A.R. Somnath Iyer, J.
(1) In this reference made to us under the provisions of Section 21(2) of the Chartered Accountants Act (Central Act No. XXXVIII of 1949), we are concerned with the conduct of the respondent D. B. Kulkarni who audited the accounts of a small bank known as the Supreme Bank of India which had its head office in Belgaum and two branch offices, for the years 1949, 1950 and 1951. On a complaint received from the Deputy Secretary to the Government of India, Ministry of Finance, in respect of the said audit conducted by the respondent, the Disciplinary Committee of the Council of the Institute of Chartered accountants of India made an enquiry and recorded a finding that the respondent was grossly negligent in the conduct of his professional duties and failed to obtain sufficient information to warrant the expression of the opinion which he expressed at the determination of his audit and that such negligence amounted to misconduct as defined by Section 22 of the said Act. That finding was forwarded to the Council of the Institute of Chartered Accountants which affirmed it. The proceedings have now been referred to us for final orders to be made by us under the provisions of sub-section (3) of Section 21 of the Act.
(2) The complaint made by the Deputy Secretary to the Government of India was to the effect that the Supreme Bank of India whose accounts were audited by the respondent had not reconciled at any material stage the bank balances with the pass books of the banks with whom it had opened current accounts. The respondent who audited the accounts of the bank was reported to have not insisted on such reconciliation till about the year 1953 when alone he pointed out that that reconciliation was required. That remark was made in the balance sheet for the period ending on December 31, 1953. The complaint made against the respondent was that in the balance sheets for the periods ending on December 31 of 1949, 1950 and 1951, no such remark was made by him, and that there was no qualifying auditor's report either. It was stated in the complaint that the Accountant and the Assistant Accountant of the bank passed entries debiting entries of the other banks and making payments to themselves and to some customers of the bank in cash or through their accounts, thereby inflating the bank balances with other banks in the books of the bank. Two more charges were made in the complaint against the respondent with which we are not concerned, since the Disciplinary Committee exonerated the respondent of those charges.
(3) As a result of the negligence on the part of the respondent in not insisting upon the reconciliation of the bank balances with the pass books of the banks, it was stated, that the bank had lost a sum of Rs. 1,30,818-6-0 by reason of the fraud committed by the officers of the bank.
(4) This complaint was made to the Institute of Chartered Accountants on may 30, 1955 and had been preceded by at least four inspections which had been made by the Inspectors of the Reserve Bank. One of them had been made in the year 1951 and the remaining three had been made in the year 1953. Those inspections did not reveal the fraud that had been committed by the officers of the bank as a result of which the loss to which we have referred had been occasioned.
(5) The finding of the Disciplinary Committee which was affirmed by the Council and which has been forwarded to us for necessary orders, rested mainly upon what we may describe as the admissions made by the respondent when he was examined by the Disciplinary Committee during the enquiry conducted by that Committee. Although it is not very clear from the report of the Disciplinary Committee that the charge which the respondent was asked to meet was anything other than that he did not insist upon a reconciliation of the bank balances with the pass books issued to that bank by the other banks with whom it had opened its accounts, it has transpired during the enquiry that the negligence on the part of the respondent to make a proper verification of the assets of the bank.
The view expressed by the Disciplinary Committee was that the respondent should have made a proper verification as to the existence or otherwise of the assets of the bank by asking the bank to place before him the certificates from the other banks with whom this bank had opened accounts in regard to the balances to the credit of the bank with those other banks. In the course of his evidence the respondent gave, what the Disciplinary Committee considered as evasive and equivocal evidence in regard to the question as to whether he had or had not insisted on the production of such certificates.
Although the summary of the evidence given by the respondent has not been very accurately summed up by the Disciplinary Committee in its report, we have no doubt in our mind that the effect of the evidence given by the respondent is that he did not have before him such certificates before the certified the balance sheets of the bank to be correct. His evidence was to the effect that he might or might not have seen such certificates. He was not sure whether any such certificates had been or had not been produced before him. He tried to make it appear that he might seen some of those certificates.
But, when he stated in the course of his evidence that he had maintained no notes of the audit made by him which he should have ordinarily maintained and which should have contained a note or record of the documents which he had seen and the papers which he had perused on the basis of which he reached his conclusions as to the correctness or otherwise of the true financial position of the bank, he made a damaging admission.
(6) Mr. Krishnarao, the learned advocate for the respondent, did not dispute before us that it was elementary duty of the respondent when he audited the accounts of the bank to have called for such certificates. He did not make any attempt to contend that the respondent had called for those certificates and had based his audit report on them. What Mr. Krishnarao however contended was that since the charge which the respondent was asked to meet was that he had not reconciled the bank balances with the pass books issued to that bank, the finding of the Disciplinary Committee which was to the effect that the negligence consisting of the omission on his part to call for certificates of bank balances from the other banks with whom of bank balances from the other banks with whom this bank had opened its accounts was not one which he was either asked to meet or explain.
Mr. Krishnarao also pointed out to us that it was clear from evidence recorded by the Disciplinary Committee that the bank had produced before the respondent a record known as reconciliation book or statement. The respondent, according to Mr. Krishnarao, he audited and the pass books of the bank which he audited and the pass books which were placed before him and had also satisfied himself that if any discrepancies existed between those sets of records they had been explained by the reconciliation statement produced before him.
(7) The Disciplinary Committee was of the view, and in our opinion very rightly, that the pass books which might have been produced before the respondent by the bank must have all been bogus records fabricated for the purpose of covering the fraud committed by the officers. The reconciliation statements produced by the bank must have been similarly fabricated for that purpose. In his written statement the respondent pleaded that he had been himself the victim of fraud practices on him by the officers of the bank, and that although he knew at the time when he prepared his written statement that the statements of accounts produced by the bank before him and the pass books had all been fabricated for the purpose of concealing the fraud that had been committed be honestly believed them as a correct record of the transactions of the bank and of its financial position at the time when he made the audit.
(8) It is now too late for the respondent to contend that it was enough for him to have based his conclusion in the audit which he made merely on the pass books produced before him by the bank. It is a clearly established rule that the inspection of a bank's statement, or even of the pass books produced before the auditor is not sufficient for the verification of the bank balances, since cases have been known where fictitious statements have been presented to the auditor containing apparently correct balances, when as a matter of fact the real bank statements which were not produced before the auditor showed smaller amounts.
As pointed out by Spicer and Pegler in their book on Practical Auditing at pages 51 and 52 of the 11th edition of that book, it is always therefore essential for an auditor to verify the balance as shown by the bank statements from certificates sent by the other banks with whom the bank has opened its accounts. Although it was in this case not possible for the respondent, as has rightly been contended by Mr. Krishnarao, to obtain those certificates from those banks directly, it was necessary for him to call upon the bank whose accounts he was auditing to produce before him those certificates which they could have easily obtained.
It may be true, as urged before us on behalf of the respondent that the charge which the respondent was called upon to meet was not as precise as it should have been. The charge was not to the effect that the respondent did not verify the correctness of the statements of the banks with the help of the certificates from the other banks. But, that that was the negligence with which he was charged was only too well known to the respondent, as can be seen from the questions put to him in the course of his examination by the Disciplinary Committee and the answers which he gave to those questions.
(9) There is, we think, no substance in the contention urged on his behalf by his learned advocate that since the audit which the respondent made was only the audit of a banking company which is ordinarily known as a balance sheet audit, it was not incumbent on the part of the respondent to have made such verification. A passage from the judgment of their Lordships of the High Court of Calcutta in Deputy Secretary v. S. N. Das Gupta, (S) : AIR1956Cal414 , on which reliance was placed by Mr. Krishnarao, far from supporting his contention negatives it.
Their Lordships of that High Court made it very clear in that part of their judgment that although a balance sheet audit is primarily confined to the verification of the existence of assets shown to the balance sheet, and although on account of the multitudinous character of the transactions of a bank, it is not ordinarily possible to examine every one of them, verification of the existing assets in some satisfactory manner is essential. And the only satisfactory way in which verification could have been made by the respondent in this case was by a comparison of the statements of bank with the certificates from the other banks production of which he should have insisted upon.
(10) Nor can the fact that the respondent based his conclusions on reconciliation statements produced by the bank absolve him from his liability for negligence. As pointed out in Dicksee's book on auditing at page 168, banker's pass book or statement has to be verified by personal visit to the bank or (more usually) by banker's certificate of balance, addressed direct to the auditor--which is however possible only in England. But it might happen, as pointed out in that book that the balance recorded in the pass book or statement does not exactly agree with the balance in the cash book, as the result of unaccredited deposits and unrecorded debits.
It is for the purpose of explaining such discrepancies that a traditional reconciliation statement is generally prepared. It is somewhat curious that the reconciliation statements produced by the bank in this case on which the respondent appears to have depended were not produced during the enquiry surprising that not all the pass books relating to the years with which we are concerned were produced either. It was stated by the Registrar of Joint Stock Companies to the members of the Disciplinary Committee that although reconciliation statements were available for the period prior to the year 1948, such statements were not available in regard to the years 1949, 1950, and 1951.
(11) Be that as it may, even on the supposition that the respondent did examine those reconciliation statements and came to the conclusion that the balances reflected in the bank's statements were correct, his omission to further insist on the production of the certificates from the other banks was, in our opinion, rightly regarded by the members of the Disciplinary Committee as consisting gross negligence in the discharge of his professional duties. We are of the view that the Disciplinary committee was also justified in finding that the respondent's conduct amounts to failure on his part to obtain sufficient information to warrant the expression of an opinion on the correctness or otherwise of the assets of the bank as reflected in the balance sheets prepared by him. The finding of the Council that the respondent was guilty of misconduct such as what is referred to in clauses (Q) and (R) of the Schedule to Section 22 of the Chartered Accountants Act was inevitable, and indeed abundantly justified.
(12) It now remains for us to consider what order we should make in this case. Mr. Sundaraswamy, the learned counsel appearing for the Institute of Chartered Accountants, has frankly told us that there is no material on the basis of which we can come to the conclusion that the respondent was either dishonest or was actuated by mala fides when he audited the accounts of the bank in this grossly negligent manner. It appears to us that Mr. Sundaraswamy is right when he puts the case for the Institute in that way.
We find no basis on which we can rest the conclusion that the respondent and the officers of the bank were guilty of any conspiracy for perpetrating the fraud which was committed by those officers. The audit made by the respondent in this case, is, according to the evidence, the first audit which he made of the accounts of a bank. The respondent seems to have depended almost entirely upon the scrutiny made by his assistants without bestowing his own independent judgment or the application of his mind to the result of the examination of accounts made by those assistants.
Although it is impossible to resist the conclusion that the negligence on his part amount to gross negligence in the performance of his professional duties so as to amount to misconduct as defined by the Act, it seems to us that at this distance of time, having regard to the fact that the misconduct was committed as long ago as ten years and also having regard to the fact that even the inspections made by the Inspectors of the Reserve Bank which were made at least on four, occasions before the complaint was made by the Deputy Secretary to the Institute of Chartered Accountants, did not reveal the manipulations it seems to us that we should take no more serious view of this matter than to express our disapprobation of the conduct of the respondent in this case. Such disapprobation should take the form of an admonition which should be administered to him, and that is all that we do in this case.
13. Order accordingly.