Jagannatha Shetty, J.
1. This is a reference Under Section 21 of the Chartered Accountants Act, 1949, by the Council of the Institute of Chartered Accountants which found the respondent guilty of professional misconduct of the category mentioned Under Clause 8, Part I of the Second Schedule, with a recommendation to reprimand the respondent.
2. The facts are not in dispute. They will be found correctly stated in the reference, and may briefly be stated thus :
The respondent is a Chartered Accountant and also a partner of N.C. Rajagopal and Co. at Bangalore. In 1969, he was appointed to audit the books and records of a Company called Mysore Press Private Ltd. ('the publishers'), which has been publishing a weekly called 'PRAJAMATHA' in Kannada and Telugu languages. The respondent was required to do a special type of audit to enable the publishers to obtain or continue the membership of Audit Bureau of Circulation Ltd., Bombay ('ABC Ltd.'). That audit was also called as ABC Audit. On 1st March, 1969, and again on 31st July 1969, the publishers submitted to the ABC Ltd., circulation certificates (called Incoming Certificates) signed by the respondent in respect of the two publications for two audit periods : July/Dec. 1968 and Jan./June 1969 respectively. The certificates stated inter alia that the Auditor has adjusted from net paid sales--
(a) Copies involved in outstanding from agents and others In accordance with the instructions of the Bureau ;
(b) Copies returned or intimated as remaining unsold by agents and others whether or not corresponding credit was given to the party concerned.
He has also certified that without qualification that he had carried out the ABC audit in accordance with the instructions of the Audit Bureau of Circulations Ltd., Bombay.
3. Relying on the above certificates, ABC Ltd. issued in good faith corresponding ABC certificates for both the publications now 19th April 1969 and 11th Oct. 1969.
4. In accordance with the declared policy of the ABC Ltd., a surprise audit of the publishers was directed and a firm of Chartered Accountants namely, M/s, R. G. N. Price & Co., Madras were asked to do the surprise audit. Accordingly, the representative of the said firm visited the publisher's office on l6th and 17th Jan. 1970 along with the Secretary of the ABC Ltd. At the time of the said visit, the publishers did not co-operate and failed to produce certain essential records for scrutiny. However, on the records made available, R. G. N. Price & Co. submitted a report to ABC Ltd., pointing out various procedural lapses and Irregularities in the audit conducted by the respondent. On perusal of that report and relevant correspondence, the ABC Ltd, formed an opinion that the Incoming Certificates Issued by the respondent were not based on proper audit. Accordingly, it withdrew the ABC certificates earlier granted to the publishers. ABC Ltd. also authorised its Secretary to lodge a complaint against the respondent before the Council of the Institute of Chartered Accountants of India.
5. Thereupon, the Secretary made a complaint to the council charging the respondent with professional misconduct in having issued certificates of Circulation in respect of two publications, viz., 'PRAJAMATA' (Kannada and Telugu Weekly) for two audit periods, July/Dec. 1968 and Jan/June 1969 without due care and in total disregard of the Rules of ABC Ltd. On receipt of the complaint, the Council called for an explanation from the respondent. The respondent submitted a written statement denying the allegations made against him. The Council, after considering the complaint and the written statement, came to the con- elusion that there was a prima facie cases against the respondent and referred the matter to the Disciplinary Committee for enquiry. The Disciplinary Committee, after proper enquiry, submitted a report stating that the respondent has failed in his duty to carry out the audit in accordance with the regulations of ABC Ltd. The Committee was also of the view that, the respondent was not right in granting clean certificates without any qualification and without obtaining sufficient information to warrant the expression of his opinion, The committee, however, observed that the action of the respondent did not appear to be wilful and deliberate although his opinion on the correctness of the entries In the books of accounts of the publishers was erroneous.
6. The Council of the Institute, after considering the report of the enquiry, came to the conclusion that the respondent was guilty of professional misconduct Under Section 21 read with Clause 8 of Part I of the Second Schedule, namely, 'failure to obtain sufficient Information to warrant the expression of an opinion'.
7. Since the charge against the respondent was primarily based on his failure to carry out the audit in conformity with the regulations of ABC Ltd., it will be necessary to refer to the standards and methods prescribed for the ABC audit.
The essence of an ABC audit is to obtain an exact and honest measure of circulation of a publication. Under the instructions, it will not be sufficient for the auditor to confine his attention merely to the number of copies printed and summarise details of copies printed numerically, but in order to arrive at the correct figure of circulation, he will have to correlate it through all the three states, namely, newsprint consumption, distribution and finance.
The auditor, in particular, must satisfy himself on the following six points :-
(1) That all charges to the trade are made at the basic retail price of the publication, less regular trade terms.
(2) That commission and allowances to the trade do not amount to more than 40 per cent of the basic retail price of the publication, Further, that there are no other additional allowances or indirect credits to the trade (news agents).
(3) That all returns are credited at normal rates, and that no returns are withheld or paid for by means of travellers' expenses, advertising allowances or In any other forms.
(4) That increases in output are specially examined and the cause ascertained. Causes of any wide fluctuations will be very carefully ascertained.
(5) That outstandings and arrears from the trade are genuine and they do not normally exceed 3 months credit in case of agents and 4 months in the case of Railway Book Stalls.
(6) That in case of bad debts, the number of copies Involved are deducted from net paid circulation.
In arriving at the figure of net paid circulation, all copies for which at the close of the audit period (i.e., 30th June or 31st Dec.) payment was outstanding for a period exceeding three months in the case of news agents and others will be excluded. In the case of Railway Book Stalls copies Involved in outstandings exceeding four months will be excluded.
These are some of the special Instructions issued for the guidance of all the auditors and uniformly applied to all ABC (publications with a view to provide both for the publishers and the advertiser, and honest measure of circulation which can be accepted without reserve in any country.
8. Apart from these special Instructions, the Auditor cannot afford to forget his general duties which have been universally recognised and neatly summarised first by Lindley, L. J., in Re London and General Bank, (1895) 2 Ch 673 at p. 682 and later by Lopes, L. J., in Re Kingston Cotton Mill Co., (1896) 2 Ch 279 at p. 288. They are as follows :--
The Auditor does not discharge his duty by merely examining the books without inquiry and without taking any trouble to see that the books themselves shew the company's true position, He must take reasonable care to ascertain that they do so. Unless he does this, Ms audit would be worse than an idle farce. It is the duty of an Auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonably competent, careful and cautious Auditor would use. What is reasonable skill, care, and caution must depend on the particular circumstances of each case. An Auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. But, if there is anything calculated to excite suspicion he should probe it to the bottom ; but in the absence of anything of that kind, he is only bound to be reasonably : cautious and careful.
9. We shall now proceed to consider whether the audit conducted by the respondent fell short of these requirements. It was urged for the respondent that from the accounts of the publishers that were examined, there was nothing to excite suspicion and therefore he did not seek further information from the publishers. It was also urged that he was reasonably cautious and Ms certificates were justified under the circumstances.
10. We have given the matter our fullest consideration and examined and re-examined the materials before us. We have also called for the relevant account books and perused the entries therein. Finally, we are unable to accept the contentions urged for the respondent.
One of the charges against the respondent was that the outstanding from the agents of the publishers for a period of more than three months have not been adjusted from the net paid sales. In order to disprove the charge, the respondent solely relied upon the ledger folio of Sri D. S. Narayan, Chairman of the publishers and the journal entries authorised by the Chairman. There were three agents for the publishers ; (i) Norway News Paper Agency, (ii) M/s. Radiant News Agents, and (iii) Sri P. S. Misra. So far as the accounts pertaining to the second Agent was concerned, the disciplinary committee did not find anything wrong in it. But in the case of M/s. Norway News Paper Agency, the committee after looking into the account of the publishers and that of Sri D. S. Narayan found that they could not be accepted. The committee was of the opinion that the credits and debits in respect of the said agent arose out of interpolated entries in the cash book and those entries have not been made in the regular course of the business. In the case of Sri P. S. Misra, the committee found that the position was still worse and the credit given to the said agent was not genuine. We are entirely in agreement with the opinion expressed by the committee. In the absence of documents to support the payments from the agents, the respondent ought not to have prima facie relied upon the entries in the personal folio of the Chairman Sri D. S. Narayan. There is nothing to indicate that Sri D. S. Narayan received money from the respective agents as stated in his account. The respondent, no doubt, produced some journal entries authorised by the Chairman. We have also perused those journal slips. The question is not whether those journal slips or the entries based on those journal slips were correct or not. The journal slips were only self serving records. The respondent ought to have looked for the basis for the credit and debit shown in the personal folio of the Chairman. It was the duty of the respondent, according to the instructions of ABC Ltd., to examine and ascertain whether the out months credit. The manner in which the Chairman used to authorise journal entries in favour of some agents, without any corresponding document to evidence payment from the agents, should have at the very outset excited suspicion on the correctness of the entries in the personal folio of the Chairman, He was not there merely to verify the arithmetical accuracy of the accounts. He ought to have enquired into its substantial accuracy with all the skill, care and caution. If he had conscientiously audited the accounts and in accordance with the instructions of the ABC Ltd., he could have probed into the matter to the bottom to find out whether the purported sale to the agents were genuine or it wag only make believe arrangements.
We have no doubt that the respondent has failed in his duty. We entirely agree with the conclusion of the Institute that the respondent did not audit the accounts of the publishers in accordance with the regulations of the ABC Ltd. The respondent was thus guilty of professional misconduct under Clause 8, Part I of the Second Schedule of the Chartered Accountants Act, for which he is hereby severely reprimanded.