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BOD 716/2024Not guilty

An auditor was accused of backdating a company's filings. The complaint failed on a simpler ground - standing.

9 min readJainam Shah

A company director accused a small firm's auditor of backdating a decade of filings. The Board found the director had no stake in the audited company, and closed the case untested.

Held
Not guiltyThe charge was not made out
Forum
Board of Discipline (First Schedule)
Clauses
Item (9) of Part I of the First Schedule
Decided
File no.
PR/324/2019/DD/338/2019/BOD/716/2024
Source
Original order (PDF)

A chartered accountant audited a small, family-owned engineering company's accounts for over a decade. A director of an entirely different company then accused him, before the Institute, of backdating and falsifying that company's filings to help it escape years of regulatory default.1

What happened#

A chartered accountant serves for years as the statutory auditor of a small, family-run engineering company, signing off on its accounts alongside its directors.
That company occupies commercial premises as a sub-tenant, under an old leave-and-license arrangement with a separate landlord company. A dispute over the tenancy turns into eviction proceedings, brought before a court that hears small causes in Mumbai by a director of the landlord company.
Pursuing the eviction, that director inspects the tenant company's public filings and finds well over a decade of defaults — no annual returns, no financial statements reaching the Registrar of Companies for years on end. The tenant company eventually clears the entire backlog at once, under a one-time government scheme that lets a defaulting company file years of overdue paperwork without prosecution.
The director takes the matter to the Institute, accusing the auditor of colluding with the tenant company to backdate and fabricate its accounts so the scheme could be used to erase the default. He raises seven separate defects across more than a decade of the auditor's certificates and filings.
A screening finds six of the seven defects groundless and lets only one through to a hearing — whether the auditor's own appointment paperwork, for the company's earliest years, was ever properly on record. At the hearing itself the Board never reaches that question. It finds the director has no stake in the audited company at all, and closes the case.

Two things decided the case, and neither was one of the seven defects the director had raised.

The first was who was doing the accusing. The director held no shares and sat on no board of the audited company; he could not show he was a creditor, a debtor or a previous auditor of it either. The company he did have a stake in was the landlord in the tenancy dispute — a separate company altogether (para 4.3, para 8).2

The second was that the Board treated that gap as decisive on its own. It never asked whether the appointment paperwork was in order, because it never reached a point where that question mattered (para 10).

The charge#

  • Item (9) of Part I of the First Schedule — before accepting a position as auditor of a company, a chartered accountant must first ascertain that the statutory requirements attaching to that appointment have been complied with.3 It is the only clause the case ever reached.

The complaint had listed seven defects: an appointment for the company's earlier years with no record behind it; audit reports that certified a profit in years the director said were losses; a 2014 consent letter that, on its face, covered only one financial year while the form filed with the Registrar recorded a five-year appointment; notes to the accounts citing the wrong Companies Act; AGM delays condoned without authority; annual-return dates and director counts that did not match the auditor's own certified forms; and financial statements for several years all signed on the same two dates. A screening found six of the seven groundless and let only the first — the appointment record — through to a hearing.

The director objected to how much had been dropped. He told the Board he was "in shock" at the leniency, and put the objection in his own words:

I fail to understand the reason behind finding the Respondent 'Not Guilty' in all except one instance of professional misconduct (para 5)

None of the six dropped defects was reopened. The hearing proceeded on the one that had survived screening.

What the respondent said#

On the charge that reached him, his defence was that any irregularity in his appointment was technical, not substantive. Nobody but a shareholder, a director or a previous auditor could properly question the validity of an appointment, he said, and the director bringing the complaint was none of those things. An auditor's appointment is a contract between the company and the auditor; the form filed with the Registrar is only an intimation of it, not a request for permission, so a failure to file it correctly could not undo the appointment itself (para 4.1).

He also pointed to time and scale. The matter concerned events more than a decade old, and he could no longer trace the underlying papers. The company's only shareholders were family members, no public interest was at stake, and the previous auditor — the person best placed to object to any irregularity — never had. He described himself as a low-profile practitioner, eighty-one years old and almost retired, who had always worked sincerely and ethically (para 4.2).

And he placed the complaint in what he said was its real context: a tenancy dispute between the audited company and the director's own company, in which he had been made a scapegoat for a disagreement that had nothing to do with his audit work (para 4.3).

What the Board held#

The Board went first to the question of who was allowed to ask it anything at all. It examined whether the director had any direct legal interest in the audited company, and found he did not — not a shareholder, not a director, and unable to show he was a creditor, a debtor or a previous auditor either. His reliance on a separate procedural lapse, the company's failure to file Form 23B, did nothing to prove the auditor's alleged misconduct (para 8).

On the broader accusation — that the audited company was itself a sham created to enable an illegal occupation — the Board found nothing in the record connecting the auditor to it, and said so plainly: a statutory auditor has no role to play in a company's occupation of its premises (para 9).

It brought the two findings together:

the Board is of the view that the Complainant lacked the necessary locus-standi to pursue the instant complaint as the assertion that the company is a sham, without any direct evidence of personal legal interest is insufficient to hold the Respondent Guilty of any professional misconduct. The Respondent has acted well within his professional capacity. (para 10)

The order#

in conclusion, in the considered opinion of the Board, the Respondent is 'Not Guilty' of professional misconduct falling within the meaning of Item (9) of Part- I of First Schedule to the Chartered Accountants Act, 1949. Accordingly, the Board passed an order for closure of the case in terms of the provisions of Rule 15 (2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007. (para 11)

A not-guilty finding under Rule 15(2) ends the matter at the Board of Discipline itself — there is no punishment stage to follow, because there is no finding of guilt to punish.4 The six other defects raised in the audit paperwork, screened out before the hearing even began, were never weighed on their merits.5

Why it matters#

This section is ours, not the Board's.

Standing can decide a complaint before a single fact in it is tested. The Board never examined any of the seven defects raised in the audit paperwork here; it closed the case because the person raising them had no shareholding, directorship or other direct stake in the audited company. If you are complaining about another member's work, be ready to show your own connection to the matter, not only the paperwork you have gathered against it.

A screening opinion can end most of a complaint long before any hearing. Six of the seven defects raised here were found groundless at the prima facie stage and never came back. Read what the Director (Discipline) actually finds against you — it is very often narrower than what was originally alleged.

Being a company's auditor does not make you a party to its other disputes. The Board found nothing tying this auditor to the tenancy dispute the audited company was caught up in, and said so directly. Keep what you certified and what your client did elsewhere as separate questions, both in your own records and in how you answer a complaint.

This summarises a public order and links the primary source. It is general information, not legal or professional advice.

Footnotes#

  1. The complainant was CA. Bhaven Shah (M. No. 159303), a chartered accountant himself, of Mumbai. He was not a party to the audit in question; the order records him as a director of M/s Modern Products Private Limited, the company whose premises the audited company occupied as a sub-tenant (para 4.3). The respondent was CA. Bharat Babubhai Shroff (M. No. 014822), also of Mumbai, statutory auditor of the audited company, M/s NAK Engineering Private Limited, for its financial years 2004 to 2017. ↩

  2. The order's own account of the director's stake in the audited company is inconsistent. Recording the Board's observations, para 7 describes him, immediately before recounting his claim that the audited company was a sham, as "holding a 5% share" — without saying a share of what. Para 8, which is where the Board actually weighed his standing, records that he was "neither a shareholder nor a director" in the audited company, and that he could not show he was a creditor, a debtor or a previous auditor of it either. The order does not reconcile the two statements. This page follows para 8 and para 10, which is where the case was actually decided. ↩

  3. Item (9) of Part I of the First Schedule requires a chartered accountant, before accepting a position as auditor of a company, to first ascertain that the statutory requirements attaching to that appointment have been duly complied with. ↩

  4. First Schedule matters go to the Board of Discipline; Second Schedule matters, and matters falling under both, go to the Disciplinary Committee. The two carry very different punishment ceilings. ↩

  5. The findings were signed by CA. Rajendra Kumar P (Presiding Officer), Ms. Dolly Chakrabarty (Government Nominee) and CA. Priti Savla (Member) — the same Board that had earlier screened the complaint at its 301st meeting. The final hearing was held on 26 June 2024 at ICAI Bhawan, Mumbai; the findings are dated 27 August 2024. ↩

Written by Jainam Shah. Found guilty under Item (9) of Part I of the First Schedule; the Board ordered a not guilty. General information, not legal or professional advice — read the order itself before relying on it.

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