ICAI And Its Members Archives

ICAI and its Members

1. Disciplinary Cases Disciplinary Committee (DC) of ICAI has decided the following cases and held the concerned members as guilty of professional or other misconduct. These cases are reported in the publication of ICAI “Disciplinary Cases” VOL-1. Page Nos. given below are from this Book. The names of members are not given in order to maintain confidentiality.

(i) Case of Mr. A.J.

In this Case, member has been held to be guilty of professional misconduct in respect of following four charges.

(a) Member accepted the position as auditor of NCP Ltd (Company) for 2006-07 without first communicating with the previous auditor in writing. In this case the member was appointed as auditor by the company on 01-10-2006. The member stated that he had informed the previous auditor about this fact by letter dated 14-08-2007 Under Certificate of Posting. This was considered by DC as not sufficient communication.

(b) The member accepted the appointment as auditor of the Company without first ascertaining from it whether the requirements of sections 224/225 of the Companies Act have been complied with. The DC found that the member could not establish whether these provisions were complied with.

(c) The member failed to exercise due diligence and was grossly negligent in the conduct of his professional duties while carrying out the Audit for 2006-07. The DC has noted that there were serious mistakes and grave irregularities in the Financial Statements audited by the member. The member could not produce his working papers to explain his view point.

(d) The member accepted the appointment as Auditor of the Company although payment of the undisputed audit fee of the previous auditor was outstanding. The DC has found that the undisputed audit fees payable to previous auditors were outstanding. No satisfactory evidence for payment of the outstanding fees was produced by the Member.

The D.C. has, after due consideration of the submissions of the Member, awarded punishment by way of removal of the name of the Member from the Register of Members for a period of one year. (DC- Pages 57-66).

(ii) Case of Mr.MKJ

In this case the complaint against the member was that he accepted Tax Audit assignment of a partnership firm without first communicating with the previous Tax Auditor. Further, the complainant (previous Tax Auditor) had stated that the member accepted the tax audit although his undisputed audit fees were outstanding.

The D.C. found that the member sent letter to the previous auditor Under Certificate of Posting. Although this was not sufficient compliance with the requirement for communication, the member could prove that the Postal Department had delivered the letter of communication to the previous auditor. Therefore, this charge was not proved.

However, the D.C. has held that the member was aware of the fact that undisputed audit fees of the previous auditor was outstanding and no satisfactory evidence were produced as to why this was not paid. Therefore, on this count the member was held to be guilty of professional misconduct.

The D.C. has issued a letter of caution to the member advising him to be more careful in future in complying with the provisions of C.A. Act and Code of Ethics. ( DC Pages 74 – 81).

(iii) Case of Mr.S.A.

In this case, the member was found guilty of professional misconduct in respect of the following charges.

(a) The member accepted position as Auditor of Six Entities without communicating with the previous auditor in writing. The defence of the member was that he had verbally communicated with previous auditor and no objection was raised. This was not accepted as proper communication by D.C.

(b) The second charge was that the member accepted the audit of six entities although audit fees and other fees for Tax consultation due to previous auditor was outstanding. The member could not produce any evidence for the payment of outstanding fees. The D.C. held that the member was not required to ensure payment of fees for Tax consultation but as regards outstanding Audit Fees due to the outgoing auditor no effort was made to clear the same.

The D.C. held the member guilty on both counts and awarded the punishment of Reprimand to the Member.

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues as under on Pages 1008 – 1010 of the CA Journal for January, 2014.

(i) Issue No: 1:

Appointment of another Auditor at Adjourned A.G.M without Special Notice.

If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company. In terms of section 190(1) of the Companies Act, 1956, special notice should be given to the Company at least fourteen clear days before the meeting in which the subject matter of the notice is to be considered. The meeting contemplated in section 190(1) undoubtedly is the original meeting.

(ii) Issue No: 2:

Charge of Fees by C.A in practice based on percentage of Turnover.

In terms of Clause (10) of Part I of First Schedule to the C.A. Act, it is not permitted for a Chartered Accountant or a firm of Chartered Accountants to charge fees on a percentage of turnover, except in the circumstances provided under Regulation 192 of the CA Regulations, 1988.

(iii) Issue No:3:

Whether a member in practice can be a director of company?

A member in practice is permitted generally to be a Director simpliciter in a Company provided he is not a Managing Director or Wholetime Director and is required to attend only the Board Meetings of the company and not paid any remuneration except sitting fees for attending the meetings.

(iv) Issue No: 4:

Whether a Chartered Accountant in practice is entitled to accept teaching assignment?

A Chartered Accountant in practice is allowed to accept teaching assignment in university, affiliated colleges, educational institution, coaching organisation, private tutorship, provided the direct teaching hours devoted to such activities taken together do not exceed 25 hours a week.

(v) Issue No: 5:

Undercutting Fees:

It is now possible for a C.A. in practice to accept a position as Auditor previously held by some other C.A. in such conditions as to constitute undercutting.

3. Rotation of Auditors:

ICAI had successfully objected to the introduction of the system of Rotation of Auditors for the last over six decades. Several Commissions and Parliamentary Committees had agreed that rotation of Auditors was not in the interest of the Accounting Profession as also for the Corporate Sector. Inspite of this, provision for rotation of auditors has now been introduced by enactment of new section 139 of the Companies Act, 2013.

Detailed procedure for Rotation of Auditors as contained in section 139 has been stated in November, 2013 (Page 107), issue of B.C.A. Journal. Briefly stated, a firm of Chartered Accountants cannot continue as auditor of listed companies and other specified companies for more than 10 years. This period for sole proprietary concern is five years. After the expiry of this period, the same audit firm or its associate cannot be reappointed for a period of 5 years.

As stated earlier, the system of Rotation of Auditors u/s. 139 is to be applied only in Cases of Listed Companies and other Companies as may be prescribed by Rules. It may be noted that Draft Rule 10.3 provides that this system of Rotation of Auditors will apply to all Public and Private Companies, other than Small Companies and One-Person Companies. This provision is very harsh and almost of all Small and Medium sized Audit Firms will lose their medium sized Audit Clients. If a reference is made to section 149(4) it will be noticed that the requirement for appointment of Independent Directors on the Board of Companies applies to Listed Companies and other companies as notified by Rules. Draft Rule 11.2 provides that this requirement will apply to any Public Company having (i) paid-up capital of Rs.100 cr. or more, or (ii) Turnover of Rs. 300 crore or more or (iii) Aggregate Loans, Deposits etc. exceed Rs. 200 crore. There are similar other sections where similar powers are given to the government and the Draft Rules have equated Listed Companies with large Public Companies. ICAI should suggest that Draft Rule 10.3 should provide that the system of Rotation of Auditors should apply, besides listed Companies, to only large Public Companies having paid up capital exceeding Rs. 100 crore or so.

The Draft Rule 10.4(4)(i) is the most damaging rule in as much as it provides that for the purpose of rotation the period for which the auditor is holding office as auditor prior to commencement of the New Act shall be taken into account for calculating the period of 5 or 10 years. If this is implemented the existing small and medium sized Audit Firms will lose almost all their Audit Clients. They will cease to be auditors in almost all the companies where they have been auditors for 5 or 10 years during the next 3 years. This will put their Audit Staff, Articled Assistants and others in the most precarious position. Most of these firms will have to close down their Audit Practice. In some cases such firms will have to adopt unhealthy practice of canvassing for audit work. ICAI should strongly represent for amendment of this Draft Rule 10.4 (4) (i) so that it is specifically provided that period prior to enactment of section 139 is not counted for the limit of 5 or 10 years for reappointment of statutory auditors. It may be noted that Explanation below section 149
(11) dealing with Independent Directors who can hold office for 10 years specifically provides that the period prior to enactment of the section is not to be considered for counting the period of 10 years.

4. EAC Opinion:

Recognition of Distribution Network Acquired in a Business Acquisition as an Intangible Assets

Facts:

Company X (Company) was incorporated in February, 2011 as a wholly owned subsidiary of company Y. During the year 1st April, 2011 to 31st March, 2012, the company X acquired a business from company Z, an unrelated party, on a slump sale basis for an arm’s length consideration. Company Z is a leading manufacturer of kitchen appliances. The acquisition of business has led to company X becoming a leading player in this segment. As part of the acquisition, company X has acquired a large network of distributors, service centres, service points, retailers and manufacturing points.

The company operates through different channels, such as, the distributors, retailers, direct dealers, etc. More than 80% of the sales in the past were effected through the network of distributors (The distribution network).

The management of company X engaged a valuer to carry out the purchase price allocation. The intangible assets identified by the valuer for the purchase price allocation included brands and the distribution network. As per the valuation report, the distribution network was identified as an intangible asset and considering the time period over which the current distribution network was expected to contribute to the revenue of company X, the economic life of the distribution network was considered to be indefinite. However, the agreement appointing the distributor was valid till 31st March, 2012 and was renewable on mutual terms.

Query:

The querist has sought the opinion of the Expert Advisory Committee as to whether the distribution network acquired as part of the business acquisition in the case of the Company qualifies for recognition as an intangible asset as per AS 26.

EAC Opinion:

After considering paragraphs 6.1, 6.2 and 31(a) of AS 26 the Committee is of the view that for recognition, an intangible asset, even if acquired as part of a business purchase, should meet both the definition and recognition criteria specified in AS 26. The Committee notes from the Facts of the Case that the distribution network, being an arrangement for the marketing of the company’s product, is a non-monetary item without physical substance held for the purpose of supply of goods. Further, it appears from the Facts of the Case, that the existence of the distribution network is a factor for the acquisition of the business. So, while allocating the purchase consideration the valuer is able to identify the distribution network separately and also assign a value to it. This indicates that (i) the distribution network is identifiable; (ii) it is probable that future economic benefits attributable to the distribution network will flow to the company; and (iii) the cost of acquisition of the distribution network can be measured reliably.

Further, considering paragraphs 16 and 17 of AS 26 the Committee is of the view that the key terms of the distribution agreement mentioned by the querist indicate that the distribution network is controlled by the company at the time when it acquires the business, but the distribution agreement is valid only upto 31st March,2012 and the exchange (market) transactions for the same or similar distribution network are not available. In other words, there does not appear to be any control on distribution network either through legally enforceable rights or in any other way beyond 31st March,2012.

Hence, distribution network acquired as part of the business acquisition in the Company’s case qualifies for recognition as an intangible asset as per AS 26 only upto 31st March,2012.

[Refer page nos. 1038 – 1044 of C. A. Journal – January, 2014]

5. ICAI news:

(Note : Page Nos. given below are from C.A. Journal for January, 2014)

(i) Empanelment of CA Firms on C& A.G. Panel for the year 2014-15

Applications are invited online from the firms of Chartered Accountants who intend to be empanelled with the office of C & A.G. for appointment as auditors of Government Companies/Corporations for the year 2014-15. The format of application will be available on the website www.saiinida.gov.in from 1st January, 2014 to 15th February, 2014. (P. 1118)

Campus Placement Programme – February – March, 2014

The Committee for Members in Industry of the ICAI is organising Campus Placement Programme for newly qualified Chartered Accountants at various centers all over India. Campus Placement Programme will be organised at various centres viz. Ahmedabad, Bangalore, Bhubaneswar, Chandigarh, Chennai, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi and Pune from 17th February, 2014 to 15th March, 2014. (For details refer Page 1122)

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ICAI and its members

Disciplinary Cases:
The Disciplinary Committee (DC) of the ICAI has decided on some cases about professional or other misconduct. These are reported in the publication “Disciplinary Cases” Vol -1. The page numbers given below are from this book. The names of the members are not given, in order to maintain confidentiality.

(i) Case of RBK:
In this case, the Bank had complained that the member has issued financial statements to 97 persons from the same place. The Bank had given loans to these persons on the basis of these statements. On inspection by the Bank, it was found that these persons had no business activity or source for repayment of loans.

During the inquiry, the DC found as under:
(a) T hat the member had issued projection statements which were signed by him without putting any date;
(b) T hat the projection statements did not disclose the exact years and instead stated years I, II, III, IV and V, creating ambiguity for the reader about the years for which projections were given;
(c) T hat in a number of cases, the member had issued two/three projection statements for the same individual certifying different figures;
(d) T hat the basis on which the said statements were issued were not disclosed by the member.

The explanation given by the member was that he had issued the certificates based on the information given by the parties. He could not produce any documents on which reliance was placed.

The DC also noticed that the Branch Managers who gave the advances had not made any inquiries about the capacity of the parties and loans were sanctioned without authority.

On the basis of the above, the DC held that the member allowed his name to be used in the projection statements, giving the impression that he vouches for the accuracy of the information. It also held that he failed to carry out his duties in a diligent manner and failed to obtain sufficient information for expression of his opinion. Therefore, the DC held the member guilty of professional misconduct under clauses (3), (7) and (8) of Part I of the Second Schedule to the C.A. Act.

The DC further noted that all the loans were given in contravention of the prescribed rules of the Bank and some officials at the Branch Level were involved in it. Moreover, all loans were recovered by the Bank and all accounts were closed. In view of this, the DC has taken a lenient view and awarded punishment by way of “Reprimand” to the Member (pages 126-134).

(ii) Case of R.P.R:
In this case, R.P.R. had conducted the Audit of a Cooperative Housing Society for the years 2003 to 2007 and given one Audit Report for all the four years. The allegation against him was that the Income & Expenditure Account for any of the years was not prepared and only the Balance Sheet as at 31-03-2007 was attached to the Audit Report. It was further alleged that the notes to the Audit Report were highly damaging. Therefore, he could not have stated that the accounts give a true and fair view of the state of affairs of the Society.

During the inquiry by DC the member explained as under:-

(a) T hat he prepared the Balance Sheet and Audit Report for the limited purpose of addressing litigation amongst the members of the Society;
(b) T hat he had relied on the audit done by the previous auditor and followed in the period covered under the Audit;
(c) That he had pointed out the deficiencies in his report by way of Annexure to the report;
(d) That no Income & Expenditure Account was prepared as the Project was under construction;
(e) T hat he had carried out the assignment to the best of his ability. However, he admitted that due to lack of experience, there could be some technical mistakes, but the same could not be said to be due to negligence on his part. He further stated that there was no malafide intention. It was admitted that he had not done audit of similar works earlier and therefore there could be some mistakes.

The DC noted that there were several mistakes in conducting the Audit and the member had not followed Auditing Standards i.e. AAS-28. Further, the member had admitted that there were mistakes in giving Audit Report due to lack of experience of similar audit. Therefore, the D.C held that the member was guilty of professional misconduct under clauses (7), (8) and (9) of Part I of the Second Schedule to the C.A. Act.

Looking to the facts of the case, the DC awarded punishment of “Reprimand” as the DC found that the mistakes were of technical nature and that the member had also shown remorse for his mistakes in the written representation (page 67 to 73).

2. Financial Reporting Review Board (FRRB)

ICAI has constituted FRRB with the objective to improve the Financial Reporting Practices. Observations of FRRB after examining the Accounting Policies followed by Companies in their published financial statements have been published in the publication “Study on Compliance of Financial Reporting Requirements” Vol – II. Some of the observations of FRRB are given below. Page numbers. given below are from this publication.

(i) AS-2 (Inventory Valuation)
In the Annual Reports of some Companies, the accounting policy for valuation of Inventories simply states that Raw Materials, Stores and W.I.P are valued at the lower of cost and the net realisable value.

Observation of FRRB: It may be noted that Companies have disclosed the policy for Valuation of Inventories, but they have not disclosed the cost formula used for Valuation of Inventories, which is required to be disclosed as per Para 26(a) of AS-2 (Page 11-12)

(ii) AS-2 (Inventory Valuation)
From the Schedule of “Inventories” given in the Annual Reports of some Companies, it has been noted that Inventories were described “As taken, Valued and Certified by the Management”.

Observation of FRRB: I t may be noted from the clarification given in the Guidance Note on “Audit of Inventories” that the use of the expression “As valued and certified by the Management” may lead the users of Financial Statements to believe that the auditor merely relied on the management’s certificate without carrying out any other appropriate audit procedures to satisfy himself about the existence and valuation of Inventories. Further, use of this type of wording indicates that there is a disclaimer for Inventories which should be avoided (page 12).

(iii) AS-2 (Inventory Valuation)
From the Schedule of Current Assets given in the Annual Report of a Company, it is noted that stock-in-trade also includes the stock of DEPB Receivables as well as Plant and Machinery retired from active use.

Observation of FRRB: It may be noted that under Para 4 of AS-2, Inventories include finished goods, WIP, Raw Materials, Consumables, Loose tools etc. Therefore, DEPB Receivable should be treated as part of Loans and Advances and Plant & Machinery retired from active use should be included as part of Fixed Assets. Hence, they should not be included in Inventories (page 16-17).

3. Some of the Ethical Issues:
The Ethical Standards Board has given answers to some Ethical Issues on Pages 1612-1614 of C.A, Journal for May, 2014. Some of these issues are as under:-

(i) What is the Conceptual Framework Approach?
It is a framework that requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply with a set of specific rules.

Professional accountants are required to apply this conceptual framework to identify threats to compliance with the fundamental principles, to evaluate their significance and, if such threats are other than clearly insignificant, then to apply safeguards to eliminate them or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised.

(ii) What are the threats involved while complying with the fundamental principles?

Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. these are (a) Self-interest threats (b) Self-review threats (c) advocacy threats (d) familiarity threats and (e) intimidation threats.

(iii) What are the available safeguards that may eliminate or reduce the threats at an acceptable level?

Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories, viz.,
(a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment.

(iv) What is Ethical Conflict resolution?
Ethical conflict resolution means to resolve a conflict in the application of Fundamental Principles while evaluating compliance with the fundamental principles.

4. EAC Opinion
Accounting treatment of Subsequent expenditure on technological Upgradation/Improvements on Capital Assets:

Facts:
T company is a wholly-owned Government of india enterprise incorporated in the year 1965 with the main objective of setting up cement plants in deficit areas to cater to the needs of that area and other neighbouring States. The company has stated that though it is the only Government of india enterprise in the country in the cement sector, its market share is less than 1% of the total market share in the country, thereby leading to severe competition from private entrepreneurs in the market. the company has one of its cement factories in one of the districts of Andhra Pradesh, that was commissioned in the year 1987. The plant has been in operation for more than 25 years after its commissioning and most of its major equipments have outlived their lives.

Now the company having been declared sick by the Bifr in the year 1996, due to erosion of its net worth, no technological upgradation/modernisation could take place as was called for the cement industry due to fast technological changes. however, normal maintenance was carried out to keep the plant running. as many new cement plants with higher capacity and latest technology have been set up by private entrepreneurs in the vicinity of the plant of the company in Andhra Pradesh and Karnataka, the company had been facing severe competition from private entrepreneurs in the industry and the company is finding difficulty to operate the plant economically without modernisation/technology upgradation.Therefore, in place of changing the vital equipments with latest technology which entails substantial investment, the company made an endeavour to upgrade/improve icertain equipments with certain amount of expenditure with a view to increase the standard efficiency of the vital equipments, increase its useful life and reduce the operating cost to the extent possible. The company has, therefore, undertaken modernisation/upgradation of vital equipments, keeping energy efficiency and environment friendly technology in mind, to increase their standard performance with increase in overall productivity and standard operating efficiency of the plant.

Query:
In view of the above, the opinion of the eaC of ICAI is sought on the following issues: (a) Whether the cost of above modifications/upgradation/improvements can be capitalised along with the cost of concerned equipments and depreciation charged accordingly; or (b) Whether the cost of above modifications/ upgradations/improvements should be amortised/depreciated over a period of 10-15 years as the benefit of the above works would result in further increase in useful life of the equipments by not less than 10 years.

Opinion:
After considering paragraph 23 of Accounting Standard (aS) 10, ‘accounting for fixed assets’, the Committee is of the view that expenditure on fixed assets subsequent to their installation may be categorised into (i) repairs and (ii) Improvements or betterments. repairs, implies “the restoration of a capital asset to its full productive capacity after damage, accident, or prolonged use, without increase in the previously estimated service life or capacity”. it frequently involves replacement of parts. On the other hand, betterment is defined as “ … an expenditure having the effect of extending the useful life of an existing fixed asset, increasing its normal rate of output, lowering its operating cost, or otherwise adding to the worth of benefits it can yield. The cost of adopting a fixed asset to a new use is not ordinarily capitalised unless at least one of these tests is met. A betterment is distinguished from an item of repair or maintenance in that the latter has the effect of keeping the asset in its customary state of operating efficiency without the expectation of adding future benefits.

Thus, the Committee is of the view that normally, expenditure on repairs, including replacement cost necessary to maintain the previously estimated standard of performance, is expensed in the same period. Similarly, the cost of adopting a fixed asset to a new use or modernisation of such asset without actually improving the previously estimated standard of performance is also expensed.

Accordingly, in the view of the Committee, only such expenditure that add new fixed asset units or that have the effect of improving the previously assessed standard of performance , e.g., an extension in the asset’s useful life, an increase in its capacity, or a substantial improvement in the quality of output or a reduction in previously assessed operating costs are capitalised. The Committee is of the view that ‘previously assessed standard of performance’ is not the actual performance of the asset at the time of repair/improvement etc., but the standard performance of the same asset in its original state.

From the facts of the case, the Committee notes that it has been stated that the expenditure has resulted in increased productivity, reduced operating costs and also enhanced the life of the equipments. however, the Company has not informed whether the increase in productivity or enhancing the life is beyond the previously assessed standard of performance of the concerned equipments. It is only the increase beyond the standard of performance of the concerned equipment in their original state, which is treated as betterment and related expenditure is capitalised.

After considering paragraph 23 of AS 26, the Committee is of the view that if the above upgradation/modernisation results into an increase in the useful life of the concerned asset the unamortised depreciable amount of the concerned asset along with the expenditure incurred on upgradation/modernisation should be charged over the revised remaining useful life subject to the useful life implicit from the specified rates as per Schedule XIV to the Companies act, 1956. The Committee wishes to point out that such depreciation should be charged with reference to the ‘useful life’ and not with reference to ‘physical life’ of the asset.

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ICAI and its members

1. Disciplinary Cases Disciplinary Committee (DC) of ICAI has decided the following cases which are reported in ICAI publication viz., “Disciplinary Cases” Vol. I Part – I and II

(i) Case of G.K.

In this case, Mr. G.K. used to audit the accounts of certain group companies and give statutory audit reports from 01-10-2005 to 26-09-2009. He did not reveal to the company management that his name was removed from Register of Members maintained by ICAI. It was further alleged that he had connived with one of the Directors of the company to defraud the other Directors.

The D.C. found that the name of Mr. G. K. was removed from the Register of Members for non payment of Fees and therefore he was not entitled to audit or give statutory audit reports. Therefore, Mr. G.K. had contravened the provisions of sections 8 and 24 of the C.A. Act. Section 24 provides for prosecution of such person and court can levy fine upto Rs. 5,000/- and under certain circumstances award punishment by way of imprisonment upto 6 months.

However, under the present proceeding, Mr. G.K. was held to have committed other misconduct under Clause (2) of Part IV of First Schedule and Clause (1) of part II of second schedule of C.A. Act on the first charge. As regards the second charge the D.C. held that this was not proved. The D.C. awarded punishment of removal of the name of Mr. G.K. from membership for 3 months (Reported on Pages 20 – 27 of Part I of Vol.I)

(ii) Case of V.K.

In this case, the member advised his client that capital gains tax of Rs. 6.91 lakh was payable as Advance Tax for A.Y. 2007-08. The member undertook to deposit Advance Tax on behalf of his client. The client paid Rs. 6.91 lakh to the member who deposited the cheque in his account. The member deposited only Rs. 0.91 lakh as Advance tax on behalf of his client. He, however, added the figure of Rs. 6 lakh in the Bank Challan to defraud the I.T. Dept. In other words, the member had misappropriated Rs. 6 lakh and cheated his client. When this fact came to the knowledge of his client, the member refunded the amount to his client with interest. He has also paid interest charged by the I.T. Dept.

The D.C. has found the member guilty of professional misconduct under Clause (10) of part I of second schedule of C.A. Act. The D.C. has held that amount collected from client for payment of Advance Tax was used by the member for his personal purpose in violation of the above clause. The fact that the member has returned the amount with interest can not absolve the member from his guilt.

On the consideration of the facts of this case, the D.C. has awarded punishment to the member and directed that his name be removed from the Register of Members for a period of 2 years. Further, the D.C. has imposed a fine of Rs. 50,000/- to be deposited within 90 days. (Reported on pages 28 – 36 of Part I of Vol.1).

(iii) Case of Mr. V. K. D.

In this case, the Reserve Bank of India (RBI) reported to ICAI that the member (Statutory Auditor of NBFC Company) has submitted a certificate on 12-04-2007 stating that the company continues to undertake the business of NBFC requiring it to hold the certificate of registration u/s. 45-IA of the RBI Act. The RBI has stated that according to company’s letter dated 26- 03-2007 it had informed RBI that it had yet to start the commercial business. Hence, according RBI the Certificate of the Member was wrong. The charge against the Member was about gross negligence under Clause (7) of Part I of second schedule of CA Act.

The defence of the member was that he issued the certificate dated 12-04-2007 in response to the request letter from Company, whereby, he was requested to certify whether the company continues to carry on principal business of NBFC as on 31-03-2007. As per RBI press release No. 1998-99/1269 dated 08-04-1999, the Company’s financial assets should be more than 50% of its total assets and income from financial assets should be more than 50% of gross income. Both these tests are required to be satisfied as the determinant factor. It may be appreciated that the Respondent was not required or intended to verify and certify generally whether the Company has commenced the commercial business of which Respondent denies any knowledge or involvement.

The D.C., after hearing the Member and after verifying the documents produced by him, held that the company was meeting with criteria of NBFC as prescribed by RBI. It was also noted that the company was a private company and did not require to obtain business commencement certificate. Therefore, when the criteria of investment in Financial Assets and income from such assets was met and the Member gave the certificate keeping in mind the going concern concept. No mala fide intention was established. Therefore, giving benefit of doubt to the member, it was held that he was not guilty of professional misconduct. (Reported on Pages 6-12 of Part II of VoL-1).

2. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues. These are published on Pages 1171 – 1172 of CA Journal for February, 2014.

(i) Issue No.1

Whether an auditor is required to provide to the client or to main auditor of the Head Office of the same enterprise access to his audit working papers?

Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors, except in case it is required by the Regulatory norms.

(ii) Issue No.2

Whether Joint Auditors can demand the working papers of one another?

The working papers are the property of an auditor. Therefore, no joint Auditors can demand the working papers of the other Joint auditor.

(iii) Issue No.3

Whether a joint auditor will be responsible for the work done by other joint auditor?

Council direction under Clause (2) of Part 1 of the Second Schedule to the C.A. Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severely responsible for the work which is not inter se divided among the auditors.

(iv) Issue No.4

Whether the statutory auditor can accept the system audit of same entity?

The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

3. EAC Opinion:

Treatment of Mark to Market Losses on Principal only Currency Swap:

Facts:

A company is engaged in providing port and related infrastructure services (including SEZ) to various port and SEZ users.

The company has stated that when it approaches banks for long term loans to fund the capital expenditure for port project, it has the option of seeking a foreign currency loan (FCL) or a Rupee loan. In case FCL is not readily available, the company agrees to borrow Rupee loan. The sanction letter of bank could also provide the company the option to convert the undrawn portion of Rupee loan into FCL at a later date. Further, along with the sanction of Rupee loan, banks also sanction derivative limits so that the company could utilise the same for swapping drawn and outstanding Rupee loan amount into foreign currency facility. According to the company, it enters into derivative transaction by way of Principal Only Swap (POS) to the extent of outstanding Rupee loan in its balance sheet. As per the company, though POS transaction is an off balance sheet item, the same cannot be entered into unless there is an underlying outstanding loan in the balance sheet. Hence, it is clearly inter-linked to a balance sheet item.

The company has further stated that POS transaction with bank involves notional swap of the company’s Rupee loan with USD. As a result, the company has USD exposure through POS. The tenor of underlying Rupee loan of POS contract is same and notionally, the company swaps the Rupee loan with the USD loans. The bank which enters into the POS actually buys Rupee from the company and sells it USD. However, no cash flow takes place, no entries are passed in books and details of outstanding transaction are disclosed in the financial statements. Thus, effectively, what was a Rupee obligation of the company becomes a USD obligation with the POS.

According to the company, all POSs are monitored on a regular basis and, periodically, the company has interest inflow on account of differential interest rate on Rupee and USD borrowings. As per RBI directives, POS contracts are cancellable but once cancelled, cannot be renewed during tenure of the term loan and, hence, it is possible to have POS till the maturity of Rupee loan.

The company has also stated that for such transactions, bank pays Rupee interest rate of, say 11% and the company pays USD interest rate of, say, 5%. The difference is called ‘carry’. This means that if Rupee interest rate goes below 11% the company gets benefited as ‘carry’ remains same and vice versa, but the company has exposure on account of variation in INR/USD exchange rate. Effect of USD increase is still exchange rate difference and is still to be accounted for by way of Mark to Market (MTM) loss/gain. But, this is, again, only a memorandum (notional), because, just as the exchange rate differences on External Commercial Borrowings (ECBs), this also does not actually materialise till the loan is actually paid off.

The question arises about accounting for MTM losses/gains on such POS transaction along with receipt of ‘carry’ income at regular intervals in accordance with the Ministry of Corporate Affairs (MCA). Notification dated 7th December, 2006 and subsequent extension vide Notifications dated 31st March, 2009 and 29TH December, 2011.

Query:

On these facts, the company has sought the opinion of the Expert Advisory Committee as to whether the mark to market losses on POS can be treated as exchange rate difference and, accordingly, can be recognised as per paragraphs 46 and 46A of AS11, notified by the Central Government.

EAC Opinion:

The Committee is of the view that the issue raised by the Company requires examination from two angles – firstly, whether the Rupee loan taken by the company becomes a foreign currency liability by the existence of POS transaction or whether it should, in substance, be treated as a foreign currency loan by the existence of POS transaction and, secondly, whether the POS transaction can be considered to be a foreign currency transaction within the scope of AS11.

A reading of AS11 indicatesthataccountingtreatment for only those forward exchange contracts which are entered into for hedging foreign currency risk where the underlying transaction is denominated in a foreign currency, or for trading or speculation purpose. The Committee notes from the Facts of the Case that the underlying transaction is a Rupee loan that does not give rise to any foreign currency risk. It is the POS transaction in the Company’s case that exposes the company to foreign currency risk rather than mitigating the same. Thus, the purpose of the POS is not hedging any foreign currency risk. The POS is not held for trading because the company is not a trader in foreign exchange. There may be speculation, if there is no underling transaction or if there is an underlying transaction but the intention is to speculate the movement in foreign exchange rate and to cancel the POS for booking profit at the opportune time. In the Company’s case, the POS has an underlying transaction viz., Rupee loan. But, the company’s intention is not to speculate the movement in foreign exchange rate and to cancel the POS at the opportune time for profit booking. This basic purpose of the POS transaction in the Company’s case is to take advantage of the difference between Rupee interest rate and USD interest rate. Its purpose is saving in interest cost though it exposes the company to foreign risk. The mere fact that the company might have considered likely foreign exchange loss in making the decision to enter into the POS transaction, in itself, does not make the POS as held for speculation purposes. Thus, the POS is not held for hedging any foreign currency risk or trading or speculation purposes. Hence, the POS is not a forward exchange contract within the scope of AS11 and therefore, is not a foreign currency transaction within the scope of AS 11,

Examination

Group I

Group II

Both Groups

(a) FINAL

Appeared

Passed

Appeared

Passed

Appeared

Passed

Nov.2013

51728

2932

5.67

54,786

4,026

7.35

32536

1013

3.11

May 2013

45822

6319

13.79

50,354

9,389

18.65

27,556

2764

10.3

Nov.2012

48320

13193

27.30

51,906

11,341

21.85

29,339

3804

12.9

(b) IPCC

Nov 2013

122253

23,342

19.09

117834

21076

17.88

62033

5038

8.12

May 2013

124310

24,161

19.44

112465

16675

14.83

70504

8428

11.73

Nov.2012

100494

25269

25.14

96,181

20326

21.13

52531

5835

11.15

4. ICAI News

(Note: Page Nos. given below are from C.A. Journal of February, 2014).

(i) Extension of Last date for complying with CPE Hours

ICAI has notified that the last date for complying with requirement of CPE hours for the Block Period of 2011-2013 has been extended from 31-12-2013 to 31-03-2014 (ICAI Website).

(ii) C A Examination Results

The Results of CA examination which have been recently declared are very strict. This will be noticed from the following comparative figures. (ICAI Website).

(iii) New Branches of ICAI

Following New Branches of ICAI have been opened on 3rd January, 2014 (P.1280-1282).

(a)    Dibrugah (EIRC)
(b)    Tinsukia (EIRC)
(c)    Karimnagar (SIRC)
(d)    Warangal (SIRC)
(e)    Ongole (SIRC)

(iv) Get CA Journal on Mobile

CA Journal will be available on ios (I pad/I Phone etc) and Android Devices from 01-03-2013 (Refer P.1279).

BCAJ Admin

ICAI News

Placement Programme of ICAI

ICAI had organised placement programme for new Members in the months of February and March, 2014. Details are given on P. 1561 – 1562. Some factures are as under.

• No. of candidates interviewed 2,327

• No. of organisations participated 80

• No. of Interview Teams 136

• No. of Jobs offered 717- Accepted 681

• Highest Salary offered – Domestic posting Rs. 21 lakh P.A. and for International posting Rs. 20.25 lakh P.A

• Average CTC offered Rs. 7.30 lakh P.A. (ii) ICAI Publications (a) Compendium of opinion Vol. XXXII (12-02-2012 to 11-02-2013) (b) Study on Compliance of Financial Reporting Requirements (Vol – II) ( P. 1578 – 1579).

	Feb-Mar, 2012
Number of candidates registered	9717
Number of interview teams	12
Number of organisations	76
Number of jobs offered	874
Percentage of jobs offered vis-à-vis registered candidates	9.00%

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