a question of my reputation.

S — That’s right. In Bhagavad Geeta also I told you the same thing. Loss of reputation is more harmful than even death. Now it is high time that you focus on systems in your office.

A — It is an eye-opener. Small lapses lead to heavy damage. Usually after our tax audits, we relax, and wake up only next year. But this year, I should change this. I must focus on housekeeping and get better organised. I am convinced that this is a serious professional misconduct and if I were in the client’s position, I would be very much upset.

S — Good. This is a lesson which should change your functioning. All the best to you.

Note: The above dialogue between Shri Krishna and Arjun is based on Clause (7) of Part I of Second Schedule which is reproduced below. This dialogue aims at bringing out those small things that we take for granted. Such small things and lack of documentation can lead to big problems in future. It thus becomes very important to inculcate a habit of documentation not only within us but also amongst our office staff.

Clause (7) of Part I of Second Schedule states that a CA in practice shall be deemed to be guilty of professional misconduct, if he –

“does not exercise due diligence, or is grossly negligent in the conduct of his professional duties”. Be very cautious and see to it that nothing is done in ‘good faith’ without proper documentation/safeguards.

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Ethics and u

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Shrikrishna (S) — Arjun, you are looking relaxed and seem to be enjoying the chilled climate. Arjun (A) — Yes. At long last, we could upload all tax returns by midnight of 30th November. We paid advance taxes of all clients by 15th of December.
S — N ow, what is going on?
A — U sual running about for scrutiny assessments!
S — But tell me. You got so much of additional time for tax audit. Could you do it properly?
A — Please don’t ask me that! I know how we managed it. It is always a nightmare.
S — A re your audit papers organised properly? A — Who is going to see it now?
S — T hat’s the trouble with all of you. You have learnt many times that work should not only be done, but it should be seen that is done.
A — O f course, we have so many papers generated. But where to keep them? We don’t have space to keep all that record. We have to either scrap it or give back to the client!
S — T his is the folly. You somehow sign the audits. That too, backdated! And say that you don’t have working papers. I told you so many instances of complaints for misconduct.
A — But how to overcome this problem?
S — See, I cannot tell you the whole list of documents that you need to maintain. That you know better. Do you have at least the appointment letters of all audits?
A — N o. Only for companies we have started taking. It is compulsory to upload to ROC – with 23B. All these years we never did it.
S — I know, you people do it only when you have no option. That too, at the 11th hour.
A — A ll queries are also there. Now we send the queries on e-mail. So automatically, there is a record.
S — But when did you send the queries on mail?
 A — Continuously during the last two to three months.
S — A nd when did you sign the audits?
A — Company audits in the beginning of September. And tax audits in November.
S — I had told you that a partner of even a large and reputed CA firm was held guilty since there were queries sent after the date of the audit.
A — O h! I need to see that. I don’t know what my assistants have done.
S — M oreover, there may be many queries raised. But have you put remarks as to how each one was resolved?
A — See. We just instruct our juniors to do the vouching etc. Some of the queries are solved. Some remain just hanging.
S — A nd you sign the balance sheet even when queries are unresolved. There are many cases where queries were not discussed at all. Obviously, it is a gross negligence. What about MRL?
A — T hat we rarely take. Everything is oral and in good faith.
S — I have told you how ‘good faith’ is the most dangerous thing in your profession. If you sign in good faith, why should there be an audit by qualified person like you?
A — I agree. But in practice, it is difficult.
S — No. Not very difficult. You lack will-power. And once you develop that habit among the clients, they take you for granted. Thereafter, it is difficult to insist on these things.
A — What you say is right.
S — A ctually, it is very wrong that you relax immediately after the deadline. The real work should be done at this stage. Organise the records, audit files, connect all loose ends. Your staff will be available. Do the right things when everything is fresh in the mind. Who will remember after four or five years? Where will you trace the records?
A — Y ou are frightening me. I have understood. But somehow, it does not happen. I tell you, a couple of audits I have given many adverse remarks. In fact, there are annexure containing adverse observations.
S — That is alright. But what is your final audit opinion?
A — T hat is a standard one – ‘subject to this ……. It is true and fair!’
S — T hat itself is highly objectionable. On the one hand, you give serious qualifications; and at the same time, you say it is true and fair. How do you reconcile these two things? There is a clear direction in SA 700. You either give a disclaimer or say it does not give true and fair view.
A — Y es. That’s a point. See, every time we discuss these ethics, we invariably refer to some live case, some actual story. Today it was general.
S — Y es. But your negligence like this will give rise to many stories! And remember, now the misconduct means not only ‘gross negligence’ but also ‘lack of due diligence’. And again, now you cannot take shelter from ‘watch-dog’, ‘blood-hound’ theory.
A — Good that you told me all this. I was wondering how I should keep all articles occupied after the tax-returns. I will make them arrange all papers properly.
S — Y es. It will also help you in peer review. This is a wake-up call for you, dear!

Note: The above dialogue between Shri Krishna and Arjun is based on clause (8) of Part I of Second Schedule which is reproduced below.

Clause (8) of Part I of Second Schedule states that a CA in practice shall be deemed to be guilty of professional misconduct, if he – ‘Fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion.

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Ethics and You

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Procedure of Enquiry (Continued) – Part V

Arjun (A) — Procedure of Investigations of Professional and other misconduct and conduct of cases – Rules, 2007 ….. (repeats 3 – 4 times)

Shrikrishna —Arey, Arey, Arjun. Why are you repeating the same name again and again?

A — The name of the Rules is so long! I am trying to memorise it –by heart!

S — Ha! Ha! Ha! You can always make it short – as Misconduct Enquiry Rules.

A — I know, but I was just killing time until you came. Last time you told me that once the hearing is concluded, one can get the minutes – verbatim, Notes of hearing.

S — Yes – Not only when concluded; but even in between if it is adjourned for further evidence or any other reason. And you need to apply for it.

A— Good. If there is a long gap between two hearings, one may lose track of what has transpired earlier.

S — Sometimes, after the hearing is half-done and adjourned, the Committee may undergo a change. Usually, every February, your Council Committee changes.

A — Oh! Then what happens?

S — The new Committee gives you an option whether you want a de novo hearing; or it can continue from where it ended last.

A — What is the implication?

S — See, sometimes, for strategic reasons, it would be worthwhile to have a fresh hearing. After all, there is always an element of subjectivity in any judicial proceedings. All are human beings!

A — That’s true. If an Assessing Officer or CIT is changed, it makes lot of difference; either way. But tell me, what precaution one should take during the hearing?

S — After all, you should always project yourself as a decent professional. Approach should be polite and co-operative. Handling of papers should reflect your preparedness. Temper should be cool. No agony, no irritation, no nervousness.

A — It is easy to advise. But very difficult when you are sitting there!

S — I agree. That is where an experienced Counsel can help. You should not get excited or argumentative. If there is a mistake that occurrs, it is appreciated if you candidly admit it. Remember, the panel consists of CA professionals. So you can’t fool them.

A — Yes. One should not act too smart. That’s what you mean. How many times can one seek adjournment?

S — In practice, there is no limit if there is a valid reason. They don’t tolerate dilatory tactics. Already they give you a lot of time.

A — Once the enquiry concludes, what happens?

S — They declare it as concluded. You are given fullest opportunity to plead your case. Even after conclusion, at your request or on its own, the Committee may direct you to place on record any document or submission within 8 to 10 days of time.Of course, that cannot be a new evidence. Otherwise, the other party can object.

A — What happens if the complainant does not remain present?

S — Even then, the Council proceeds with the enquiry. The Administration steps into the shoes of the complainant. There is no automatic escape for the respondent.

A — Do they declare the result immediately?

S — No! No! It takes more than 8 to 10 months for the Committee to release its report. It is a very detailed report with reasons. The conclusion is stated as to whether a respondent is guilty or not in respect of each charge or allegation.

A — And punishment?

S — For punishment, there is one more hearing before the BOD or DC – as the case may be, But in that hearing, the respondent has to appear alone, without any counsel. There, he can plead why the punishment should be less harsh! Usually, they orally inform the punishment there itself. A formal communication is sent after a few days. That is called the ‘order’. The first one, holding you guilty, is a ‘Report’.

A — Oh My God! It is a long procedure. How long all this takes?

S — After the enquiry is initiated ………….

A — (interrupts) That means, prima facie opinion?

S — Yes. Right. After that, there may be a period of even two to three years until you actually receive the order!

A — Is that the end of it?

S — No. There are many points. But we will discuss them when we meet next. Om shanti !!!!

Note:
This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

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Ethics and u

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Shrikrishna (S) — Arey Arjun, we are meeting after a gap of four months. Where were you?

Arjun (A) — I was on a vacation. Now the war of audit and tax returns has started. So I resumed.

S — T hat may not be the only reason. You are looking quite disturbed.

A — Y es, very much. I am very unhappy with you.

S — O h! Why? What have I done?

A — A fter Mahabharata, you said you are introducing Kaliyug. That is the era of evil.

S — Y es. That was the plan of Brahma – the Creator. I am also bound by that.

A — But it is rather too much! Things are unbearable.

S — I t was bound to happen. It was predicted thousands of years ago.

A — Y es. But my friend is having such a nightmarish experience! I have lost my sleep. Henceforth, I will not trust anyone and will not help anyone! Not even close relatives.

S — But we had discussed the hazards of ‘good faith’ many times in the past. As a professional, one should have some skepticism.

A — T rue. But one of my CA friends had earlier helped his cousin out of the way. The cousin was like a vagabond, never settled in life.

S — Quite normal. Then?

A — O nce this cousin came to my friend and said he would start some big venture. He said some financier was willing to finance 90% of cost if he showed that he had 10% of his own.

S — T his is also normal. What next?

A — S o he requested my friend to give him a cheque of about 40 lakhs so that he could show it to the financer.

S — A nd your friend in good faith must have obliged him!

A — Y es! And now he is in deep trouble!

S — I can guess!

A — He wandered for four to five months from one financer to the other. And after five months, before the validity expired, he simply put it into his bank.

S — S o, your friend lost 40 lakh.

A — N o! What has happened is even worse than that!

S — O h! The cheque bounced?

A — Yes. And the cousin filed a suit under section 138 of Negotiable Instruments Act.

S — But he has to prove why the cheque was given.

A — H e fabricated a story that my friend had agreed to employ him on a salary of Rupees two lakh – per month; and he never paid for about two years! Now he paid it and the cheque bounced!

S — But, he has to prove it.

A — I n fact, my friend told the court that he was a low profile practitioner and would never even dream of employing any person on such a high salary! He had a CA working for him at about 40000 rupees whereas his cousin was not even qualified!

S — T hen wasn’t the Magistrate convinced?

A — That is the Kaliyug! It is difficult to prove a truth! S — I agree. It is difficult. But ultimately, truth alone will triumph.

A — That is alright. But for that, one has to sacrifice one’s life. He is convicted with six months’ imprisonment!

S — H as he not contested it?

A — H e has. But God alone knows when he will get justice. And on top of it, our Institute has initiated disciplinary proceedings against him!

S — Oh! Adding fuel to the fire! Poor fellow.

A — N ow we don’t know what view the Institute will take. While issuing the cheque, obviously there was no balance in my friend’s account.

S — I t is a big lesson for all of us. One needs to be ultracautious!

A — But, I want to ask you, if you are God, then this is your ‘Leela’ only. Why do you do such things? What pleasure you get out of it?

S — M aybe, in his earlier birth, your friend might have ditched someone. I need to see the records!

A — But now, you are also my cousin!!

S — H a! Ha!! Ha!!!

Note: The above dialogue between Sri Krishna and Arjuna describes one of those instances where a simple act, done by Members in good faith, can prove fatal. This act, though done out of innocence, may be regarded as a misconduct under Clause(2) Part IV Schedule I by the Institute, i.e., bringing disrepute to the profession. Hence, one needs to be very cautious and see to it that nothing is done in ‘good faith’ without proper documentation/safeguards

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Ethics and u

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Arjun (A) — Prabho! I am sorry, I could not meet you during Diwali; nor could I return your calls. I was so busy!

Shrikrishna (S) — What kept you so busy – even after your extended tax-deadline? I thought, you would be relaxing during Diwali.

A — Actually, I have a few assignments of transfer pricing. Most meaningless exercise! Nothing but deceiving oneself.

S — It may be true. But having accepted the work, one should do justice to it.

A — That is manageable. Actually, my main engrossment was our Institute’s elections.

S — Are you contesting? Nobody told me.

A — No, no… that’s not my cup of tea. I would prefer to remain away from politics. I have many other worthwhile things to do.

S — Good. But then what are you busy with? Where are you running?

A — My friend is standing for Central Council. Poor fellow, he lost his deposit last time even in WIRC elections. Why is he attempting Central Council – God alone knows.

S — But didn’t you advise him?

A — They don’t listen to such advice. I think, even there, there is some dirty politics or some ulterior motive which I will never be able to understand. And he is insisting that I should run along with him everywhere! Including outstation. I have to do it out of courtesy.

S — He must be spending quite a lot! Printing of brochures, posting them, etc. – a massive exercise. And expensive too!

A — Most important is, it is wasteful. And about our members – so called voters – the less said the better!

S — Why? Are they not interested?

A — Interested? Most indifferent. As good as illiterate.

S — Don’t tell me! Very strange!

A — Many of them don’t even know what is Central Council and what is Regional Council. They don’t even know what is the term of the Council. Many believe that the election is directly for the post of President.

S — Do they at least know who is the President?

A — I am doubtful about that also. You will be shocked that during the last election, the percentage of invalid votes was also high.

S — That means they don’t even know how to vote. But you circulate all instructions. Don’t you?

A — Of course, yes. But who bothers? They just throw all such letters into dust-bins! Many in industry are least concerned about Institute. They don’t even take membership.

S — What do these Council members gain?

A — Very few are sincere and dedicated. They don’t have personal agenda. But many of them do it just for publicity, position, public relations. The fact is that they have time and money to spend.

S — That means there is not much difference between our public body elections and your professional elections!
 
A — You said it! Many candidates spend so lavishly on publicity. Real talented people cannot afford it. They either remain away from the whole activity; or very few good people win it purely on merit. But the situation is worsening.

S — A nd what about their preferences? Do they vote judiciously?

A — Ha! Ha! Ha! – They go by caste, community, language and all such factors that exist in general polls.

S — Oh! That’s very sad.

A — I ndeed, disgusting. All those who have never met you before, suddenly develop so much affection! And they abuse the electronic media – cell-phones, whatsapp, facebook, email! One gets mad. And in that process, even good communications of genuine candidates are overlooked.

S — There should be greater regulation and close monitoring. Printing and stationery is a national waste! I think, we should discuss issues of ethics pertaining to such candidates and representatives.

A — I agree. But now it is too late! We will do it later. Bye. I need to go on my friend’s campaign. Remember, his serial number is 25. Do tell your devotees who are CAs. Please!

Om shanti !!!!!

Note

The above dialogue is intended to reflect the harsh reality of our Institute’s elections. It’s high time that we, particularly the voters, rethink about the whole process of election.

Ethics and U

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Procedure of Enquiry (Continued) Arjun

(A) — Where is this Lord Shrikrishna gone? He says he is omnipresent. But often makes me wait! Shrikrishna

(S) — Arey, Arjun. You have already reached! Sorry, I was held up.

A — Don’t worry. We are quite used to such waiting in the tax department. Anyway, you were explaining to me the procedure for enquiry of disciplinary cases.

S — Yes. Your friend was to apply for extension of time to send a reply. Did he do that?

A — Yes, he did. But there is no response from the Institute.

S — That does not mean that he should just wait for reply and do nothing till then. Usually, they do grant additional time of 15 to 20 days.

A — Ok. He has prepared some reply. He is alleging that the complainant himself is a bad person and the complaint is frivolous.

S — Y our friend must be feeling that he had helped the complainant in the past, and now the complainant is acting vindictively! Right?

A — Yes, precisely. How can he complain when he is himself a defaulter? One should come with clean hands before the Court for justice.

S — You are right. But that is in general jurisprudence. Here, your Council has no jurisdiction over nonmember.

A — So, anybody can complain? The Council cannot do anything to outsiders? They will catch hold of only the members?

S — Unfortunately, yes. There are other fora where you can seek justice by retaliating. But your Council is concerned only with the good behaviour of members.

A — Why so?

S — Because the Council has to uphold the reputation of the whole profession. Misconduct of any member adversely affects the image of the profession and it is harmful to all other members.

A — I appreciate what you mean. Then what should my friend do?

S — He should write a proper reply to the point. Each and every point alleged by the complainant should be tackled systematically. One should write objectively and not emotionally. All paragraphs should be serially numbered.

A — So, a counter-attack on the complainant will not help?

S — Exactly. You may point out in a decent language as to how the complainant himself is a wrong-doer. But emphasise that you have acted properly. That is what the Council wants to see.

A — So his errors do not justify mine, right?

S — Obviously. Otherwise, how will the profession have credibility?

A — OK. What happens after he sends the explanation?

S — That explanation is simply forwarded to the complainant. He gets an opportunity to send a rejoinder.

A — Why? Even if my reply is convincing, it has to go to him?

S — Yes. They cannot close it merely on your explanation.

A — Ok. Then to his rejoinder, I can send sur-rejoinder? S — N o. You have no second inning.

A — Ah! This is unfair.

S — Under the new system, you have no further opportunity at this stage. Once these three documents are received, that is, the complaint, your reply and rejoinder, then only the Directorate examines the case.

A — Oh. Nothing till then!

S — But while scrutinising, if they want any further information or document, they will write to either party and get it.

A — After examining the case, they give the final verdict?

S — No. The Director forms what is called as a prima facie opinion; as to whether you are ‘prima facie’ guilty; or not guilty.

A — So, it is the Director who decides this? That means, the justice is left to the bureaucrats?

S — No. The Director has to present the prima facie opinion before the Board of Discipline if it is Schedule I offence.

A — And to Disciplinary Committee if it is 2nd Schedule. Correct?

S — Yes. And if mixed one, then also to DC. BOD or DC may concur or not concur with the prima facie opinion. Or even partly agree or disagree on certain items.

A — What I have understood at this stage is that your first reply itself should be as exhaustive as possible.

S — It should be supported by documentary evidence also.

A — Then what?

S — If you are not prima facie guilty, you receive an intimation that your case is closed. Otherwise, they inform you that there will be a detailed enquiry.

A — I think, this much is enough for the time being. I will explain to my friend all that you have told me. But I need to know more. Next time, you please explain to me how the enquiry is conducted. But please give your blessings to my friend so that he will not be held even prima facie guilty.
S — Tathaastu!

Note: This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

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Ethics and u

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Negligence – Failure to disclose a material fact

Arjuna (A) – Hey Bhagwan, last so many occasions you have been telling me the instances of negligence of a chartered accountant. Surely, it is a misconduct.

Shrikrishna (S) – Yes. That is clause (7) of Part I of Second Schedule. But remember that it covers not only gross negligence, but also the lack of due diligence.

A – I understood. But I am now tired of listening to the stories of negligence. Tell me something else today.

S – Actually, although this is one of the most serious misconduct, this clause rarely operates alone. Quite often, alongwith this clause 7, one or both of the other two items are invoked.

A – What are they?

S – First is clause (5); and then (8). These are invoked simultaneously although the net result is clause (7).

A – Tell me one by one. Don’t confuse me by explaining all of them together.

S – OK. Let us start with clause (5). It says that if the auditor is aware of a material fact which is not disclosed in a financial statement; but disclosure of it is necessary, then it is a misconduct. In short, it is a failure in performing his duty.

A – But the primary duty of disclosure is that of Management. Our Council specifically makes us write such a remark in our audit report.

S – Agreed. But that does not absolve the Auditor of his duty to comment on such deficiencies. That is the very job of an auditor. Otherwise, on what basis can you say that the accounts give true and fair view?

A – But you know, many times, clients do not tell us the full facts. Or they pressurise us not to mention certain things.

S – If you start accepting such requests from the management, then you are not fit to be an auditor. Moreover, it is also your duty to ask for information.

A – We do ask; but often, we do not insist on it. And if we report certain things, we feel the client would be in deep trouble.

S – That is a mistake. Heavens are not going to fall if you report certain discrepancies.

A – I can tell you, in many companies, fixed assets register is never maintained properly. In fact, it is not maintained at all!

S – Yet, you write a standard remark in CARO report.

A – Yes. But tell me of some other instances.

S – I must have told you of a case of an auditor of an educational trust. A very prominent educational institution had schools and colleges at multiple locations. Highly placed people were on its governing body.

A – Then what happened?

S – It had opened many bank accounts required from time to time. Sometimes, accounts were opened for temporary purpose of receiving some grants; or for particular projects which were then completed.

A – Yes. It is quite normal.

S – One junior professional was their auditor. They told him that out of some 16 bank accounts, statement of 5 accounts were not available despite follow-up with respective banks.

A – That is a common difficulty. Accounts must have been inoperative.

S – They told him that there were hardly any transactions except perhaps a few internal transfers. He believed them and did not put any remark.

A – We also avoid putting any qualification in such cases. We feel shy of doing so!

S – That’s the trouble. In the subsequent year, there was some other auditor. He found the bank statements and noticed that there was an impact of about Rs. 30,000/-. Remember, the total collection of that Trust was more than Rs. 8 crore!

A – Oh. Then the impact was negligible!

S – Subsequent year’s auditor adjusted it in the Trust Fund in the next year and again did not put any remark. The adjustment was shown in the balance sheet without any explanation.

A – Actually, for educational trusts, there is no revenue impact. Who complained in this case?

S – Surprisingly, the Income Tax department complained! This again was not revealed in scrutiny assessment; but while processing the application for renewal of section 80 G certificate, the Director of Income Tax noticed it!

A – But why is the tax department bothered about such trivial things?

S – That’s your fate! Many times, even big blunders go unnoticed; and a small thing proves fatal. I also told you long back that whether any person’s interests are adversely affected or not is not material. Council wants to ensure that its member performed his duty diligently!

A – That is all right; but why small people are victimised? So in this case, what happened?

S – Unfortunately, auditors for both the years were held guilty of professional misconduct.

A – Oh my God! The first auditor should have mentioned the fact that bank statements were not made available. He should have stated a disclaimer to that effect.

S – Yes. Thus, it is a failure to disclose a material fact. Its impact on quantum may not be material; but in principle, it is a lapse when statements of 5 out of 16 banks accounts are not available.

A – Had he taken Management Representation Letter?

S – Yes, he had obtained MRL. But his ‘stars’ were unfavourable.

A – How then, are other clauses attracted?

S – Clause (8) talks about failure to obtain sufficient information which is necessary for expression of an opinion. The negligence or lack of due diligence is the resultant failure. One has to take care of all these clauses.

A – Yes. We often consider only ‘gross negligence’ as a misconduct.

S – Important point is when a punishment is awarded; it may be for each such clause. Thus, if one’s membership is suspended, it may be one or two months for each of these clauses!

A – Then I should be more vigilant and should write the report without any such psychological inhibitions. Without fear or favour!

S – For small lapse, consequences may be too harsh!

A – God, only you can save the audit profession!

Om Shanti!
NOTE :

The above dialogue between Shrikrishna and Arjun deals with the Clause (5) and (8) of Part 1 of the Second Schedule which are often invoked alongwith Clause (7):

Clause (5): fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity.

Clause (8): fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion

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Ethics and u

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Certification of projections:

Arjuna (A) – Oh God! I am really fed up. I feel I should not sign any document at all.

Shrikrishna (S) – What happened? You have been signing so many things – reports, certificates and what not!

A – Yes. But that is inviting trouble for myself.

S – If you sign diligently and carefully, why should there be any trouble. That is your very profession. That is your bread and butter.

A – I know. But people expect us to sign anything and everything under the sun! Regulators, Bankers make us sign any kind of certificate.

S – If you are not comfortable, don’t sign it. Who is forcing you to do so?

A – The relationship, Bhagwan, our relationship with client creates pressure on us.

S – Don’t make general statements. What exactly is your worry?

A – Now see, many of our clients apply for bank loans. They submit project reports. Quite often, it is prepared by us only.

S – Nothing wrong about it. Then?

A – Bankers insist that we should sign the projections.

S – How can you certify the projections? You should refuse.

A – That’s the difficulty. We CAs have not been taught to say ‘No’ at all. We try to help the client anyhow.

S – True. But client also should appreciate your difficulty.

A – That does not happen. It is a one-way traffic. They always expect us to compromise and oblige.

S – But they never reciprocate! Is it not?

A – You said it! The client sits on our head because he is impatient for the loan. The Banker also pressurises us. And many of us succumb to it.

S – Client takes the loan and in due course, becomes an NPA. Right?

A – Yes. And then the first scapegoat is the chartered accountant! Banks routinely file complaint to our Institute. We are trapped!

S – So clients emotionally blackmail you that they are not getting the loan because of your unwillingness to sign. In such a case, you should clearly tell them that your Institute does not permit you to sign any projections.

A – But I don’t understand why bankers insist on our doing irregular things?

S – Because that helps them save their skin. If anything goes wrong, they can pass the blame on you people.

A – But why can’t we sign the projections?

S – You are asking an elementary question. Paarth, you can certify only what is factual. That is the very meaning of ‘certificate’. Projections are essentially based on assumptions; and are always uncertain. If you venture to do that, you will be a ‘fortuneteller’ and not a chartered accountant.

A – Tell me, is there is no way out at all? Because if I refuse to sign, client says he can obtain signature from hundreds of other CAs.

S – You people lack unity. That is why people take you for a ride. The quacks bring disrepute to your profession. They can sign anything.

A – And that spoils our relationship with the client. He feels unhappy with us!

S – You should read and understand AAS-35 – now SAE 3400. It does permit you to sign projections if you fulfil certain conditions.

A – What are those conditions?

S – I can’t explain all the details. But broadly, the assumptions should be realistic and reasonable. They should be clearly stated. Even hypothetical assumptions should be consistent with the purpose of the information.

A – What other things should we see?

S – If any study or survey is done by some agency, you should obtain the report. You should also study the track record and history of the entity. Moreover, projections should be restricted to a reasonable time period in future. Further, you should also judge the management’s competence to prepare proper projections.

A – I think I should also read that SAE 3400 and show it to the client.

S – Most important, you should ensure a clear engagement letter and also insist that all the representations of the management are in writing and signed by them.

A – My friends at district level areas find it all the more difficult to tackle such situations. They have very limited work opportunities and have to compromise on many things.

S – And there is often an unhealthy rivalry.

A – I feel the Council or its Committee should take up the matter with the managements of the Banks and ask them not to insist on such things.

S – Yes. And your local associations and study circles also can make representations to the Banks.

A – There is yet another problem. One bank asked a CA to give a certificate that all statutory dues have been paid. How can one certify that? In our country, there are hundreds of laws. It is impossible to visualise all of them.

S – Very true. In such cases, you should specify the various laws that are commonly applicable to such entities and restrict your certificate to only those statutes. There cannot be a generalised certificate. Even under CARO, only specific laws are covered.

A – But tell me. If one gives such certificate, who is going to see that? Banks say it is just for their record.

S – So long as everything is smooth, there is no problem. But once the unit starts defaulting in servicing the loans, banks will take out all these certificates. And it is a serious misconduct. It is gross negligence as well as lack of due diligence. Many disciplinary cases are coming up on this count! And not following the accounting and auditing standards is clearly a misconduct.

A – I will take up this issue in our study circle and do something concrete to save our fellow-members.

S – Good. That is why you are so dear to me!

Om Shanti!


NOTE :

The above dialogue between Shrikrishna and Arjun deals with the Clause (3) of Part 1 of the Second Schedule which are often invoked alongwith Clause (7). It states that:

A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he-

Clause (3): permits his name or the name of his firm to be used in connection with an estimate of earnings contingents upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast.

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Ethics And U

Shrikrishna (S) — Arey Arjun, I am waiting here for you since long.  You were to come at 5.  It is already 5.45.
 
Arjun (A) — Very sorry, Bhagwan.  Got held up in income tax office.

S — Why?  Now all scrutiny assessments must be over. April is a relaxing month.  Isn’t it?

A — For CAs, there is no relaxation at all.  We have to work like     donkeys.  There is so much harassment for recovery of tax.Clients’ accounts are attached, prosecution notices are being issued like a child’s play.
.
S — Is it?  Why prosecution? 

A — The less said the better. I.T. authorities have innovative brains. They are always searching for new avenues to harass the assessees.  And the entire burden falls on CAs – with no fees!

S — Anyway!  That’s a permanent headache of our country.

A — I feel, bureaucracy does not want transparency.  They don’t want discipline and digitalisation.

S —  Why?  That will reduce their workload.

A — But they may be having vested interests in allowing the state of confusion to continue. They may be interested in manual intervention, for reasons best known to them!

S — That’s an endless subject.  Last time, we discussed the preliminaries of NFRA.

A — Yes.  I remember.  Now I am worried about bank audits. Days are very bad for CAs.

S — I agree.  CAs are projected to be main culprits in all financial frauds.  That’s unfortunate.  But sometimes, you CAs also behave very loosely.

A — What do you mean?  We work round the clock – with no family life.  And we are the most underpaid profession.

S — May be!  But you don’t follow even simple systems.  First and foremost is the time discipline.  You people are never on time!

A — It is partly true.  But we are always at the mercy of others!

S — You have made yourselves vulnerable; always a soft target.  You have allowed yourselves to be taken for granted.

A — What to do?  Business community is so dominant!  We can’t afford  to say ‘no’ to them.  They simply go away and catch hold of another CA.

S — That’s the pity.  You lack unity.  You come together for academic discussions; but never for collective action!  And you have developed a habit of ‘managing’ everything.

A — Yes.  Even CPE hours we try to ‘manage’.  But the recent episode of bank frauds has caused turmoil in the profession.  I wonder whether I should do any bank audit at all!

S — If you act methodically, you should have nothing to fear from.

A — But they don’t allow us to work systematically. There are strict timelines.  A big branch to be audited in barely 3 to 4 days.  And no one co-operates.  Poor branch manager alone has to face the music.

S — But what prevents you from keeping your own papers right?  Tell me, do you write to previous auditor?

A — Why should we write?  Appointment is made by RBI or the Board of a nationalised bank.

S — My dear, Arjun.  There is no exception to clause (8).  Whosever appoints you, whatever be the organisation, and whatever be the type of audit, writing to previous auditor is a must.

A — But then how can we meet the deadline if we wait for his reply?

S — In this particular context, you need not wait; but writing you cannot avoid.

A — I must keep this in mind.

S — Moreover, you don’t keep working papers.  You know that the work should not only be done; but it should be seen to be done.  And while doing audit, you should always have professional  skepticism.

A — What is that?  You mean we should suspect everything?

S — No.  Not that way.  But you cannot afford to accept everything in good faith and at face value.

A — But when reputed organisations produce documents before us, how can we disbelieve that?

S — But you should learn to verify independently the truth of every statement of a client.  He should get a feeling that you verify every document, it has a psychological impact.  And when there is  slightest of suspicion, you should take it to its logical end.

A — What you say is right.  Very often, we just leave it like that. We avoid to escalate the matter.

S — Do you ensure that your assistants are properly trained?  Tell me, have you ever read the Standards on Auditing?

A — You mean SAs?

S— Yes.  I believe, most of you carry out the audit just by common sense, without studying the relevant material properly.  You never make efforts to upgrade yourselves.  Do read SA 200 and SA 240 before you do any audit now.

A — But we really slog.  We do the work sincerely.  And there is no time for documentation and correspondence.

S — That is precisely where you lack.  Documentation is a must.

A — I know.  There are many big firms. They do not really do much indepth audit; but merely compile thick files of working papers.They command fat fees.  All these laws and ethics, I feel, apply only to small people like us.  After all, might is right.

S — Don’t say so.

A — I have a few friends who have affiliations with some foreign firms and they enjoy the brand, they do advertising under the corporate shield, they do anything they like.  Nobody is going to ask them in our country.

S — Arjun, I understand your grievance.  But don’t worry.  Now Supreme Court has taken serious cognizance of all these activities of Multinational firms.

A — Oh!  When was that?  Good, Good.  Tell me some details.

S — Supreme Court delivered its decision on 23rd February, 2018. Very detailed discussion.  I suggest you read it yourself.  But don’t read it just for fun.  Learn something from it and try to implement the basic principles of ethics.

A — O Lord!  I always obey your commands!

!!OM Shanti!!

Note:
This dialogue is in the context of recent scandal of PNB, ensuing bank audits and also the Hon’ble Supreme Court decision in respect of Multinational Accounting Firms (MAFs). – Civil Appeal No. 2422 of 2018 [Arising out of Special Leave Petition (civil) no. 1808 of 2016].

Ethics and U

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Arjun (A) — Hey Shrikrishna, we have been meeting every month to discuss
the ethical issues, disciplinary mechanism and things like that. But
tell me, where shall I find all this information?

Shrikrishna
(S) —There are many sources. But you are always on the battlefield.
Always fire-fighting! Where will you find time to read. You can always
ask me!

A — That is alright. But you are not that easily accessible to all, no? That’s the problem.

S — That’s true. I am reachable by ‘Bhakti’ alone. True devotion my dear, real, genuine devotion

A — But if we want you to save us from disciplinary case, how do we worship you? What is the Bhakti that you like?

S
— That’s a good question. The best form of my worship is to do your
duty i.e. karma religiously. U nfortunately, many of you are operating
very loosely; in an unprofessional manner. You never upgrade your
skills.

A — Why? We do have to complete our quota of CPE hours ! 30 hours every year, You see !

S
— I know. Don’t tell me how most of you just ‘manage’ it. You people do
it merely as a compliance. That too, because it is compulsory! Its
spirit is lost.

A — And there also, we always seek ‘extension’. Anyway, first tell me which books to refer.

S — Arjuna, you CAs must have read a lot of books, but I bet you have not read your ‘CA Act, 1949’.

A
— Yeah, you are right. I am only aware that there is a CA Act. But have
never gone through the same. Perhaps it was there in our final CA
syllabus.

S — Great Memory ! But my dear, it was amended in the year 2006.

A — May be! Who has time to read? You see.

S
— Ah…the common excuse – ‘No time’! See Arjuna, your CA Act is the
base of Code of Ethics. And you should atleast make an effort to go
through that. Chapter V of that Act deals with misconduct.

A — Oh! I see. S — Next is CA Regulations. Just as you have Income tax Rules, there are CA Regulations also.

A
— Achha. But these are bare texts. How will I understand everything
only by reading these. Besides, reading bare texts is so boring!

S
— Ya…there you are! You also have a book – ‘Code of Ethics’ published
by your Institute. This is like a commentary. It has elaboration on
various sections and both the Schedules. At the end of this book, one
can also see Council General Guidelines.

A — Oh that’s good. That means I have to read CA Act, Regulations and this commentary. This is so less compared to Income tax!

S
— No, wait…there is more to it. For your better understanding, the
Institute has also published FA Qs. You also have Appellate Authority
(Procedure) Rules, Enquiry Rules and so on.

A — But, Prabhu,
sometimes I have practical doubts like, how to enrol an article, how to
open a second office and many such things. Reading these books and
guidelines will help me? Or should I call the Institute office directly.

S — Arjuna, your Institute is very smart!. For such practical
queries, you have a ‘Manual For Members’. It has all information like,
which form to fill up, what is the time limit, what is the limit for
enrolment of articles, how much is the fees etc.

A — Do we have any online material for quick reference?

S
— Yes, of course! Your generation does not want the pain to go through a
book!!!…Online search is always a better option for you guys.

A — Hey Bhagwan, you know me so well….you see, when its online, we can always do ctrl+F and make things faster!

S
— Yes… the famous ctrl+F and google search. That’s the reason your
generation is so fast. But most of the time its half baked knowledge.
Anyway, my dear Arjuna, all this material is available on the
Institute’s website. You also have ESB website.

A — ESB? What is that?

S — It is Ethical Standards Board. Do you remember CESURA?

A
— Ya…I had read about that in CA Final. As far as I remember it is
Committee on Ethical Standards and Unjustified Removal of Auditors.

S
— Yes, that CESURA is now renamed to ESB. Even ESB has got good
technical stuff on its website. It has also uploaded Ethics Plus, a
brochure in question-answer form. Why don’t you go through the ESB
website yourself? I can’t spoon feed you everything.

A — Wow….Bhagwan, I never knew, we have so much literature on our Code of Ethics.

S
— Arjuna, remember, this literature is for your help and clarity only.
But eternal vigilance still stands. Always be upright and independent.
That’s what your profession stands for. And that is my real worship.
Understand?

A — Yes, Prabhu! Well said!

Om shanti !!!!!

Note
This dialogue intends to give information about various technical materials available on the Code of Ethics.

Ethics and U

fiogf49gjkf0d
Shrikrishna (S) — Arjun, you are looking very much tensed up today. Any problem?

Arjun (A) —Yes. Already having a tough time facing scrutiny assessments. Plus advance tax work is on. Again, after the Union Budget, some urgent study and action will be required.

S — But that is normal in this part of the year. You should be quite used to such pressure!

A — I agree. But suddenly my friend is insisting that I should accompany him to Delhi.

S — Delhi? What for? To meet the PM or FM? Ha Ha Ha!

A — No Bhagwan. He is a very low profile CA. Poor fellow was held guilty of misconduct in a very trivial matter. Probably, he was not represented properly.

S — So, what is there at Delhi now?

A — When he consulted a senior member, he advised him to approach the Appellate Authority of our Institute.

S — I know. It is presided over by a High Court Judge.

A — Unfortunately, Appellate Authority does not have camps in regional offices! One has to attend at Delhi only.

S — Oh! It would be very expensive. Travel, counsel’s fee, and so on!

A — True. He is very much afraid of all this. He has engaged a counsel; but he is insisting that I should also accompany him.

S — He may be a little diffident.

A — Yes. Actually, he is from a rural area. Does not have the exposure and smartness to organise all this.

S — Then better rethink as to whether it is worthwhile contesting the issue. What is the punishment by the way?

A — Actually, the punishment is a mere reprimand. But he feels it is a stigma.

S — I know of another CA who was awarded one week’s suspension of membership. But he did not find it worth contesting, though his case had a lot of merit.

A — Why? One should always fight for justice.

S — I agree. But justice at what cost? And what is the guarantee of result? Are you aware of the procedure of Appellate Authority?

A — No. I will be attending for the first time.

S — See, in the notice, they must have mentioned as ‘preliminary hearing’.

A — Yes. What does that mean? .

S— It means, they will only hear your side and ascertain whether there is any substance in your appeal.

A — And then what?

S — Then, sometime later, they will hear the other side – that means the Council’s side. And they will decide whether the appeal is to be admitted! You also will be called for that hearing.

A — Oh! That means like the regular High Court. But both sides are not heard together?

S — Only after the preliminary hearing!

A — Very strange!

S — Yes. And if the appeal is admitted, then only they will fix up a date for hearing both sides.

A — Oh, my God! So the poor respondent will have to travel to Delhi thrice – with the Counsel?

S — Yes, my dear!

A — Then double the cost! And again so much of time! Doesn’t seem worth the trouble.

S — To avoid all this, the best thing is not to commit any misconduct even inadvertently! Not even in your dream!

A — What you say is absolutely correct! Prevention is better than cure. I must tell all this to my friend. One should really do the cost-benefit analysis of the whole thing.

S — Unfortunately in our system, justice is becoming more and more costly; and illusory.

A — Bhagwan, after all, this is your ‘leela’. You alone can save us from disaster!

Om shanti !!!!!

Note
The above dialogue intends to introduce our readers to the procedure followed by the Appellate Authority. The readers can go through section 22A of the Chartered Accountants Act, 1949 for their self study.

Ethics and U

fiogf49gjkf0d
(Updating of knowledge)

Shrikrishna (S) — Yes Arjun, how was the budget?

Arjun (A) —You mean Union Budget of 2016-17? It was very nice!

S — What was nice about it?

A — FM has touched upon many pain-points of tax payers. Has tried to rationalise many provisions.

S — Oh! You CAs believe that Budget means Finance Bill. That too, only Direct tax. One needs to see the broader picture; the economic part as well.

A — I agree. But those astronomical figures of a few lakh crores; and high-dream schemes really don’t make any meaning. Statistics is always deceptive.

S — Still, you should try to understand those things.

A — What you say is right. But who has the time to go through it? You know how hectic March is for us.

S — But you have no choice. Clients will expect a communication from you about the salient features.

A — So many people and firms bring out the booklets. Our BCAS budget booklet is excellent. S — T hat’s true. But have you bothered to buy them and distribute among your clients? You should educate your clients.

A — We are running around for completion of scrutiny assessments; service tax calculations, and what not!

S — And what about bank audits that will come in April?

A — That reminds me. I need to attend branch audit seminars. I have also to complete my CPE hours! A headache!

S — But why did you not complete it before? Why wait till the last date; and do it only in extended time?

A — That is in our blood now! We CAs don’t like to do things in time.

S — So that at the last moment, you can act to be too busy!

A — But these compliances keep us busy round the year. There is no respite to think of anything creative.

S — There is one more important thing that you CAs have not taken seriously! And that may invite trouble.

A — He Bhagwan! What do you mean? Any more burden?

S — Yes. Income Computation Disclosure Standards. ICDS.

A — I have heard about it. What exactly is it?

S — You are mainly practising income tax. Then you should know it. There are 10 ICDS and the Income for financial year 2015-16 was supposed to be computed by applying ICDS.

A — Oh, My God! Really, is it applicable? So our advance tax estimates also were to be done by ICDS?

S — Of course! Materiality, Revenue Recognition, Foreign Exchange, Inventory Valuation and so many of them. All affecting taxable income.

A — But have they not postponed it? Such a new thing made applicable all of a sudden!

S — They brought it last year only. But you always expect extension of every compliance.

A — Lord, we meet here to discuss our Code of Ethics. What has ICDS to do with the Code of Ethics?

S — You are mistaken, my dear! Technical competence is a fundamental part of ethics. You are a professional. If you are not up-to-date in knowledge, how will you render proper service?

A — That’s a point.

S — Technical lapses, lack of basic knowledge on the part of a CA, are considered to be misconduct.

A — Is it negligence?

S — Certainly.

A — But is there any effect on accounts?

S — No. On account of ICDS, you need not change the accounts. But tax provision will be affected.

A — Then our audit will also be affected. It is a part of statutory compliance.

S — And not doing it properly is a gross-negligence; or at least a lack of due diligence!

A — Clause (7) of part I of Second Schedule! Right? S — Very good! You remember so much!

A — So now, I need to update myself on Ind AS and ICDS! That means, my summer vacation is gone!

S — Don’t sacrifice your vacation. But always have knowledge update in your priority list. Be pro-active and avoid last moment tensions.

A — I agree. It affects our health; quality of work suffers; and in general, there is trouble.

S — Timely action will bring you peace in practice.

A — You are absolutely right, Lord, as always! Om shanti !!!!!

Ethics and U

fiogf49gjkf0d

(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 !!!!!

Ethics And U

Arjun (A) — (Chanting
bhajan) Hare Rama hare Rama, Rama Rama Hare Hare!

Hare
Krishna Hare Krishna, Krishna Krishna Hare Hare!

Shrikrishna (S) — Arey.
Arjun! What makes you chant so ardently? Any serious problem?

A —    I have learnt that in this kaliyug,
Namasmaran is the only remedy. Finding it difficult to survive.

 

S —    What
happened? This is your normal grumbling.

 

A —    This
profession is so demanding and absorbing that you can’t think of anything else.
Compliance! Compliance!! and compliance!!! – or else, penalty and prosecution.
There is no other thought in mind!

 

S —    I
had told you, change of work is the best relaxation. That keeps your creativity
alive.

 

A —    But
what else to do? We don’t get time to come out of the work.

 

S —    You
should have developed some hobby. That would keep you mentally at peace.

 

A —    CA
pass hote hote jaan nikal gayi. Hobby ke liye time kidhar tha!

 

S —  You
have to take out some time. Have some social life. Come out of this obsession
of practice.

 

A —    Social
work? That reminds me. My friend is in deep trouble because of this social
work!

 

S —    How?
What happened?

 

A —    He
was helping a social organisation of which he was a member. They were doing
purely social work.

 

S —    Very
good.

 

A —    No.
That only brought him into trouble.

S —    How?

 

A —    Since
he is a CA professional, they expected him to streamline the administrative
things. He was neither a trustee nor an office bearer.

 

S —    Then
what was the problem?

 

A —   In
their constitution, there was a mention that the Trust may appoint an
administrator and a token remuneration was also allowed in the bye-laws.

 

S —    Oh!
Then what?

 

A —   They
started calling him `Administrator!’ But he was working purely honorarily. He
did not even think of the remuneration. He never received any such honorarium.

 

S —    Then
where is the problem?

 

A —   Earlier,
there was an office bearer who had committed many irregularities. My friend
exposed his mis-deeds. So he had to leave. He was waiting for vengeance.

 

S —    But
what wrong did your friend commit?

 

A —    Actually,
my friend was a partner in a CA firm. The audit of the trust was pending due to
the disorganised functioning of that old office-bearer. So my friend, with good
intentions, got the audit completed in his firm. The partner did it. My friend
was never involved in the process of audit. As an administrator, he guided and
helped the staff of the institution in complying with the audit requirements.
He was like a friend and guide.

 

S —    Finally
what happened?

 

A —  The
old office-bearer has filed a complaint to ICAI that my friend did the audit of
an organisation of which he was himself the Administrator! They say it is
conflict of interest.

 

S —    Very
sad. One needs to be very cautious.

 

A —    Actually,
he was not a part of decision making nor had any executive powers. He was
described as Administrator merely because he was helping them out to clean up
the old mess.

 

S —    Poor
fellow! I feel, he will be absolved if one considers the scenario in totality.
Things happen inadvertently.

 

A —    It
is a big lesson to all such ‘social workers’ who are practicing as CAs.

 

S —    I
agree with you. But don’t worry. Your friend should come out clean if what you
say is true. If his karma is bonafide, it is my duty to give the fruit
accordingly.

 

A —    Let’s
hope, he will be absolved. He is very nervous now. The ultimate result may be
favourable; but the process of enquiry is very cumbersome. The mental agony in
itself is a punishment.

 

S —    But
that should not deter you from doing good social work. Only a little more
caution is required. For this, these should be a constant hammering of the code
of ethics.

 

A —    True.
I must thank BCAS for making us aware of all such realities of life. I will
certainly think of taking up some good social work.

 

S —    Good.
You are blessed!

 

          Om
shanti.

 

The purpose of this dialogue is to bring out some real life
situations where things happen inadvertently. _

 

Ethics and You

Section 132 of the Companies Act, 2013 – NFRA provisions

 

Arjun
(A) — (talking on phone to some CA friend).

Oh! So you mean to say, all power’s of our Institute for disciplinary
matters have gone away? That means, it will be handled by Government officials?
(waits for response from that friend).

Baap re! Mar gaye! We are already tired of facing the revenue
authorities ………… (again a response from the other person)

Oh My God! You also don’t know much? Don’t worry.  I will understand from Bhagwan Shrikrishna
right now! HE is here.

 

Shrikrishna
(S) — Cool down, Arjun. Don’t get hyper. You are a professional.

 

A —    As usual, Bhagwan,
You came at the right time! I thought of You and You arrived.

    

S —    You are my most favourite
friend and devotee! What are you worried about?

 

A —    I don’t understand these new
NFRA rules. I feel like closing down the practice.

 

S —    So much panic? And that too
without understanding the so called new Rules! It is unbecoming of a
professional.

 

A —    What else can we do? My
friend says – now our misconduct cases will be handled by NFRA. Our Institute
has lost control over disciplinary cases!

 

S —    NFRA?

 

A —    Yeah! That National
Financial Reporting Authority! The name NFRA sounds like Nafrat!

 

S —    Oh, you are talking about
Section 132 of Companies Act! Have your read it?

 

A —    No! Who has time to read
such things? Here, we are simply fire-fighting with compliances and scrutiny
hearings!

S —    Then do read it. Most of
your fear will go away.

 

A —    How do you say so? Somebody
told me that at present, our Council Members in the Disciplinary Committee
understand the practical difficulties of our profession. We don’t know what
these Government guys will do! They will simply harass us; and I don’t know
what they will expect!

 

S —    But why don’t you think of
not committing any misconduct in the first place? Prevention is better than
cure.

 

A —    I agree. But you are aware
how our CAs are unnecessarily dragged into the disciplinary cases. There are
disputes between two parties and CAs are made scapegoats.

 

S —    That I know. But do you know
the new Rules? How is ‘misconduct’ defined in those rules?

 

A —    No. I am totally in the dark.

 

S —    My dear Arjun, there is no
change in the definition of ‘misconduct’. It is the same thing as before. Same
two schedules. No changes at all. Only the jurisdiction has changed.

 

A —    So all these small items of
misconduct will be seen by NFRA?

 

S —    Yes. But not in all cases.

 

A —    What do you mean?.

 

S —    Relax Arjun. NFRA will deal
with only large firms. For small and medium firms like yours, the jurisdiction
is still with your Institute.

 

A —    What do you mean by large
firms?

 

S —    Large means those firms who
are auditing more than 200 companies; or more that 20 listed companies, or
those who are auditing the companies listed abroad.

A —    Oh!  I won’t have such big audits in this birth.
Next birth, I will surely not be a CA! Please help me in my next birth; and
keep me away from this profession.

 

.S —   Don’t be so negative and
skeptical. You need to do the profession properly.

 

A —    Anyway! Good news is that an
average CA will not have to face NFRA. Right? What relief to all small and
medium firms like ours! Lord, you are very kind!

         

S —    But do read and understand
what is NFRA about.

 

A —    Leave it. Bhagwan,
for the time being, explain it to me next time we meet. Now I have to complete
VAT audits and understand the Union Budget.

 

S —    I know all of you CAs! You
will study it only when it pinches you. You will be sleeping until a thing
starts biting you!  That always keeps you
under some fear or the other. Learn to update your knowledge constantly. Not by
merely managing your CPE hours.

 

A —    I agree. Our BCAS motto is ‘Na
bhayam Chaasti Jaagratah’. He who is awake and alert has nothing to be
afraid of! Next time, please tell me about NFRA in more detail.

 

S —    Sure, dear.

 

A —    Bhagwan, Pranaam to
you!

 

          !!OM Shanti!!

 

Note: The above dialogue discusses about the proposed NFRA
provisions (section 132 of the Companies Act, 2013) and gives a glimpse on its
applicability. _

 

Ethics and U

fiogf49gjkf0d
Disrepute to the profession

Arjun (A) — (chanting) Hare Krishna! Hare Krishna!

Shrikrishna (S) Vatsa, whenever you think of me with devotion, I appear before you!

A — ‘He Bhagwan’ ! Trahi maam! Please save me.

S — Why? What happened? Surely, some one of your friends is in trouble with your Institute.

A — Yes. For that only I have to meet you so often; every month!

S — Tell me, in the first place why do you people accept the assignments which you cannot carry out properly?

A — Bhagwan, this complaint is not for doing the work negligently; but for not accepting the work!

 S — Is it so? Tell me what really happened?

A — See, my friend’s firm was empanelled with some Regulator’s office for audit of its members. He did the audits assigned to him diligently for a few years.

S— Then what happened?

A — For 2013-14, audits of 3 such member units were allotted to his firm.

S — Good.

A — He also received the allotment of audit of the Regulator’s office itself. In a routine course, he communicated his acceptance and within a few days, went to the Regulator’s office to discuss the work.

S — Very good.

A — The officer over there expressed surprise as to how the firm was allotted that work, when audit of 3 member units had already been allotted to them.

S— Strange!

A — The officer also said that the scope of work was much larger and that the allotment was for 2 years probably to compensate for lower annual fees.

S — Then?

A — My friend noticed that the scope was really very wide and his firm was not equipped or geared up to do certain aspects of the work.

S — Such as?

A — Like system audit.

S — Oh!

A — So he came back, and immediately wrote to them that he would not be able to do the audit assignment.

S — Fair enough! Was he too late?

A — Not at all! He received the letter in mid June, met them in 10 days and by end June, he informed his inability. There were at least two more months for the deadline. But still, to his surprise, the Regulator cancelled his empanelment altogether for two years. They did not even give any opportunity of being heard.

S— Very surprising. I feel, it was some ego issue of the person in the Regulator’s office. Did they file a complaint?

A — No. They just passed on the information that the member’s conduct would bring disrepute to the profession, since he refused the work after having accepted it once.

S— Really, this is rather too much!

A — That’s what I am saying. Now-a-days, such complaints from Regulators are becoming too rampant.

S — Yes. MCA is also very active now.

A — Good that you mentioned about MCA.

S — Why?

A — My another friend received a notice from ROC’s office regarding the audit of a company. It contained 30 to 40 queries. Most of them were rather trivial. Actually, while scrutinising, one particular reality was overlooked by them and therefore, most of the queries were redundant.

S— So he must have replied to them.

A — Of course, he did. But unfortunately what they do is without applying their mind on your replies, they simply forward the queries to ICAI!

S— That means, waste of time of the member as well as the directorate of ICAI.

A — True! MCA could have easily dropped many of the points and sent only the points not explained to their satisfaction.

S— I agree. If what you say is true, there should be proper representation to the Regulator’s office.

A — It is becoming unbearable. Many of the members are keen to run away from the profession. They feel, the situation will still worsen in the years to come!

S— All of you collectively must seek some way out. Running away is not the solution.

A — True. That is why ‘hum aapki sharan mei hein!’

Om shanti !!!!!

Note:
The above dialogue shows how a Member should be cautious enough while dealing with Government authorities / Regulators. In the above case, had Arjuna’s friend verified the scope of work properly before accepting the assignment, he would have been saved from all troubles created later on. One may argue that the above act does not bring any disrepute to the profession as such.

ETHICS AND U

Vulnerability of the profession:

Shrikrishna
(S) — Arjun, you are looking very much upset today.

Arjun
(A) — Not only upset; but terribly afraid.

S —    Your BCAS’s motto is ‘Na Bhayam Chaasti Jaagratah’
He who is awake has nothing to fear about.

A —  That is alright in a motto. One can give a
big sermon on that. But what actually happens in practice?

S —    What happened?

A —  My friend has been trapped very badly. He
was unnecessarily dragged into disciplinary proceedings.

S —    But why? Has he done everything right?

A —    No. Actually, he was an auditor of an
executor and trustee company. In that audit, certain disclosures on a few
accounting standards remained to be made.

S —    Then what is wrong if he is faced with
disciplinary case?

A —    The reason why and how his lapses came to
surface are very strange.

S —    That does not matter. How he got exposed is
not relevant.

A —    But nobody is aggrieved by his lapses.

S —    That is also not material. Whether anybody
suffered or not is of no consequences.

A —    That is true. But the aggrieved party had
nothing to do with the audit. The real dispute was something else. Altogether
different.

S —    What was that?

A —    This executor and trustee company executed
the will of somebody. That is their normal business.

S —    Yes. What about that?

A —    One lady felt that in the process of
execution of the will, there was some injustice to her.

S —    Then why didn’t she write to the company?

A —    She did. But the company did not heed to her
complaints. So she wanted to teach a lesson to the company.

S —    Then what did she do?

A —    She made complaints to all possible forums;
and kept on following up vigorously.

S —    Oh!

A —    And she engaged some CAs to find out the
flaws in the financial statements of the company. Actually, that had nothing to
do with the company’s act of executing the will.

S —    Bad luck!

A —    My friend who was the auditor, was called by
ROC’s office. So were the directors.

S —    What then?

A —    Regional Director pointed out the flaws.
There was nothing wrong in financials; but a few disclosures had been omitted.

S —    So what did he do?

A — He agreed that the lapses were very
technical in nature. He suggested for compounding of offence. So, my friend
paid composition money of Rs.5,000/- and got the matter closed. Directors also
were summoned.

S —    Actually, when you compound an offence,
indirectly you admit the lapse.

A —    Agreed. But my friend felt that was the end
of the matter. ROC’s office forwarded the matter to our institute.

S —    Arere!

A —    Poor fellow! The directors also paid their
composition money and are now free! That lady got nothing in her hands. But
this friend of mine is facing the music of disciplinary action. This is unfair!

S —    Cool! Arjun, cool down. You may feel it is
unfair. I also feel sorry for your friend. But unfortunately, this is not a
case of ‘complaint’ against him. And the fact remains that there were flaws.

A —    If it is not a complaint, what is it?

S —    It is an ‘information’ case. The lady is out
of the picture. Due to some reason or the other, the institute has received the
information. They have to take it to the logical end.

A —    How vulnerable our profession is! Even a
person unconcerned with our work can create problems for us! He may not be even remotely affected by our work.

S —    That’s right, Arjun. Your Council feels that
a CA’s work should be perfect in absolute terms. Not in relative terms.

A —    This is a good lesson to all of us. But what
will happen in this case?

S —    He may be held guilty under clause (7) of
Part 1 of Second Schedule. ‘Gross negligence or lack of due diligence’. 

A —    Oh! That is very serious. Then there may be
a punishment!

S —    Since you aspire for independence, the
eternal vigilance is its cost. You have to be on your toes all the time. A
little laxity may expose you to so many risks.

A —    I agree with you. The new Company Law is
also like a nightmare to auditors! We are so vulnerable that we cannot even
imagine what will happen; when and how!

S —    So Arjun, just as I am holding the reigns of
this chariot tightly, you also have to do like that. A little looseness may
cost your dearly!

A —    Yes, My Lord! This is nothing but your
message of karmayga from Geeta! I bow before you. Pranaam!

Om Shanti.

(The purpose of this
dialogue was to underline the importance of perfection in our work and point
out the vulnerability).

Ethics and You

Arjun (A) — Hey Bhagawan, I always envy you. You are always
enjoying without any worries !

Shrikrishna (S) — Why? What did I do to enjoy?

A —  See, we are slogging here on GST; struggling
to somehow push the returns; and you played ‘Govinda’ dancing on music
with people !

          This year you enjoyed the independence
day by breaking the Dahihandi.

S —  What you are saying is right ! But it is not
that I enjoyed because it was my birthday. It is my very nature to be cheerful.
That is Karmayoga with detachment that I preached through Geeta to you.
Did you forget it?

A — It is very easy to say so; but you don’t
know our plight in complying with the tax laws. It is a nightmare !

S —  I appreciate that. But see my case. I was
born in prison at midnight. If king Kansa had known about my birth, he would
have killed me. Then it was heavily raining. There was a flood in river Yamuna.
In that situation, my father took me across the river and left me at Gokul.

A —  Yes, I am aware.

S —  Further, right in my early childhood, there
were attacks on my life, from cruel demons! I had a hard life.

A —   I know, you had to fight with many Rakshasas
throughout your life.

S —   So enjoyment and cheerfulness is my very
nature – ‘Swabhaava’. It does not depend on external factors. You have
to do your karma religiously.

A —  That is OK. But here the Government has made
it a total mess ! They are pushing the GST when their own machinery is not
geared up.

S —   Arjuna, you have faced many more challenging
situations when you were in exile for 12 years, and when you fought at Kurukshetra
in Mahabharata !

A — That is true; but our Government authorities
are more dangerous and fierceful than those Kauravas. Here, there is
nothing but confusion.

S —  Cool, Arjun. Cool down. Things will be
settled soon. You only put in sincere efforts. Start in time.

A —  But simultaneously, we have to do tax
audits. That deadline is also approaching. There are festivals in between.
Articles are on leave. I wonder how we are going to manage all this !

S —  They will give you enough time. Don’t worry.

A —  Don’t tell me. Nowadays, they have stopped
giving extension !

S —   Never give up hope. Think positive.

A — Actually, I forgot to tell you one incident
of one lady CA. She is a very average practitioner mainly into traditional
work.

S —  What happened to her?

A —  She had two new clients. One wanted some big
amount of loan. By coincidence, the other client claimed to be rendering
financial services; arranging for bank-loans and so on.

S —  Good. So she introduced one to the other.
Right?

A — Yes. And that person asked for advance fees
by cheque as well as cash for expenses. The client who wanted loan insisted
that he would do this only through this CA lady.

S —  Oh ! That’s dangerous.

A — You guessed it right. She collected fees,
issued her receipt; and passed on the amount to the other person through bank.

S —  Even cash ?

A — No. That she delivered physically.

       She sent email to him saying that she
has passed on to him the full amount. He confirmed it by return email; but with
a little vague wording.

S —  That person must have let her down.

A — Absolutely ! He ditched both – the lady as
well as that other client. And both the clients have filed criminal complaints
against each other, dragging the CA also into it.

 S —  So sad !

A — And on the top of it, he also filed a
complaint to our Institute! Poor lady. She just allowed the amount to be routed
through her hands and is now in deep trouble !

S —  That is because she issued a receipt as if
she was going to render the service ! I know, she did it innocently, with
honest intention.

A —  So vulnerable our profession is !

S —  So, again I tell you; Be very cautious. You
will be signing many audit reports this month. Be proactive. Be clear in
communicating. Don’t risk your own image while accommodating a client. Do
proper documentation. Keep all working papers. Don’t have too much good faith
in others. If there are new assignments, write to the previous auditor
immediately. Ensure, by careful verification and in writing that previous
auditors’ audit fees have been really paid – Get proper appointment letter and
engagement letter.

           And………

A —  Oh Lord ! You are telling me the entire Code
of Ethics now perhaps for the 50th time! I know it by heart.

S —  But unfortunately, you don’t follow it and
then succumb to remorse ! It is my duty to tell you, advise you till you get
it. Just as I did it in Geeta.

A —  And Bhagawan, I do put your advice in
action most dutifully !

S — True ! But you must follow it more
skillfully for yoga is skill in action! Do your Karma diligently;
perform your part of duty diligently; and the fruit will follow. That is my
duty !

          Om Shanti.

            The purpose of this
dialogue was to underline the importance of documentation in our work and point
out the vulnerability. Acts done in good faith and to accommodate others may
sometime backfire very badly.

ETHICS AND U

(Timely communication)

Arjun (A) – Oh God! I am really tired. March is a nightmare!

Shrikrishna (S) – YI know. But you are quite used to such pressures.

A –    I agree. But too many things come at a time.  Advance tax, Service tax, time-barring returns and on top of it, gearing up for bank audits! Attend seminars!

S –    Time-barring returns? Why? They remain pending for two years.

A –    Yes. Our clients simply don’t move. They are lethargic and don’t respond to our calls!

S –    But do you write to them in time?

A –    Who has time to write? We make phone calls. Our staff reminds the clients and their staff. Somehow, writing becomes difficult.

S –    Why? You have technology at your command. You must initiate your action in time, by writing to the concerned people. You need to communicate with the client’s staff as well as with the client directly.

A –    What you say is right. Otherwise, clients keep on blaming us only, for their own lapses. They expect too much from us.

S –    Yours is perhaps the only profession that takes the burden on its own head to remind and follow up with the clients.

A –    You said it!

S –    You develop bad habits for the clients and then keep on crying. This is solely because you don’t communicate in appropriate manner and time! And with appropriate person ! It is the key of success in all walks of life; even in personal life.

A –    True. But we are always doing fire-fighting. There is no peace of mind to sit and write.

S –    That reminds me. You were saying, bank audits will be allotted and you need to gear up for it. But do you write to the previous auditor?

A –    It is allotted by the banks who are Government organisations. Where is the need to take NOC from previous auditor?

S –    You are mistaken. Firstly, there is no requirement of obtaining NOC as such. You have to simply communicate with the previous auditor in writing. That too, before accepting the audit. And the Council has recommended that it should be sent by registered post only.

A –    But even for Government audits?

S –    Of course, yes. It is immaterial who appoints you. I understand that bank branch audits are to be completed within a short time. But you can’t escape the requirement of writing. Also verify whether his undisputed audit fees have been paid.

A –    Oh My God ! Many of us don’t do that. They are under an impression that it is not required for Government audits.

S –    Remember, it is required not only for statutory audit; but for all types of audits – be it concurrent, internal, tax-audits and whatever.

A –    Email won’t do? or courier ? or hand delivery ?

S –    Why do you always think of bypassing the norms? Is it so difficult to send by registered post? If you send by hand, there should be clear proof that the previous auditor has received it.

A –    What if his address is changed?

S –    See, you have to send it to the last known address. And there are many ways of finding out the address, if you really wish.
A –    Anyway. Where else we need to be alert?

S –    Good question. See, Finance Bill is presented in February and it takes effect from April. There are many changes directly affecting your clients. Do you ever take the trouble of preparing a list or a note of provisions affecting your clients.

A –    Actually, so much literature is available. Why do the same effort?

S –    My dear Arjun, how many clients will understand what is relevant for them? There is so much of material; but one has to give them tailor-made suggestions. One has to pin-point what action and caution he should take. And also explain the gravity.

A –    I understand. It is always good to educate the clients.

S –    Not only clients; but your own staff and articled trainees. Do you ever take any trouble of training your own team? Otherwise, how will they perform well? How will they deliver what is expected of them?

A –    I agree, Lord !

S –    And remember, you have to do it now. Well in time !
A –    But many of our articles are on leave these days for their exams. That is another trouble.

S –    But you can do it as soon as they resume working.

A –    Good that you told this. I will plan it properly during this May. Ours is a group of CA firms. I will share this idea with them so that there will be many articles who can benefit.

S –    Good. But do it in time. You need to be proactive. Timely planning and communication is in your own interest. And a trained staff can make your life simpler.

A –    Yes, My Lord. I will try to inculcate this habit. Otherwise, things will go beyond our control; and every year, same stress will continue. Namaskar to You.

S –    You are blessed!

Om Shanti.

Note:This dialogue is based on clause 8 of part I of First Schedule to the CA Act; and also underlining the importance of timely communication.

ETHICS AND U

Arjun (A) — Hey
Shrikrishna, all these years I believed that YOU make sure that there is rule
of justice in the world! But…….

Shrikrishna (S) — Yes, Arjun.
‘But’ what?

A —    Now,
I have grave doubts about it! You had said everybody gets the fruits of his
deeds – his karmas.

S —    Yes.
That’s right.

A —    And
you also said that a person is himself responsible for his own progress or
downfall.

S —    Correct.

A —    And
further; I also remember you saying – a person is his own friend and his own
foe! Right?

S —    Absolutely!
Hundred per cent marks to your memory!

A —    But
then, I find that our CA friends are suffering due to misdeeds of others.

S —    Why?
What happened?

A —    See,
my friend is practicing for the past 20 years. Totally unblemished track
record!

S —    This
is a bold statement. It only means that his lapses have not been exposed so
far!

A —    Whatever
you may say. But so far he never had any problem.

S —    Good.

A —    He
signed one company’s audit for one year in good faith.

S —    What
do you mean by good faith? One should never certify any accounts merely on
faith; unless one verifies it.

A —    Actually,
his friend said, he has exhausted the limit of number of companies that one can
audit. He said, this was a group company and he had seen everything.

S —    Oh!

A —    Now,
the directors of that company misused his signature. No doubt, he signed for
one year; but directors uploaded the balance sheets of 3 or 4 subsequent years
to ROC as if my friend had signed them.

S —    Strange!

A — And
later on it was revealed that the management was totally fraudulent. They had
formed many companies, got them listed on stock exchanges and did a lot of
financial irregularities. All documents were fabricated!

S —    So,
what happened to your friend?

A — Somebody
made a complaint to our Institute saying that he relied on these balance sheets
and was duped!

S —    Naturally.
Anybody would do that if he has suffered.

A —    No.
The funny part is that the complainant also turned out to be a fraudulent
person. Both the complainant as well as the chairman of the company were behind
bars!

S —    Good.
I told you that everybody gets the fruits of his karma. Each one of them
became the enemy of himself. So, what I told you in Mahabharata was true!

A —    Yes.  But why should my friend suffer? He was
unnecessarily dragged into the disciplinary case. He did not even receive his
fees!

S —    How
do you say ‘unnecessarily’?

A —    Of
course! Both the parties were criminal. How is auditor answerable? What is his
mistake?

S —    Arjun,
just think for a while. Is it not a fact that he signed the audit papers?

A —    Yes.
But only for one year.

S —    OK.
But for that year, had he checked the books and records properly?

A —    But
it was fraud!

S —    So
what? Did he write to the previous auditor? Did he check up validity of his
appointment? Did he upload necessary forms like form ADT 1 to ROC? Did he
obtain management representation letter? Clause 7 of Second Schedule clearly
covers both – gross negligence and lack of due diligence.

A —    No.

S —   
Then! See my dear, God helps the diligent.

A — That
means he was duped by his friend. I believe, that friend is also facing
complaints.

S —  I
told you many times. Your Council is concerned with your conduct; not anybody
else’s. Have you acted diligently as a professional? What prevented you from
refusing to sign?

A —  Temptation!
And also the faith in the friend!

S —   That
is very common among all professionals. Rather, it is human instinct.

A — Actually,
the management promised to help him in the proceedings. They said they would
take care. But now they backed out. They are themselves in difficulty! It had
come in the press also.

S —    That’s
what I am saying. Your friend may not be involved in the fraud. But did he
inform police about forgery or all these happenings?

A —    He
was so afraid! He said both the parties are criminal.

S —    Whatever
it is. But he has to face the music. It will be better if he pleads guilty. At
least, his case may be considered sympathetically. Confession often helps.

A —    Can
he be absolved?

S —    Difficult.
He may be held guilty of misconduct; but punishment may be soft if he comes out
clean.

A —  Yes,
Lord! I take back my words. This is a good lesson to all of us. We cannot claim
to be totally innocent. It is a breach of duty as a CA. There is no point
blaming others.

S —    So
then, I am sure, you will take care.

A —    Yes
Lord! Please protect me.

S —    Tathastu.

Om Shanti.

Note:

The above dialogue is based on Clause (7) of
Part I of Second Schedule. Once again, it emphasises how we professionals take
certain assignments only on good faith and take various aspects for granted.
Shri Krishna, in the above dialogue has rightly pointed out – ‘God helps the
diligent’.

Ethics and U

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Arjun (A) — O’Lord, I am very much disturbed today.

Shrikrishna (S) —Why? What happened?

A — I really wonder how to protect myself in the profession!

S — I have been telling you what precautions you need to take. Eternal vigilance, dear Arjuna, eternal vigilance!

A    — I have lost my sleep!

S — Your motto is Ya Esha Supteshu Jagarti. He who is awake when the world around is asleep.

A    — That I know. So long as I am physically awake, I have to be alert, do everything diligently with open eyes. That I understand.

S — Right. Speak the truth; do your duties religiously and never commit default in continuous studies. Not merely for CPE hours, but also for real updation of knowledge.

A — I agree. But now that much is not enough.

S — You need to be disciplined, pro-active and wellorganised! Follow the rules of ethics that we have been discussing all along.

A    — Hey Bhagwan, my worry is absolutely different. Nothing to do with what is in our hands! It is beyond all precautions that one can take!

S — What do you mean? If you follow all these tips, then what is the problem?

A    — Somebody has forged my CA friend’s signature on the balance sheet; and while uploading the returns, put my friend’s name as auditor!

S — How did he come to know about it?

A    — The Banker to whom the client submitted the balance sheet rang him up to confirm whether the CA had really signed it.

S — And the signature tallies?

A — Largely, yes. Very difficult to say that it is not his signature. So skilfully forged!

S — And the seal?

A    — There, fortunately, there is some variation. But there was another case reported in the press. Out of 20 companies in the same group, the promoters forged the signatures of a few auditors. Now the promoter is behind the bars.

S — O h! This is dangerous.

A    — There is already a disciplinary case going on against another friend of mine where balance sheets with his forged signatures were filed with a nationalised bank – in a branch in a totally remote place. This CA has never ever handled any client’s work from that place!

S — Then who filed the complaint?

A    — Obviously, the banker. The borrowers’ accounts became NPAs.

S — I am sure; the borrowers were in collusion with the banker.

A    — That is obvious. That branch manager is facing a departmental enquiry for such malpractices.

S — Then what is the problem?

A    — See, problems are many. Firstly, all our disciplinary proceedings last for not less than 3 to 4 years! So carry that tension. Then, whatever diligence you may have, such things are beyond your control. So, constant fear. Further, your image with the bank unnecessarily gets spoilt.

S — I know one such case. A CA in Kolhapur received some accounts for submission to the bank. He saw that it was apparently signed by a CA in Mumbai who happened to be his friend. Immediately, he called up his friend and asked whether he had really signed it.

A    — Good. That’s how a CA should act. And then what happened? I guess he denied having signed it.

S — You are right! So a lot of trouble was saved. The client destroyed the papers.

A    — But I wonder what one should do in such a situation.

S — I feel, one should inform the police authorities about the forgery.

A    — But in our country, approaching the police is also risky and not easy! They only harass you.

S — Then one should also inform the Institute; so that if at all any complaint comes, this will prove one’s bonafides.

A    — But what will the Institute do?

S — Frankly, at that stage nothing can be done. But at least it is on record.

A    — I think one should write to the bank as well.

S — Bankers should be advised to verify such things as a matter of routine, so that malpractices will be exposed before any damage is caused to anyone.

A — Yes; and it is in the interest of the banker as well. But the unfortunate part is that quite often bankers also could be doing it knowingly.

S — The real solution would perhaps be the digitalisation of signatures.

A — True. But it will take a little more time for that culture to develop fully in our country.

S — But then, you people do not even handle the digital signatures carefully! DSCs are lying anywhere in your offices, indiscreetly.

A    — I know. There are situations where CAs have misplaced clients’ DSCs. Very embarrassing!

S — You must study the provisions of the I.T.

Act – Not merely Income Tax; but Information Technology. DSCs should be preserved with utmost care and security.

Otherwise, even God will find it difficult to save you! And there should be very careful documentation.

A    — Yes, Lord! I fully agree. Prevention is better than cure. We simply can’t afford to handle such things loosely.

S — Remember, today if the manual signature is forged, perhaps the forensic studies will help you. But if it is misuse of digital signature, then don’t even approach ME for help.

A    — Sure, Lord! I will keep it in mind always. Om shanti !!!!!

Note

This dialogue is based on the general principles of diligence in unforeseen situations. _

Importance of Unity

fiogf49gjkf0d

 

Arjun (A)

Shrikrishna Bhagwan, in Bhagwad Geeta,
you had told me about re-birth.

 

Shrikrishna
(S)

Yes dear.  I had mentioned that so far, you and I, and
all these people have taken innumerable rebirths.

 

Arjun

And whatever good or bad we do, we get
the fruit in the same birth or in next birth.

 

Shrikrishna

Yes. 
That is true.  But what makes
you ask this question?

 

Arjun

My friend is very innocent person,
very God-fearing.  Now practising in a
rural area.

 

Shrikrishna

What about him?

 

Arjun

He had done the audit of some company
5-6 years ago.  He left that work since
the company shifted elsewhere.

 

Shrikrishna

Ok. Then?

 

Arjun

A few months ago, all of a sudden,
survey party from income tax came to his office.  They harassed him for 3 days – asking
questions about that old client.

 

Shrikrishna

Oh! Why?

 

Arjun

They said they found two different
balance sheets signed by him for the 
same year – the last year of his audit.

 

Shrikrishna

Surprising!  But you said he is very innocent!

 

Arjun

Yes. 
I have no doubt about his innocence. 
Gentleman to the core!

 

Shrikrishna

What did they find?

 

Arjun

Actually, in village places, most of
the professionals work from residence only. 
They keep some room for office. 
So they searched the records in his house also.

 

Shrikrishna

But what did they get?

 

Arjun

Absolutely nothing.  Not even the remotest evidence.

 

Shrikrishna

So what did they finally do?

 

Arjun

They were completely satisfied.  But they said they had instructions to
investigate thoroughly.  They regretted
inconvenience caused to him!

 

Shrikrishna

Good. 
But there must be something else in the story.

 

Arjun

Yes. 
He showed them that he signed the same and the only balance-sheet that
was submitted to ROC and IT!  And the
alleged balance sheet which they got somewhere else was only photocopy.

 

Shrikrishna

They have to produce original.  But what was their grievance – when correct
balance sheet was filed with ITR?

 

Arjun

That’s precisely why I mentioned about
re-birth.  He must have committed some
sin in last birth.

 

Shrikrishna

Why?

 

Arjun

Actually, for subsequent years, there
were multiple financial statements for every year.  Different for ROC, different for IT and
something else to the Bank!

 

Shrikrishna

It was then a blatant fraud!

 

Arjun

Yes; true.  So subsequent years’ auditor is also in
trouble.

 

Shrikrishna

But where is the client?  What does he say?

 

Arjun

That’s another story.  The main director of that company is now
absconding.  That prompted them to go
to the CA’s office! He is the real culprit.

 

Shrikrishna

They must have recorded the statements
of both of them.

 

Arjun

Yes, obviously.  My friend flatly denied the
allegation.  But the subsequent auditor
succumbed to the pressure of survey people. 
But then immediately retracted it.

 

Shrikrishna

You mean to say your friend suffered
unnecessarily.  There was no fault on
his part.

 

Arjun

Exactly.  In the hospital, we see many small innocent
children suffering from terminal diseases. 
What sin they have committed?

 

Shrikrishna

You are right.  Your friend did not perhaps do anything
wrong; but somebody did it and the poor fellow suffered because of someone
else’s wrong deeds!

 

Arjun

And the irony is that the client is
very resourceful and influential.  He
will settle it with IT.  But the IT
people have forwarded the information to our Institute and my friend will
have to face the music for a few years!

 

Shrikrishna

I have sympathy for your friend.  But I had also explained to you the role of
fate or destiny in Bhagwad Geeta. Even Lord Shree Ram had to undergo hardship
for no fault on his part!

 

Arjun

I am more worried because in our
profession, there is hardly any opportunity to do a straight thing!  Everything is manipulation.  So what will happen in our next birth.

 

Shrikrishna

Dear Paartha, don’t be so negative.

 

Arjun

What shall we do?  Neither the clients whom we serve are clean
nor the authorities before whom we represent the clients are straight!

 

Shrikrishna

The only solution is the unity amongst
you all.  If you act collectively with
positive thinking and good leadership, you can improve the things.  You are educated professionals.  You should provide leadership to the
society.

 

Arjun

But what exactly we can do
collectively?

 

Shrikrishna

You can be more assertive.  You can afford to say ‘No’ to wrong
things.  Today, you have a fear that if
you refuse to oblige a client, some other CA will do it.  He will compromise on the standards.

Arjun

That’s true.  We can even develop good culture and
discipline iin the finance sector.

Shrikrishna

And you can establish the image and
credibility of the profession, so that no once can point a finger at you.

Arjun

I see a point in what you are
saying.  Since we are not united, no
one heeds to our feelings and suggestions. 
I think, all of us should seriously think on these lines.

 

Shrikrishna

I had already said in puranas that in Kaliyug, the real strength
lies in unity.  Please act unitedly and
you can change the world.

 

Arjun

Yes, My Lord!

Om Shanti.

Note:

The above
dialogue emphasises on importance of collective strength and how it is lacking
in our profession. The only solution to remain clean in the profession is to
have a good unity.

Independence

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Arjun (A) — Slogging! Slogging!! Slogging!!! Please help me God. Oh Shrikrishna, where are you?

Shrikrishna (S) — My dear Arjun, I am always with you. I am everywhere! Omni-present!.

A — And Omnipotent, Omniscient as well! You have no boundaries; but we are bound by so many constraints.

S — Didn’t you celebrate your Independence Day?

A — There was that flag – hoisting in our housing society. But who will wake up early on a holiday? I never attend it.

S
— Oh! Shame on you. Don’t you remember the martyrs that sacrificed
everything for independence of the country? Even their lives! How dare
you be so callous about independence?

A — Oh, Lord, please pardon me. I never meant offence to anyone.

S — I thought, at least you would be valuing the independence above all!

A — Yes. I do. In fact, our profession is expected to be ‘independent’. We are supposed to act without fear or favour.

S — Then how can you afford to sleep when flag hoisting is on? You CAs should be in the forefront.

A
— I agree. But you know, we get so tired. So much of tension. Last
time, I narrated all our difficulties. You advised us to gear ourselves
up.

S — Then what have you done about it? You are in the habit of mere crying.

A — What to do? We are so helpless. Clients are not serious. Our staff is also useless. Everything comes on us.

S
— But you are an independent professional. You have to overcome the
situation some day or the other. How many years you can pull on like
this?

A — Lord, ‘Independence’ is a myth. Everybody dictates on
us. Regulators, Clients, staff, articles, our Institute; and even our
family members.

S — Ha ! Ha !! Ha !! Rukmini and Satyabhama also
keep dominating on me. Jokes apart; tell me, have you taken steps to
complete the audits in time?

A — Ah! There is so much time upto 30th September. Clients wake up only after 15th of September.

S — Let clients not wake up. What about you yourself? You need to be eternally vigilant. That is the cost of independence!

A
— So many holidays in August. Independence Day, Parsi New Year, then
Rakhi, then your own birthday of Krishnashtami. Again in September,
Ganapati will take away our time! I think, we cannot do things in time.
We must start crying for extension. You only said, we need to be
‘proactive’!

S — Wah! Great thought! You are very much aware
that this year courts will not support you. Tell me, have you studied
new CARO; have you looked into IFC?

A — IFC? What is that?

S — Internal Financial Controls. You have to specifically report on that. And CFS?

A — You are giving me surprises. What is this new ghost?

S — Consolidated Financial Statements. Are you at least aware that even your CARO format is changed?

A — Yes, Yes. I have heard about it. Frankly, I have not studied the new company law as yet. So much of ambiguity there!

S
— True. But you can’t afford to be totally ignorant. Remember,
Government is appointing new regulatory authority to look into the
quality of your work.

A — Baap Re! Already we have disciplinary
committee, consumer forum, NFRA, and what not! And on the top of it,
this new Authority? God save the profession.

S — I will surely save you, only if you are vigilant and diligent.

A — Oh Lord, I know, I am rather lethargic. I have to be constantly on my toes. Even slightest of relaxation may be suicidal.

S
— Assure you that so long as you can prove honest efforts and support
it by documentation, your Council will always help you. Don’t worry.

A — Thank you, Lord!

Om Shanti.

The
above dialogue aims at highlighting the importance of having the right
attitude towards the profession. Being alert and proactive towards the
dynamic laws becomes extremely important in today’s world.

(Balanced behaviour)

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(Balanced behaviour)

Arjun (A) — Bhagwan, in last so many meetings, you have been telling me about our professional ethics. I am rather fed up with your stories. Tell me something new.

Shrikrishna (S) — Arjun, Ethics is an all-pervasive concept. Your profession is your mission. People look upon a professional with certain expectations. Any deviation from ideal behaviour on your part is not acceptable.

A — But why? We are human beings. And today, whole world is behaving in whatever way they like.

S — True. But you can’t do that!

A — Let everyone mend his ways; then we will also change ourselves.

S — Oh! It is like standing on the bank of a river and saying – ‘Let the entire water flow away; then only I will cross it!’

A — Let me tell you one thing. By and large, we are ethical

S — That’s the problem! In ethics, one can be either ethical or unethical. There is no in between stage!

A — But why we alone are subjected to this burden?

S — Because you are intellectuals. You are expected to lead the society. You can’t follow the common lot who don’t think. They follow you. It is not a burden; it is your shield.

A — Our clients always dictate their terms. We can’t resist beyond a certain limit

S — Unfortunately, you people not only succumb to the pressures, but at times, you yourselves initiate unethical tricks!

A — Yes. Agreed. There are a few of us who indulge in this instances like that.

S — Remember these few spoil the image of the entire profession.

A — One cannot generalise. There are quacks in every profession.

S — Agreed. Still, even the basic professionalism is often lacking. You study lot of academics; but not learn the communication skills. Courtesy, etiquettes – all these are very important.

A — But that is lacking even in other professionals – like lawyers!

S — True. Do you think that justifies the lack in your profession!

A — See, many times, some disgruntled members of a company call us directly for some information. This is irritating that we don’t feel like talking to such persons.

S — Avoid taking their calls or meeting them! Right? And if they write to you, you feel you are not obliged to reply. Is it not?

A — You said it!

S — That precisely is the problem. If you feel that they should seek information from the management and not from you, why don’t you write to them firmly but politely?

A — Who has time to do that?

S — Dear Arjun, you don’t understand that their ego is hurt. They feel that you don’t have even the basic courtesy to reply to them. They approach the Institute with a complaint. Most of the complaints are made out of `ego’ problems

A — There is a point in what you say.

S — This behaviour is unbecoming of a professional. It creates a very bad impression about the profession, just as you blamed the lawyers a while ago.

A — How can this be a misconduct attracting disciplinary proceedings?

S — I agree. But then these people find out some loophole or the other in your work. In fact, your own professional brothers help them in doing that!

A — Yes. I have also noticed this. It gives them sadistic pleasure or sometimes, they act out of jealousy.

S — It takes at least 3 to 4 years to establish your innocence! This mental agony is more severe than the actual punishment, if at all you are held guilty! Please remember that in these proceedings, small things like lack of courtesy, lack of professional behaviour count a lot

A — I am realising that ethics is a very wide concept. It is not purely a legalistic idea. It travels beyond that. Even insignificant actions or inactions are a part of Ethics! Thank you Lord!

S — Bless you!

Om Shanti.
The purpose of the above dialogue is to bring forth the importance of certain simple courtesies the professional practice. Very often, it is seen that the disciplinary proceedings are initiated out of ego clashes. Such ego clashes can be minimised to a very large extent by following certain simple professional courtesies like timely and proper communication.

(Gearing up!)

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(Gearing up!)

Arjun (A) —Hey Bhagwan, with great devotion I am offering my pranam to you!

Shrikrishna (S) — What happened to you suddenly? We have been meeting so often, but you never started with such ‘pranam’!

A — Bhagwan, I didn’t say it so expressly earlier. I always bow before you. I pray you and seek blessings from you.

S — You are always blessed. But what is the special reason today?

A — No; I was just wondering how I will cope up with the work of audits and tax returns. The season has started! Next 3 to 4 months is a ‘kurukshetra’ – battlefield for us CAs.

S — But this is going on for so many years. What is frightening you so much this year?

A — I believe, this year they are not going to extend the due date! We are always banking on extension.

S — But why do you need extension every year? Can you not plan the work well in advance?

A — It is easy to say so, but difficult to implement.

S— Why?

A — Every month we are busy meeting some deadline or the other. Recently I am told, a reputed bank recruited many employees. Out of them, 80% are for compliances and only 20% for business promotion!

S — Oh! But don’t you agree that such compliances are required for having financial discipline? And you have so much of automation at your disposal.

A — I agree. Still, it is rather too much.

S — Then that is your work opportunity. Look at it positively.

A — But every year they add something new. Our time goes in updating ourselves.

S— What is new this year?

A — So many things! CARO report is changed. They have added many points. Then Ind ASs. And on the top of it that ICDS in Income Tax!

S — What have you done to keep yourself updated? Good that you have compulsory CPE hours – continuous education. At least something you can know. Thereafter, you can study on your own.

A — What you say is right. But our CAs look at CPE hours also as a compliance! They are rarely interested in the lecture.

S — Then what do they do?

A — They just enrol themselves by paying fees. Then either leave the venue and re-appear at the closing hours to sign the attendance sheet. Otherwise, they doze off in the auditorium, sitting at the back. Or depute a proxy!

S — So, people also ‘manage’ CPE hours

A — Yes. Now I am told, they are going to increase the hours.

S — Unfortunately, many of you don’t appreciate the spirit behind CPE hours. How can one do such a demanding profession without updating the knowledge? You should not only upgrade your own knowledge and skills; but also see to it that your staff and trainees are also properly trained.

A — Ah! These days articles (trainees) are absolutely of no use. They have their own priorities. Exam and leave! I wonder why they join articles. And work-wise mostly they are a big zero!

S — Arjun, tell me how much time you have spent to train up your articles? Do you have proper systems in office? Do you implement what you studied in audit subject?

A — True. We are not ourselves well organised. We have no reference files of audit-clients, we don’t do proper documentation. But we have to work under so many constraints! No space, no manpower……

S— I appreciate that. But what is basically lacking is the will power. Anyway, for audit whatever is essential, have you started doing?

A — Like what?

S — Basically, third party confirmations from banks, debtors, creditors…….

A — Who has time to do all that? Our clients never listen to us.

S — No; but somewhere you need to take a firm stand. If you tell them at the last moment, they will resist. You have to insist or indicate to your client that you would then have to put a remark in the report.

A — What you say is right. We need to be more pro-active and assertive. We need to gear up on all fronts. It is high time. We need to wake up!

S— Yes. I suggest you can also see your last year’s files, make checklist, send mails to clients….

A — Yes. And I think, I should take out some time and study important laws applicable to my clients. This will help me in my audit work also

S— Arjun, be also very particular about your documentation. This makes things easier.

A — Yes. You are right.

S— Infact, you should be alert all the time. This will help you in being pro-active automatically. And that is precisely your Institute’s motto – Ya Esha Supteshu Jagarti!

Om Shanti.

Knowledge Updation

Arjun (A) — Govind Bolo Hari Gopala
Bolo Radharaman Hari Gopala Bolo Shrikrishna ! Shrikrishna !

Shrikrishna (S) — Arey arjun, today
you are chanting my bhajan! What is the matter?

A — I am in a good mood today; for a
change !

S — Oh, i see. But what makes you so
happy?

A — This   time, 30th  
September date was  extended
without our asking for it. All of us were anticipating no such extra time. So
it was a bonus!

S — How complacent you people are!
You become happy even by such small things. In a way, it is a good quality.

A — Bhagwan,  we 
are  otherwise  slogging 
day  and night – literally reeling
under the pressure. So even small reliefs mean a big thing for us.

S — 
So   this   time,  
you   could   complete  
it   quite comfortably, you mean.

A — Not exactly. But yes. The
nightmare was a little less frightful!

S — and then you enjoyed Diwali!

A —    Well, to some extent yes. Still, the
pressure of time-barring assessments continued. But by and large, there was
relaxation.

S — That  means, now you will wake up directly in next
September !

A — ha  ! ha 
!! ha  !!! not  really. now 
i will have to manage my CPE hours.

S — ‘Manage’? What do you mean? Why
always at the last moment?

A — That is the real fun. We need to
simply enrol for some seminar, relax there; and get CPE credit.

S — But how will you manage the new
things that are coming?

A — what are they?

S —    GST; and that ICDS which was postponed last
year. And many other regulations that are continuously coming.

A —    See, it will keep on happening. There are
experts available. They will study and guide us. Why break our head?

S —That’s  the pity, Arjun. Most of you have almost
given  up 
self-study.  Even CPE  hours 
you  are ‘managing’. not taking it
seriously.

A —So far, lack of self-study has
not been declared as a misconduct!

S —Great thought, Arjun ! are  you the same Arjun who was so inquisitive
about knowledge even on the battlefield? are you the same Arjun who had a quest
for knowledge?

A —Bhagwan,   in  
those   days,   knowledge  
was respected. It had value. Now, no one cares for it. everything can be
managed.

S — Alas! What a downfall !

Not studying in itself may not be a
misconduct; but all misconducts arise out of ignorance and lethargy, why don’t
you understand this? not following the institute’s guidelines also is a
misconduct.

A — What you say is right. That
reminds me, i have just uploaded the returns. But many hard copies of financial
statements are yet to be signed ! and they are also to be uploaded to ROC.

S — you mean, balance sheets are
still to be signed?

A —Yes.   that’s   
usual.   We   sign  
it   backdated. Sometimes, even
the checking continues after the returns are filed.

S —Oh! you may be aware, there were
instances of audit being signed; and email queries continuing even after the
signing date !

A — Yes. My friend was held guilty
of that. But i am very careful about it.

S — Anyway  ! you people 
won’t  improve. But right since
ancient time, you are my favourite Shishya.

I cannot see you not pursuing
knowledge.

A — Lord,  i am your true follower. Whatever i said just
now was the general attitude of CAs. i do my study quite religiously.

S — 
In  fact,  this 
is  the  right 
time  for  knowledge updation. For GST, you must get
geared up. Not only yourself; but see that your staff, articles, clients and
also their accountants get educated. It will be a team-effort. You should
encourage clients to attend the seminars.

A — I agree. One will get the
benefit of early start, i will tell my other CA 
friends also to be a little more serious about studies. Without updated
knowledge, we can’t survive.

S — You said it ! you need to be
constantly awake. Your motto is ‘Ya esha Supteshu Jagarti !’

A —But Bhagwan, too much of
knowledge often leads to a dilemma – one becomes indecisive. Same dilemma i
faced in Mahabharat war.

S —True. But then the knowledge
alone cleared your dilemma. moreover, mere error of professional judgment is
not a misconduct?

A —Then    what 
is  misconduct?  We  may  commit mistakes even when we know all
interpretations.

S — The  misconduct lies in lack of application of
mind.

By your working papers, you should
be able to show that you studied the issue, applied your mind and adopted a
plausible interpretation. it may not be 100% correct.

Others may perceive it differently.

A — I followed. Good that you
mentioned about working papers. i will get them also properly organised. After
one year, we can’t remember anything; and can’t locate anything.

S — Shabbash ! that’s  like a
good Ca. that  is why you are always
blessed, my dear !

A — Please continue to enlighten me
and motivate me.

Bhagwan, Aapko hamara pranam !

Om Shanti.

Note:

This   dialogue 
seeks  to  highlight 
the  importance  of continuous updating of knowledge.

(Ethical dilemma)

Arjun (A) — Oh, I am surrounded by the ocean around!  But not a single drop of water to drink! Hey Shree Ram!
Shrikrishna (S) — What reminds you of that great poetry?  And why you called Shree Ram when I am always around you?
A —    Shrikrishna, sorry. You are not only around me, but always in my heart too. I am just thinking of the present situation. I wanted both Shree Ram and Shrikrishna to help me.
S —    What situation? Which ocean you are thinking of?
A —    Ocean of old notes! High Denomination Notes. HDN! These are in plenty everywhere. But of no use at all !
S —    And you don’t have small value notes to spend. Right?
A —    Absolutely! I did not have money to pay for the cab. Nowadays, you have stopped driving my chariot! So I came here on foot.
S —    Good for health.
A —    Cannot buy provisions and vegetables – and day-to-day things. Literally starving.
S —    That is also good for health. Of late, you all had taken to over-eating!
A —    Jokes apart; but this cancellation of HDNs has spoilt our sleep.
S —    Why? You had so much of it?
A —    No. If I had that kind of money, I would not have continued this ‘magajmari’ in the practice.
S —    Then why are you bothered so much if you don’t have HDNs?
A —    Wherever I go, people keep on asking me about ‘conversion’ round the clock !
S —    Why can’t you tell that Government’s pronouncements are very clear. You can exchange notes at many places.
A —    Oh Lord! Why are you pretending to be ignorant though you are omniscient?
S —    Ha! Ha! Ha! People seek your advice on converting huge black money into white. Is that correct?
A —    Yes. They ask questions about what will happen in income tax? Will they charge tax as well as penalty?
S —    So you give answers. What is there? That’s your usual work.
A —    No Lord! It is not that simple. It is more complicated than even your Bhagwad Geeta!
S —    Really? But what is your dilemma?
A —    See, basically, there are too many questions and no definite answers. There is guess-work and speculation.
S —    Then say, you don’t know the answer. Why are you afraid?
A —    Actually, they ask me whether I can convert their notes into ‘white’ money.
S —    That’s money-laundering.
A —    But many of our CA friends have taken it as an opportunity to earn money! My dilemma is, what should I do? Whether to jump into that game or remain away.
S —    Similar dilemma you were faced with in Mahabharata.
A —    And you had advised me to jump in; and not run away from it. What is your advice now?
S —    Arjun, my advice is the same. ‘jump in’ in the same way.
A —    Oh! So you are advising me to enter into the field of conversion? Simply fall in line with my friends doing this change of colour of money? Bhagwan, you too?
S —    No my dear! I had advised you to jump in the war that time.  Same way, here also jump in the war with the weapons of honesty and straight forwardness. Say ‘No’ to such temptations.
A —    So you mean, honesty is the best policy.  They say, it is true that by honest business practices, one can become a millionaire; but for that, one first needs to be a billionaire!! Ha! Ha!
S —    See, Arjun, whether this withdrawal of HDN was good or bad in economic sense, time alone will decide.  But it was an honest decision; taken with good intentions.
A —    No doubt about it.  It requires lot of courage.  Failure in execution on the part of Administration does not mean the decision was bad.  I agree.  These hoarders of black money had literally spoilt our country.
S —    You said it! No value for truth.  All-pervasive corruption.  All unscrupulous elements.  Bribery, on money, no value for merit.  This had threatened even the national security.
A —    It was necessary to teach a lesson to such economic offenders and enemies of the nation.
S —    If that is your view, and still if you indulge in abetting the money-laundering, it will be the greatest treachery.
A —    But as a part of my profession, I must help my clients.  I should steer them out of the difficulties in financial and tax matters. That is our sacred duty!  Should I give it up? That is my dilemma.
S —    When two such values seem to be conflicting, always remember, there cannot be compromise with honesty. That is one of the noblest virtues.  Moreover, national interests, interests of the society are supreme! They are above all other considerations.  If you help the wrong-doers today, there will be further deterioration, downfall – of the society.  Your posterity is going to live in that kind of the world.  Is it acceptable to you?
A —    You are right.  But our next generation has already migrated!
S —    Why they were required to leave the country?  It was because of the inaction, indifference of the intellectual class.  You used your brilliant brains in protecting and helping; if not encouraging the wrong elements.
A —    Bhagwan, you have opened my eyes.  I must tell this to my CA friends.
S —    Moreover, there could be criminal liability on you people – prosecution under tax laws, prevention of Anti-money laundering Act, FEMA, Benami Transactions Act, and what not! This is abetment.
A —    Yes.  My Lord!  I will caution all my friends.  They should avoid all the jugglery – not just out of fear; but with a positive thought that we should be supporting only good things. Bless me Lord !
S —    Tathaastu.
Om Shanti.
Note:
This dialogue is based on the present situation arising out of cancellation of the HDNs. CAs are expected to give preference to the ‘values’ in life and  national duty. _

General Principles

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General Principles

Arjun (A) — Hey Bhagwan, today I was very eager to meet you.

Shrikrishna (S) —Why? You seem to be relaxed after the nightmare of 30th September.

A — Indeed, it was a nightmare. Fortunately the due date was extended by one month. But about the situation at that time, the less said the better! And what is the use of extension granted after the due date?

S — True. An eye-opener for you people. You need to be more proactive and disciplined.

A — I agree.

S — But why were you so eager to meet me?

A — I read a nice story on ethics.

S — Oh, I see. So you have also started taking the topic seriously.

A — Yes. I was earlier shaken by listening to so many stories about our Code of Ethics. But now I have woken up!

S — Tell me the story.

A — You might have heard of a very renowned surgeon – Dr. V. N. Shrikhande.

S — Of course, yes! Who would not know him? He performed a difficult surgery on the President of India.

A — Yes. An internationally acclaimed surgeon. Literally a God on the earth!

S — Not only excellent as a professional but a saintly person. What of him?

A — His book ‘Reflections of a Surgeon’ was recently published. He has narrated a beautiful experience. He performed an almost impossible, complex surgery on a patient very successfully while he was in UK.

S — Oh! Then what happened?

A — Naturally, all the family members of that patient treated him like a God. They revered him like anything.

S — Naturally!

A — Once the doctor went for his driving test. And by coincidence, the same patient’s very close relative was the officer there.

S — Then the doctor’s task would be very easy!

A — No, it is worth listening. That officer welcomed him with great respect and affection.

S — That goes without saying.

A — But intriguingly, the officer failed the doctor in the test! You know why?

S — No, Tell me.

A — Merely because the doctor did not adjust the mirror while sitting!!

S — Great Lesson! Thank you for this great story, Arjun. That is real duty consciousness. Real ethics!

A — Yes. He rightly thought that issuing a wrong licence could be fatal to somebody.

S — That is ethics. That is the real value-based behaviour; and the same holds good in your profession.

A — Yes. We sign the wrong accounts – or certificates – often knowing them to be wrong. We take things lightly.

S — One wrong balance-sheet may lead to loss of revenue to the country. And if based on such financials, if loans are given, the unit would soon become an NPA! It is a waste of public money.

A — True. Many people may suffer as a result of one NPA. If that unit is closed, its employees become jobless. Bank’s soundness is weakened.

S — Moreover, there is unproductive litigation. Public confidence is shaken. If the borrowers are large corporates, the loss is really grave. The whole society suffers.

A — Once credibility is lost, it is difficult to regain it. That is why, of late, I have become extra careful. A few of my clients in fact left me since I started asking questions.

S — Incidentally, one of your colleagues was arguing with me on the scope of your Code of Ethics. Actually he had taken a personal loan from his client.

A — But an auditor cannot be a debtor to the auditee! You yourself told me once.

S — Actually, the CA was not the auditor; but only taxconsultant.

A — Okay! Then what happened?

S — The CA defaulted in the repayment of loan. So the client, after tolerating for long, filed a complaint with ICAI.

A — But you said it was a personal loan; nothing to do with the profession. Isn’t it?

S — That’s the stand he is taking. But then, your Code covers not only professional misconduct; but also ‘other’ misconduct. It means a behavior unbecoming of a professional.

A — I agree. It may affect the credibility of the CA profession as a whole. It brings disrepute to the profession.

S — For example, if a cheque issued by a CA bounces, it may also attract a disciplinary action if there is negligence. It may include misbehavior even in social or family context.

A — So the irresponsible manner of driving a car is also unethical!

S — Of course, yes!

A — So the doctor’s story is very relevant. And we must commend the act of that officer. What would have happened in our country?

S — The doctor would have received a driving licence even without giving a test!

A — Just as a few CAs certify the balance sheets even without the books of account! This is inviting trouble for all of us. We need to mend our ways ! Om shanti !!!!!

Note:
The provisions of the Code of Ethics are equally applicable to the advisory work undertaken by us professionals. The above dialogue tries to explain the same.

The C.A. can also be charged under the Consumer Protection law.

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Professional scepticism – continued

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(Professional scepticism – continued)

Arjun (A) — Hey Bhagwan,
in our last meeting, you were telling me about professional scepticism.
You mean, we need to always proceed with suspicion?

Shrikrishna
(S) —No, my dear! Scepticism does not mean suspicion always. It only
means, you should not accept anything at its face value blindly.
Howsoever clean a thing may appear, you cannot rule out a possibility of
something wrong or foul.

A — I understood. We were taught in
the very first year of B. Com that merely because a trial balance is
tallied, it does not mean that all accounts are right and flawless.

S
— Exactly. After all, you are supposed to be the financial police. A
policeman need not consider every man to be a thief; but at the same
time, he cannot close his eyes merely because a person appears to be a
gentleman.

A — But we were taught that an auditor is a watchdog and not a bloodhound.

S
— Agreed! But even a watch dog constantly smells something and barks
when a stranger comes. He promptly wakes up even if there is a soft
sound around.

A — And he stares at us!

S — Even the
presence of a dog puts one on one’s guard. It acts as a deterrent. That
kind of an image an auditor should develop. He should not be taken for
granted.

A — I see your point.

S — Moreover, the times
have changed. The concept of watchdog and bloodhound is also getting
diluted. In the good old days, manipulation in accounts used to be
apparent if there were scratches, erasures or shabbiness in manual
records.

A — Yes; now in a computerised set-up, everything appears to be clean!

S
— If you start signing the accounts on oral or even written assurances
of a client, then the very purpose of audit is defeated! You should
never sign without proper verification. And you should not be shy of
asking questions.

A — Agreed. But the records are so voluminous and time is so short, we cannot verify everything. The work is endless.

S
— That calls for experience and insight. You should know your client –
by KYC! You should have properly trained assistants. You should devote
adequate time to satisfy yourself as to the veracity of financials. And
you should always be updating your knowledge and not merely gathering
CPE hours!

A — I remember, one CA signed the tax audit of
another CA firm, his close friends, and it transpired that there was a
negative cash balance of a few hundred rupees on one particular day!

S — See! You have all technology at your command. Even a cursory glance at accounts would have revealed this discrepancy.

A
— Poor fellow! That other firm’s accounts were verified in a scrutiny
assessment. The Assessing Officer noticed this error and informed it to
the Institute! He had to face the music for four years!

S — Many
times, your people sign the accounts ‘at a previous date’. Quite often,
there is contrary evidence that you have sent queries even after that
‘back date’. One needs to be very vigilant.

A — You had told me
the case that an auditor signed the accounts when only one director of a
private limited company had put his signature. And later on, the other
director refused to sign and filed a complaint on a technical ground!

S
— Many times, the client or his accountant avoids to produce bank
statement of a particular account. They say, the account is either
inoperative; or the statement is not traceable. In one case, they told
the auditor that a bank account was used only for paying Government dues
like PF, ESI, TDS and so on; and there were only contra entries!

A — Then what happened?

S
— Later on, it was revealed that the Government dues were not paid at
all. There were bogus stamps on challans; and money was fraudulently
withdrawn. So, if somebody is avoiding giving details, it triggers
suspicion.

A — The best example is non-verification of bank
fixed deposits! An independent verification of debtors, creditors and
even bank balances. We simply write year after year that the balances
are subject to confirmation.

S — While in reality, you do not even attempt to get a third party confirmation.

A
— Now, the scepticism is getting clearer! Good faith is dangerous. S — T
here are many such instances that call for scepticism. We will discuss
them next time. But I suggest, you inculcate this attitude right now!
You are supposed to sign many balance sheets in the coming weeks.

A — Yes, My Lord!

Note: This dialogue is based on the same simple but basic principles which we professionals should religiously follow.

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(Advisory practice and Code of Ethics)

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Arjun (A) — Hey Shrikrishna, you were explaining to me what professional scepticism is and why it is needed.
Shrikrishna (S) —And I told you many stories of how an auditor came into deep trouble for acting in good faith.
A — I feel like giving up this signing business and do only advisory work. No kitkit of disciplinary cases.
S — Do you feel, there is no risk in advisory practice? There are many cases where CAs were held guilty for giving wrong advice.
A — Don’t tell me! But we do everything for the benefit of our client only!
S — Agreed. But when he is exposed, he passes on the blame to you only. Moreover, nowadays the Regulators like revenue authorities, MCA and so on have also become very active in this regard.
A — But how would they know that we have advised?
S — Why? Many times, you give written advice or opinion; you raise invoice with that description; clients also tell the authorities to save their own skin.
A — I give my advice only orally. But client very often takes it only to suit his convenience. S — But then, when there are penalty proceedings like concealment of income, the client tries to take shelter that he was wrongly advised.
A — Yes. They say they are lay persons and everything is looked after by their CA. And quite often, they escape the penalty.
S — That is because the Tribunal often gives weightage to such a plea of client’s ignorance; and consultant’s advice. But sometimes, they rap the CAs for wrong advice.
A — Really?
S — Yes, really, one client rang his CA for advice; when he received a negative order from CIT(Appeals). The CA told him about further appeal to the Tribunal. In fact, his matters for earlier years were already before the Tribunal.
A — Then what happened?
S — Client told him that he had no money to spend on repetitive litigation. He enquired whether there was any alternative.
A — This happens quite often.
S — Actually, that client was no more with this CA and had gone to some other CA for routine work. He asked this CA only due to his old relations. The CA told him that since, on the same point, the matter was already before the Tribunal, he could wait and watch. If ITAT ’s order was in his favour, he could go for rectification for subsequent year’s orders. The issue was that of principle and not factual.
A — But rectification may get time-barred.
S — Actually, the CA meant rectification by CIT(A) of his appellate order. But the client by mistake approached the Assessing Officer for rectification.
A — But the Department never acts on our applications for rectification! They remain pending for years together unless you follow up.
S — That precisely happened here. So at a much later date, the client’s new CA filed an appeal to ITAT . It was delayed by 8 years!!
A — Oh my God! So much delay? S — In the condonation proceedings, the client’s counsel, as usual, pleaded that the client received wrong advice from his CA.
A — But I am told, nowadays the Tribunal insists on a sworn affidavit from the consultant or CA that he gave such advice.
S — Right you are. Here, the Tribunal did the same thing. This CA in good faith gave an affidavit that he had given such advice in the given circumstances at that point of time. He said that the advice was misunderstood by the client.
A — The Tribunal passed strictures not only against that CA but against the whole profession for lack of knowledge and lack of due diligence.
S — Yes, I have heard this case. It created a sensation a few months ago.
A — Your Council took serious note of this and initiated proceedings against the CA for bringing disrepute to the profession.
S — Baap re! But who complained?
A — Neither the Tribunal nor the client. In fact the client said he had nothing against the CA since the client knew the reality. The Disciplinary Directorate acted suo moto – on its own – since the ITAT order would certainly tarnish the image of the profession.
S — So far hundreds of cases of condonation might have escaped on the ground that the consultant gave wrong advice. But none of them went in this direction. Bad luck of that CA! But I heard that the Tribunal rectified its own order and deleted some para of strictures. Is it true?
A — Yes. But that may not help the CA. Let us watch how the case progresses now.
S — A good eye-opener once again!

Note:
The provisions of the Code of Ethics are equally applicable to advisory work undertaken by us professionals. The above dialogue tries to explain the same. The C.A. can also be charged under the Consumer Protection law.

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Attitude – Professional Skepticism

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Attitude – Professional Skepticism

Arjun (A) — He Bhagwan, in the last few meetings, you have been explaining to me our Institute’s disciplinary mechanism and its procedures.

Shrikrishna (S) —Yes, dear. It is governed by Chartered Accountants (Procedure of Investigations of Professional and other Misconduct and Conduct of Cases) Rules, 2007 published in the official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

A — Quite a longish name! Difficult to remember. We have discussed so many disciplinary cases so far. But frankly, I have lost track of what you had told me in the beginning – a couple of years ago.

S — H a! Ha! Ha! It does happen. Actually, the principles should be hammered every day.

A — I agree. We are so much engrossed with our dayto- day worries of the practice that we tend to forget the basic things. Please give me some tips that we should always keep in mind.

S — I was also thinking on the same lines. See I explained the Bhagwad Geeta to you thousands of years ago. Many people are still reading and trying to understand it. But very rarely any one practices it. Same is with your ethics.

A — That is precisely the trouble. In school also, we are taught so many good things. But when we grow old, we compromise on everything under the fond excuse of ‘practical approach’.

S — I don’t preach idealism. Even in the Mahabharata war, I had advised you a few loopholes in the rules of war. So one has to be practical. But one has to be careful in balancing the rules of ethics and practical life.

A — True. Thanks to your advice, I could get rid of Karna, Jayadratha and others. Otherwise, it would have been a tough time for all of us.

S — Anyway! There are a few guiding principles which you CAs should constantly keep in mind.

A — What are they?

S — First and foremost, you should never do anything in ‘good faith’. It is very dangerous. We are now in kaliyug. Total faith in anything and anyone is bound to invite trouble.

A — Yes, I remember the case where the CA wife filed a complaint against her CA husband when their relations got strained. And another incidence of a CA, who signed the balance sheet in good faith that the director would sign subsequently!

S — There are hundreds of such cases where there was a breach of trust. In difficult times, clients conveniently forget all the good things done by their CA for them. At times, he even risks his certificate of practice to accommodate them.

A — But you had told me a few High Court decisions – where it was held that for holding anyone guilty of gross negligence, there has to be some dishonesty or ill-motive on his part that is established. You said, even a blunder is not negligence and every negligence is not gross negligence.

S — Arjun, you are very smart ! You remember only what is convenient to you. Firstly, the law and court decisions are at their own place. Facts and circumstances are more important. And with due respect to the courts, you must note that now clause (7) of Part I of 2nd schedule is amended.

A — In what way?

S — Apart from ‘gross negligence’, even ‘lack of due diligence’ is added. This is a very wide expression.

A — Oh!

S — And moreover, if someone brings his financial statements, and you sign without much verification, can you say you are not negligent? You may not be dishonest or your motives may not be bad !

A — I see your point!

S — Again, you may not be dishonest to any person. But then, are you not dishonest to yourself? Are you not failing in your duty?

A — Yes; if we were just to sign in good faith, the audit profession has no meaning! It is abuse of our signature. It is not audit at all!

S — Moreover, if you simply endorse what client says – without verification, without asking any questions, then why is audit required at all? How can others trust the correctness of the balance-sheet?

A — But what about the principle of ‘watch-dog’ as opposed to ‘blood-hound’?

S — Now that principle is diluted. Remember, now the society and regulators expect you to be blood-hounds only. You cannot and should not accept anything at its face value. That is professional skepticism.

A — You mean, should we not trust anybody? Everything we should see with suspicion?

S — Not exactly that! But doing your duty truthfully and religiously does not mean distrust or suspicion. The question is your credibility. You are the financial police! Can you have police who do not suspect anybody? Or security personnel who does not check you. Does it mean, they suspect you? After all, the duty should be performed strictly – without fail.

A — I agree. But I would like to know more such principles when we meet next.

S — Om Shanti !

Note: This dialogue is based on the same simple but basic principles which we professionals should religiously follow.

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Procedure of Enquiry (Continued) – Part III Shrikrishna

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Procedure of Enquiry (Continued) – Part III Shrikrishna

(S) — Oh Arjun. You are coming just now? I was about to leave.

A — Sorry. I was held up in the income tax office. S — So late in the evening? Surprising! Government officers have become so sincere?

A — N o. This is the result of not working sincerely when they should have worked. Now scrutiny assessments are getting timebarred. So they make us dance!

S — But that is upto 31st of March. Isn’t it?

A — Y es. But sometimes some ‘special work’ remains. That needs to be completed in April.

S — A nyway. You wanted to know something about disciplinary proceedings.

A — Y es. That my friend has sent a reply to the Institute. I mean, to Director-Discipline.

S — N ow, as I told you, it will be sent to the complainant. He will write a rejoinder. After that, the disciplinary directorate will decide whether the respondent – that means your friend – is prima facie guilty or not.

A — T hat much you told me last time. I want to know how the enquiry is conducted.

S — See, if you are prima facie guilty, you are again given an opportunity to submit your explanation to the prima facie opinion. Then you are called for enquiry.

A — I s it always at Delhi? S — I t depends. Usually the Disciplinary Committee (‘DC’) or Board of Discipline (‘BOD’) holds a camp of one or two days in all major cities by rotation.

A — Y ou mean, they go to various places with all the records?

S — Y es. Mumbai, Ahmedabad, Chennai, Bengaluru, Kolkata etc. They carry all the records. Their staff members also travel with the members of DC or BOD.

A — O h!

S — T he record they carry is massive! Nothing is left in the regional offices. It is totally centralised.

A — O K. How do they hold an enquiry?

S — See. If it is a First Schedule offence, it is before BOD.

A — Who are on BOD?

S — P resident, another Central Council Member (CCM) and a Government nominee. Two members form a quorum.

A — And DC?

S — D C deals with offences covered under Second Schedule or when there are offences under both the Schedules. I t consists of 5 members. President, 2 CCMs and 2 Government nominees. Quorum is of three. But at least one Government nominee’s presence is a must. That is not so for BOD.

A — Complainant is also present?

S — Yes. He and his counsel also, if any.

A — But what if complainant does not come?

S — Still, the enquiry is conducted.

A — Do they give adjournments?

S — Y es. But only once! You cannot repeatedly seek time unlike your tax proceedings.

A — R espondent also can take a counsel?

S — O f course, yes. He can be a lawyer or a CA or a CS or ICWA member.

A — What do they ask?

S — Firstly, all the parties present are asked to identify themselves. E verything is tape recorded. You have to speak into the mike.

A — O h! Everything is in English?

S — Y es. But sometimes, parties do not know English; or cannot speak in English. Then they can speak in Hindi or another language, which needs to be translated.

A — I see.

S — T hen, Complainant and Respondent are put on oath. The BOD and DC have the powers of a Civil Court. So they can administer oath. The complainant is asked to read out the charges. The Committee asks questions to the complainant to define the charges.

A — A nd what if the complainant is not there?

S — T hen, the Administration does that job.

A — T hen?

S — T hen the Respondent is asked whether he has understood the charges. After that, he is asked whether he pleads guilty or he denies the charges and would like to defend himself.

A — O bviously, he will try to defend himself. S — Sometimes, the guilt is so patent and self-evident that it is pointless to defend. The BOD or DC members appreciate if you candidly accept the guilt. That helps in softening the punishment.

A — T ell me the punishments again. You had told me once, but I forgot.

S — F or First Schedule item, the punishment is one or more of the following three: A reprimand or fine not exceeding Rs. 1 lakh and/or suspension of membership for a maximum period of 3 months.

A — A nd for Second Schedule offence?

S — A gain one or more of the three. A reprimand or maximum fine upto Rs. 5 lakh, and/or suspension of membership for any length of time.

A — O h! My God!

S — A rjun, now I am in a bit of a hurry. I will explain the further part when we meet next.

A — A s you please, Lord!

S — Tathaastu !

NOTE: This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

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(Auditor’s appointment under Company Law)

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Clause (9) Part I of first Schedule to CA Act, 1949. CA Arjuna (A) : Hey Bhagawan, last time you explained to me the importance of communicating with the previous auditor. Now what next? Bhagawan Shrikrishna (S):I told you many things. But have you understood?

A – Well, I was attentive. I did understand; but find it difficult to digest and implement.

S – That is always the situation. You are impatient to grab the audit work; and are reluctant to comply with your Institute’s rules.

A – Unfortunately, our mindset has become that way. We often think of short-cuts or bypassing the rules or complying only at the 11th hour.

S – 11th hour is also not bad. You do it at 13th hour with a backdate!

A – We always have some hypothetical fear of doing things in time. We can’t work without tension! Now tell me, if directors of a company give us an appointment letter, is it not sufficient?

S – You often behave as if you have never studied the Companies Act. You can never see anything beyond income tax! That is the whole trouble.

A – Tell me then what I need to do.

S – At least read clause (9) of the First Schedule. First see whether you are the first auditor of that company or there is a change?

A – Why? Is there a difference? I just go by the directors’ letter.

S – Oh! Very dangerous! There are many who don’t even take an appointment letter! You are little better!

A – I am talking of a private limited company. Who is going to verify? Everything is within the family.

S – Are you sure – never are there any disputes in the family? Then why did you fight with Kauravas?

A – They were our cousins! Here, they are husband-wife and their son.

S – In Kaliyuga, there are instances where husband and wife – both CAs – separated and lodged complaints against each other to the Institute!

A – Oh Lord! I must keep Draupadi and Subhadra in good mood. Otherwise, they will drag me into court!

S – Can’t rule out! So, don’t be in a slumber. Previously you were ‘innocent’; but now they will call you ‘stupid’!

A – Anyway. Then what should I see?

S – See Sections 224 and 225 of the Companies Act. If it is the first appointment, then directors can appoint the auditor. But this has to be done within 30 days from incorporation.

A – Oh! And if they don’t?

S – That was sub-section (5) of Sec 224. Otherwise, they will have to hold an extraordinary general meeting and appoint the first auditor.

A – Ah! That’s simple. These are paper meetings. I will ask my friend to write minutes. He is a company secretary.

S – Arey Arjuna, don’t take it so lightly. All formalities of EGM must be observed.

 A – Yeah! He will draft the notice and minutes. Everything is internal!

S – One should see the record of service of notice. Remember, directors and members can deny that they received the notice. They can challenge the validity of the meeting itself.

A – Why should they? It is being done in company’s interest only.

S – So you feel. When everything is smooth and amicable, they will agree. But when friction starts, they will conveniently forget it.

A – Unnecessary complications! Very disgusting

. S – Why are you so uncomfortable when the compliances are so simple? After all, it is a corporate entity. There is sanctity behind these provisions.

A – Then tomorrow, there could be disputes amongst partners also!

S – Yes. That is very common. It is inevitable. Partners are bound to dispute and separate one day or the other! For every birth, there is a death and partnership is no exception.

A – Then, do you mean we should take everything in writing?

S – If possible, you should obtain signatures of all partners on your copy of balance sheet. Do you ever read the partnership deed of a client? There is normally a clause there that accounts will be signed by all partners.

A – Ah! All those are standard clauses. I don’t even ask for the Deed. Same is the case of memorandum and articles of a company. What’s the use of all those stereotyped clauses?

S – Then be ready for trouble.

A – Now, I am in practice for 24 years! Nothing has happened so far.

S – You have not died in the last 50 years. Can you not die now?

 A – Come back to auditor’s appointment. What if there is a change of auditors?

S – You have to first ensure whether the previous auditor has resigned or was removed. He may have just given a letter expressing his unwillingness to be reappointed.

 A – Then what? Is it not sufficient?

S – It may be an item requiring special notice under section 190 of the Companies Act. You have to see all these things.

A – This is too much! If I spend time on this, when shall I audit the accounts. There are deadlines.

S – This happens because you don’t recognise any other deadline except your tax returns. Why don’t you understand that your appointment should be validly made? It is of prime importance. Why are you so casual about it?

A – Clients come to us only at the last moment.

S – So to accommodate them, you compromise everything! If they are careless, make them understand the things. If you accommodate them, they will take you for granted. As if everything is your own duty.

A – I think I should insist on a company secretary’s certificate regarding compliances.

S – That will be better. At least some safeguard!. Client must spend for it. But your basic duty still remains.

A – What duty? S – At least to see the prima facie compliance.

A – Tell me further. Board can fill up a casual vacancy. Is it not?

S – Yes. But every vacancy is not a casual vacancy. First see whether the Board has power to do so. I mean, whether the vacancy is really casual.

A – Why?

S – Don’t expect me to teach you the whole of the Company Law. Why don’t you read the publication on Code of Ethics of your Institute?

A – Where will I get it?

 S – That also you want me to tell? What kind of a CA you are! Go to WIRC. The latest edition is of January 2009 – reprinted in May 2009.

A – Okay! I will see that. There seems no escape!

S – And remember, these provisions of Companies Act and Code of Ethics are very well thought of. Don’t take them as a burden. They are designed to safeguard your own interest. Otherwise, someday, you yourself will crib about your unjust removal.

A – I agree; but our clients are like that! And other CAs also are not bothered about it.

S – Don’t let your client take your professional work for granted. Read all these carefully and update yourself regularly. They are meant for your betterment. Your conduct with the client will decide the dignity of your fraternity, not only now but also in future. If you conduct yourself very loosely before the client, I am sure your future generation will pay for it.

Om Shanti.
Note :
The above dialogue is with reference to Clause 9 of the First Schedule which reads as under:
Clause (9): accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of Section 225 of the Companies Act, 1956 (1 of 1956), in respect of such appointment have been duly complied with;
Further, readers may also refer pages 188 to 210 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009)
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Communication with previous auditor

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We are trying to understand the principles of our Code of Ethics through the dialogue between Bhagwan Shrikrishna and Arjuna.

Shrikrishna (S) – Dear Arjuna, how was your vacation? Did you enjoy your outing?

Arjuna (A) – Yes, it was fine. But the last time you told me about the disciplinary action; and whenever I thought of it, my mood used to go off!

S – Why? Was it so frightening? I told you only broad principles. And if you are awake and alert, there is nothing to worry about.

A – When I was away, my manager informed me that we got a new audit and it was to be done urgently. I instructed him to start working on it.

S – Good. But did you write to the previous auditor?

A – Actually, I was at the hill station and was not getting the range on my cell. Still, I managed to speak to the previous auditor. He said, ‘Don’t worry; go ahead’. I have to sign the audit next week. Most of it is already done. I will ask the client himself to obtain his NOC.

S – Oh dear! Don’t take it so lightly. You cannot shift the responsibility to the client or anyone else. You and you alone have to write to him.

A – But the client has promised me. If you say, I have to write, I will give my letter to the client who will deliver it to the previous auditor

S – Hey Partha, never commit such a mistake. And remember, you have to do this before accepting the audit and not before signing it.

A – But we have already commenced the audit. It was urgent. Why waste time in such useless formality?

S – You are mistaken. It is not a meaningless formality. It is extremely valuable.

A – What purpose will it serve? It is the client’s prerogative to change the auditor. Why should anybody object?

S – Arjuna, you belong to a graceful profession – a learned profession. You are not a shopkeeper or a mere businessman. All professionals need to be united. Otherwise, client will take advantage and bring both of you in trouble.

A – How? Each year’s audit is a separate contract. What role has the previous auditor to play?

S – It is possible that the client’s dealings are not proper; or he may be lacking discipline. His records may not be straight. Previous auditor may be reluctant to sign.

A – So what? I will take every care and qualify the audit if I feel it necessary.

S – Precisely for this reason the client may have left the previous auditor. You will come to know from him as to whether one would be professionally comfortable signing this audit.

A – But if he objects to my accepting the audit, the client will suffer.

S – Why are you so much worried about the client who approaches you at the eleventh hour? There must be some hitch that the client may be hiding from you. Just ask whether he has paid the fees of previous auditor?

A – How will it matter? I will secure my fees and I know how to recover it.

S – Let me tell you that if you accept the audit when the previous audit fees are unpaid, that in itself is a misconduct. Let alone the other objections.

A – But the previous auditor may have charged exorbitant fees!

S – Remember, it is only the audit fees and not fees for any other services. The Guidelines from Council refers to undisputed audit fees.

A – How can one know whether it is disputed or otherwise?

S – It defines the undisputed audit fees. It means the fees appearing in the balance sheet signed by the auditor. Once it is so, it is deemed to be undisputed.

A – But what if there is cash method of accounting? Nothing will be there in the balance sheet.

S – Then you have to be extra careful. Check the records, write to the client, and write to the previous auditor.

A – What if the previous auditor objects? Or does not issue NOC for a long time?

S – Firstly, remove the wrong notion from your mind that you have to obtain an NOC. The relevant clause nowhere requires that. It only says, you have to communicate with him in writing; before accepting the audit.

A – Can I fax or e-mail? S – Not advisable. Council prefers and recommends a registered post acknowledgment due. RPAD! A – I will hand deliver to him.

S – Then you have to have a proof of delivery. I suggest, even avoid a courier. If RPAD is such a simple thing to do, why do you avoid it? This is typical of you CAs.

A – Wait. I will speak with my audit manager. (Speaks on cell phone). Good Lord! My manager informs me that the previous auditor has already mentioned in his resignation letter that he has no objection to anyone else taking up the audit! Moreover, it is only an internal audit and not statutory audit! I am saved!

S – Blissful ignorance! Mere mention in resignation letter is ‘not sufficient’. There is no substitute to your writing to him. There is no other way.

A – But what about internal audit?

S – Again a wrong notion. The rule applies to all types of audits be it statutory audit, tax audit, VAT audit, Concurrent, Internal, Revenue or Stock audit!

A – That is irritating. That is why our code is a burden.

S – No dear! Why don’t you take it positively? Perhaps, you will get valuable tips; or some advice of caution. Your efforts may be saved if the audit is risky. Or even client will dodge your fees as well! Don’t treat the previous auditor as your enemy.

A – Sometimes, I am confused as to who is a ‘previous auditor’. What if there was no tax audit for last two-three years?

S – Previous auditor does not mean the auditor for the immediately preceding year. It means the auditor who last held the same or similar assignment immediately prior to your appointment. Thus, it could be auditor appointed two-three years ago also.

A – Now that you are telling me all this, tell me, what if the audit is allotted by the Government? By CAG; or by Co-operative Department; or By RBI?

S – Still you are supposed to write. And who told you, you have to actually obtain NOC? You have to simply communicate, wait for a reasonable time.

A – But what if he objects?

S – You have to weigh the objections. If they are valid, you may consider whether or not to accept the audit. Or you may take them into consideration while reporting. But if the objection is regarding non-payment of undisputed audit fees, you are helpless. Otherwise, you will invite trouble for yourself.

A – Why does the Council not compel the auditor to respond quickly?

S – It has! In fact, the Council has advised all the members to respond to such communications quickly.

A – But previous auditor is closely known to me. I don’t think he will take it seriously for such a small fee.

S – I will tell you a real life incident. In one case, both husband and wife were CAs. The wife did the audit of a small housing society for two years. Thereafter the husband signed it. After a couple of years, there was a divorce proceedings between the two and the wife complained to the Council that the husband accepted the audit without communicating with her!

A – Ohh! This is alarming. Good that my Draupadi is not a CA!

S – Therefore, I am telling you, don’t take it lightly; and take it positively. It is in the interest of your profession.

A – Does it apply to tax assignments or certification work as well?

S – Legally speaking, ‘No’. But the Council recommends it as healthy practice.

A – Once a client came to me for advice through another CA. Thereafter, the client approached me directly. What should one do in such a situation?

S – Council recommends that you should ask the client to come through that CA; or at least inform that CA about it. That is a dignified behaviour.

A –   I am slowly getting what you are saying. If we ourselves do not respect our profession, who else will respect it? They will take us for a ride.

S –   Right. Communication with previous auditor indicates unity among professional brothers. You are well aware of what happens when brothers and cousins are not united.

Note :
The above dialogue is with reference to Clause 8 of the First Schedule which reads as under:

Clause (8):  accepts a position as auditor previously held by another chartered accountant or a certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him in writing;

Further, readers may also refer to the Chapter VII of Council General Guidelines, 2008 dated 8th August, 2008 for guidelines on undisputed fees (refer page nos. 313  – 323 of the Code of Ethics publication January 2009 edition or the official website of ICAI).

Gross negligence – Clause 7 of Part I of Second Schedule (contd.)

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Gross negligence – Clause 7 of Part I of Second Schedule (contd.)

Series 3

 Arjun (A) – Last time you told me about gross negligence. It was a great relief that every negligence is not necessarily a gross negligence!

Shrikrishna (S)–No my dear! Don’t take it so lightly. It is not a licence to commit any blunder.

A – But you only said mere error or even a blunder is not negligence and every negligence is not a gross negligence.

S – It is true. The Council itself has taken that view. But don’t stretch it too far. The line between the two is very thin.

 A – But how can one be so perfect? In every audit, there may be some flaw or the other. It is impossible to do any audit so ideally perfect.

S – Agreed. But what is important is your approach and attitude. Moreover, I also mentioned to you that now the amended clause also talks of ‘lack of due diligence’. This is a very wide concept.

A – But how does one judge a member’s attitude? How can one prove that there was no negligence; but only an inadvertent error?

S – Remember, work should not only be done but it should be seen that it is done. You need to maintain working papers.

A – Our clients don’t have a good accountant. There is always a mess in the records. Some how, we manage to draw up the balance sheet ourselves. If there are errors, we get them set right there and then. Who will keep all those queries? We don’t have time nor space to keep so many papers.

S – Understand this difficulty. But you have a double jeopardy. On one hand, clients do not realise how much work you have done. So they don’t pay your fees, let alone increase. On the other hand, your position is vulnerable before the Council.

A – But Council should understand the difficulties of the common practioners. They don’t have so much resources.

S – That is where your attitude comes into play. You have technology at your disposal. You can always email your queries, store them in your computers.

A – But clients can’t understand the queries. They want us only to reply our own queries!

S – But this will at least make him aware of the extent of discrepancies.

A – Now take our accounting standards. They just don’t care. They are not interested even in knowing the implications.

S – You need to use your persuasion skills. Sooner or later, they will realise it.

A – But what to do till then?

S – You need to be assertive. If you tolerate or cover up the flaws, you will be taken for granted.

A – That is already happening. What is the solution?

S – See, my dear. If you compromise once, you invite a great risk. First and foremost, you lose your respect. The value of the profession also goes down.

A – We become helpless.

S – Secondly, if there are flaws in the accounts, you may suffer scrutiny from Revenue Authorities.

A – Yes. We need to ‘manage’ the things over there.

S – And client says, it is your own mistake. So he does not pay for your efforts in taxdepartments.

A – I am told, now-a-days, tax authorities are routinely writing to the Institute about the shortcomings in audited accounts.

S – That’s what I am saying. And even if the client does not pay or hike the audit fees, you have to continue the audit. You are always worried that if some new auditor comes in your place, your mistakes will get exposed! Hence, you perpetuate your mistakes.

A – What you say is true. In a way, we blackmail ourselves and are afraid of deviating from wrong path.

S – Your compromising attitude leads to negligence – or lack of due diligence. Negligence is a very wide term. It covers many things. You can not define it. There can not be an exhaustive list.

 A – You mean it is as endless as your manifestations that you described in ‘Vishwa Roop Darshan’!

S – Yes. That I told you the 11th Chapter of ‘Geeta’.

A – Still, you please tell me at least a few illustrations of negligence.

S – It starts right from your appointment. See that it is properly made with reference to applicable laws, that organisation’s bylaws, and so on. You must take an appointment letter. Then, maintain working papers, preserve the queries raised by you and their replies.

A – Yes. I will be careful.

S – Then take Management Representation Letter – MRL. I don’t think you have ever taken it!

A – I have recently started taking. But not in all cases.

S – Prepare a proper audit program covering all aspect of audit. This you studied in exam but never followed.

A – I have seen some CAs who spend lot of time on all these things. They compile heap of files of working papers. This report and that opinion! I wonder whether they really do any audit!

S – It is easy to criticise others. But try to understand the spirit behind it. Then you need to know not only the applicable laws – like tax, company law, FEMA; but also your Institute’s pronouncements like accounting standards, auditing standards, guidance notes, statements, resolutions – and so on.

A – Wait wait! I cannot digest and remember all these things. We will meet again after this July returns, when I will focus on audits.

S – Yes. I don’t mind meeting again. But don’t be under an impression that negligence is invoked only in audits. It also covers tax practice. In fact, it encompasses each and every aspect of your professional functioning. I will explain next time.

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.

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Bringing disrepute to the profession (Clause 1 & 2 of Part IV of the First Schedule and Part III of Second Schedule)

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Arjun (A) Oh Lord Shrikrishna! Save Me. It is becoming too much! Shrikrishna (S) Arey! What happened?

A – Cannot cope up with this work of March!

S – Why? March comes every year. What’s new about it?

A – That’s the problem. Nothing new happens. Same old things, only more tiring. Advance tax, service tax, time-barring assessments and returns.

S – Why are there time-barring returns? Can you not file them earlier?

A – No. Some clients have a habit of filing their returns only on the last day.

S – It is their habit or your habit? You could easily push them. Do you communicate with them properly? And in time?

A – No. We ourselves keep it pending for some reason or the other. Many times, there are some issues on which it is difficult to take decision.

 S – You simply keep on grumbling but don’t want to improve.

A – This year there is one more menace.

S – What is that?

A – Many clients had taken bills for adjustment of profits. But those suppliers never paid their VAT. And such defaulters’ list is now sent by MVAT authorities to income tax people.

S – Then?

A – Now, our clients had to pay the MVAT evaded by the suppliers. And on the top of it, they are facing disallowance in Income Tax.

S – What is wrong about it? They deserve it if they are falsifying the accounts. My worry is that you CAs should not be trapped into such rackets.

A – A few of my CA friends are doing only this ‘entry’ business. They are minting money and I have to slog like this.

S – I had already told you – you have a right only in the performance of your duty; not in the fruits. Those unscrupulous CAs are now getting the fruits of their deeds!

A – I agree. But the harassment at the tax office is unbearable. Their demands are astronomical.

S – Are you also involved in settling the cases?

A – What to do? There is no alternative. I don’t do it myself. That is why my cases remain pending and I get irritated.

S – Good. That is why you are so dear to me.

A – But I feel, those who settle down, enjoy life.

S – You are mistaken. Before the war in Mahabharata also, you were under similar obsession. That time, I gave you clear vision about life.

A – But that was Dwaparyuga. Today, we are in Kaliyug.

S – True. But that time your thoughts were unbecoming of a Kshatriya (Warrior). Today, your thoughts are unbecoming of a professional.

A – But the profession has degenerated into business.

S – Let the profession degenerate; but not a professional like you. Your thoughts are confused; but fortunately, your upbringing has held you from acting in that manner.

A – I was wondering how you have not mentioned anything about misconduct so far! Is this not covered in our Code of Ethics?

S – How can it not be covered? I told you that there are two schedules to your CA Act that specify different types of misconduct.

A – Then tell me, where it is stated?

 S – See, bribery is a crime. If you are a party to it, it is abetment. That again is a crime.

A – But that is only if one is caught! It is a secret deal between the client and the officer. CA is just a middleman.

S – Remember, apart from the specific items of misconduct in the Schedules, section 22 of your CA Act covers ‘other misconduct’ also. That is very wide.

A – You mean, it is not only professional misconduct.

S – No. So if you are caught, you are directly covered by clause (1) of Part IV of the First Schedule and so also Part III of the Second Schedule. That means, convicted of a punishable crime.

A – What else?

S – Clause (2) of Part of IV of the First Schedule is very very wide. It says, if your action brings disrepute to the profession, that is also a misconduct. See, if you are involved as a middle-man, both the officer as well as your client discounts your value. They are happy because they are benefitted; but your image is tarnished.

A – That is true. Many clients treat us as agents only.

S – You should be careful as to how the society perceives your profession. In many scandals, the role of your colleagues is exposed.

A – What are the other instances?

S – What to tell you? There are cases of even CAs demanding dowry.

 A – Really? I am aware that in certain communities, CA commands a hefty dowry. I am told, nowadays that rate also has gone down!

S – That is public perception! Do they really respect you? Three CAs formed a company for some business. But the business did not pick up, so they neglected compliances totally. That company was transferred to someone; and due to some friction, the buyer filed a complaint and such negligence brings disrepute to the profession.

A – What was the outcome?

S – They were held guilty, though left on reprimand.

A – Oh! Then it will cover traffic rules also.

S – Yes. Even the indiscipline in behaviour, indecency and so many things! There are complaints of ill treatment of articles, misbehaviour with lady staff and what not!

A – One needs to be cautious everywhere! I thought our Code covers only professional misconduct.

S – Any professional is expected to have exemplary behaviour. It covers punctuality, courtesy, proper communication, personal habits – and what not? It is all-pervasive.

A – I have seen CAs whose personal habits and mannerisms are irritating. They can’t even speak properly. Even in conferences, the manner in which they rush for lunch is not befitting a professional! The less said the better.

S – Good! You have understood it. Take care of public image and you will command respect. Council is concerned with that. Om Shanti! The above dialogue is with reference to Clause 1 & 2 of Part IV of the First Schedule and Part III of Second Schedule which read as under:

Clause 1: is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;

Clause 2: in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action whether or not related to his professional work.

Part III of Second Schedule: A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.

Further, readers may also refer page 229 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

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Moneys of client to be kept in a separate bank account (Clause 10 of Part I of Second Schedule)

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Shrikrishna (S) – Hello, Arjun, you are looking in a good mood today, Any major fees received?

Arjun (A) – No. I am not that lucky. My last September’s bill will be received next September.

S – Then what is the secret of your smiling face today?

A – I just booked a foreign tour for my family in the coming vacation.

S – Great! But you go on vacation every year. What is special this year?

A – My son Abhimanyu is in the 10th SSC. Due to his classes and studies, we did not go anywhere for the last three years.

S – Where are you going?

A – Europe tour. But don’t tell Draupadi and Subhadra. I want to keep it as a secret.

S – But you said your clients don’t pay in time. You always crib about money, especially in March.

A – True. Fortunately, one of my clients went abroad for six months and he has kept a sizeable amount with me for his tax pay ments – Advance tax and self assessment.

S – Oh!

A – Another client has also given some amount to be invested in PPF next month. He is also touring for a long time.

S – Then what do you do with that money?

A – It came in handy to me for paying for the foreign trip. Sometimes, I also use it for my investments or share dealings.

S – Don’t you keep it separate?

A – Why? I will pay the tax or put in PPF at the appropriate time. I do it quite often.

S – But it is client’s money!

A – So what? He has entrusted it to me.

 S – But there are restrictions. It is not permissible.

A – Why should there be any bar? If the client has no objection, where is the problem?

S – Dear Partha, please read clause 10 – Second Schedule – in Part I.

A – Whatever I do, you always find some fault with it. My friends are also doing the same thing as I do and they deal with huge sums.

S – See, dear. So long as it is going smoothly, there will not be any problem. But basically, it is not ethical. You are using client’s money for your personal things.

A – But what is the logic?

S – There were instances where the CAs never paid the taxes of the clients. They also did not make investments as directed by the clients.

A – Many times, clients pay us for making Government payments. Stamp duty, registration fees and so on. Can we not deposit that amount in our accounts?

S – See, if it is to be expended in a short time, you may keep it. But if it is a long time, then you need to open a separate bank account for clients’ money.

A – This is strange!

S – Yes. It has also happened that CAs were tempted to play with others’ money. Some times, they lost it in the share market or entered into wrong deals.

A – This is alarming. I know one such instance. Fortunately, he could recover with the help of his friends. Otherwise, he had a tough time.

S – That is the wisdom to be learnt. Your Council does not want it to happen to other members.

A – You mean to say, I should not deposit the clients’ money in my account at all? There are no exceptions?

S – Not necessarily. The Council has already thought of practical situations. For exam ple, if an advance fee is received, it need not be deposited in a separate account. It is your money.

A – Good! Sounds sensible.

S – If some payments are to be made on behalf of clients in a short time, then it can be routed through your normal account.

A – Can I put it in short term deposits?

S – Ideally speaking, No. You are not supposed to use that money for personal benefit. You cannot earn out of it.

A – What do you mean by short time?

S – Council has used the expression ‘reasonably short time’. That depends on facts and circumstances of each case.

A – I have heard that lawyers are also required to keep separate account for clients’ money. They receive huge amounts – for court fees, stamp duty and even as stake-holders – as escrow money.

S – Yes. Same principle applies here. Another thing, whatever you receive in your capacity as a trustee, executor or liquidator, you must put it in a separate account.

A – Oh! I need to be cautious now.

S – What is really objectionable is using it for personal benefit. CAs have gone to the extent of even depositing client’s income tax refund order in their account.

A – That is criminal. It is a fraud.

S – But apart from the fraud, he was held guilty under this clause only.

A – You have opened my eyes. I feel like can celling the tour tickets.

S – You need not go that far. But make sure that whatever obligation of your client you have undertaken, fulfill those, please don’t let him down. Faith and credibility are your greatest assets and you can’t afford to lose those. After all, you are a trustee.

A – I agree. Om Shanti! The above dialogue is with reference to Clause 10 of Part I of the Second Schedule which reads as under:

Clause 10: fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time. Further, readers may also refer pages 286 – 289 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

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Attest function where the member is personally interested (Clause 4 of Part I of the Second Schedule).

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Attest function where the member is personally interested (Clause 4 of Part I of the Second Schedule). Shrikrishna (S) – Arjun, I rang your office. They told me you are not attending for the last three days. Somebody said you were at home only. Arjun
(A) – Yeah! While doing duniyabharka work, our own family’s work remains pending.

S – What was pending?

A – My brother’s all the returns are pending. Tax audit as well as VAT audit! 15th January was the last date. Now everything is done. Great relief!

S – VAT I can understand. But tax audit date has gone long back.

A – Agreed. But my experience is that while doing VAT audit, many ‘lochas’ in tax audit are revealed! That is why, in some cases, I prefer to do it together!

S – But then, you should prepone VAT audit, rather than postponing tax audit.

A – True. But who has time to do VAT audit in the September pressure! Continuously, firefighting is going on in our office. S – Anyway, I hope, your brother’s audit is done by somebody else.

A – Why? Mere bhaika audit doosre ko kyo doo?

S – Arey baba, you cannot certify the financial statements of your relatives. It is a misconduct!

A – Yes. But I make it clear in the report that the person whose audit I am signing is my relative. That’s what we learnt when we did our CA

S – That was the position long ago! Prior to 2006. But your CA Act was amended in 2006. Are you not aware?

A – We recognise only Income Tax Act. All other Acts are of no relevance to me!

S – Then remember. As I mentioned to you, you cannot sign the financial statements of any business or enterprise where you have a substantial interest.

A – Baap Re! It doesn’t talk of mere relative?

S – No. Not only that. Even if your firm or any of your partner has a substantial interest, that also you cannot attest.

A – So wide! That means I cannot sign the balance sheet of even my partner’s wife!

S – This is only to ensure your independence. If you are interested in something how can you be impartial?

A – This is strange !

S – Otherwise, people will always believe that you have ‘accommodated’ the relative. Your credibility is in doubt.

A – But I make a disclosure of interest?

S – That won’t suffice. Previously, it was permitted. But now they have deleted the words – ‘unless he discloses the interest also in his report’. Thus, that exception is a thing of the past now !

A – Oh. I never knew.

S – Your Council has issued further guidelines on 8th of August of 2008 – Date is easy to remember – 8-8-8 !

A – And what it says?

S – It says – not only your own interest – But even if one or more persons who are your relatives have a substantial interest in a concern, then that also you cannot audit.

A – Ah – But relative is a very narrow concept in Income Tax, section 2(41) only talks of parents, spouse, brother and sister !

S – Listen carefully. It is not ‘relative’ under tax act; but under the Companies Act. Section 6!

A – Oh My God! That will cover many persons. And that again I have to check in respect of my partners also!

S – Yes, my dear. Don’t take it lightly. A – And what is substantial interest?

S – For that, you need to refer to your CA Regulations. – In that, Appendix (9).

A – But it would be 20%, I believe.

S – Yes. But read it at least once! See, the Council feels that you should err on safer side; and not merely adhere to the words of law. Try to understand the spirit of it. Otherwise you may lose or compromise your independence.

A – You mean, there should not be conflict of interest and duty. Right?

S – Exactly. Therefore, as an employee of an organisation, you cannot sign as auditor. Not only that, even if you are an employee of a group concern under the same Management, then also you cannot sign.

A – What if I am a part-time lecturer in a college – and I want to sign the audit of the college? S – Even that is not allowed. For that matter, if your partner is a trustee or employee of a trust, that trust’s audit also you cannot sign.

A – Where shall I get all this to read? And who has time to read? After all who is going to see even if I sign?

S – Remember. In the Mahabharata, I supported you because you were on the right side of law. If you are casual and don’t take your rules seriously, I cannot side with you. Then you be prepared to suffer.

A – I believe, apart from our CA Act, there is some prohibition in the Company Law also.

S – Of course, yes. Section 226 of Companies Act directly states the disqualifications of auditors.

A – I will have to read it again. What other things should I see?

S – I am sure, you are not writing the accounts of any client and also signing them.

A – Ah! That I know. Therefore, I give the accounts writing invoice in my wife’s name. Sometimes in Draupadi’s name, sometimes in Subhadra’s. Advantage of having two wives!

S – But do they know what is accounting? They have learnt only classical dancing. Take care. You may invite trouble.

A – You are giving me shock after shock. Ultimately then how to practice?

S – One more thing. Just as you cannot audit the books which you have written, same way you cannot sign statutory audit where you have also done internal audit. I feel, an internal auditor should also not sign a tax audit.

A – Well, you have told me so many things. I cannot remember all this. I’d better get the literature and read it myself.

S – I can see that you have become nervous after hearing all these. But if you see the provisions of the Companies Bill, 2012, they are even more stringent and wider.

A – Oh my God!
The above dialogue is with reference to Clause 4 of Part I of the Second Schedule which reads as under:

Clause (4): expresses his opinion on financial statements of any business or enterprise in which he, his firm or a partner in his firm has a substantial interest; Further, readers may also refer to the following: – Chapter IV of Council General Guidelines, 2008 dated 8th August, 2008 (refer page nos. 313 – 323 of the Code of Ethics publication January 2009 edition or the website of ICAI). – pages 239 – 244 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

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