S. Ramachandra Iyer, C. 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, namely, gross negligence in the conduct of professional duties. The respondent is a chartered accountant at Madras who commenced practising as an auditor in the year 1931. After a few years of practice he left the profession and took up war service. That was during the years 1944 to 1946. On being discharged from the service he was employed in one of the several of the companies promoted by the late Dr. Alagappa Chettiar a prominent businessman and a great philanthropist of his time. But the respondent did not continue there for any length of time; he reverted to his profession as auditor in 1951. It is stated on his behalf that he has not been very successful in the profession either. His previous association with Dr. Alagappa Chettiar presumably secured for him a place as an auditor in the Alagappa Textiles (Cochin) Ltd., for the years 1954, 1955 and 1956. Alagappa Textiles (Cochin) Ltd. was registered on 23-11-1943. The respondent does not appear to have been connected with it in any way till he was actually appointed as auditor of the company for the year 1954. Till then audit was conducted by other auditors. Audit for the years 1954, 1955 and 1956 of Alagappa Textiles (Cochin) Ltd., was completed by the respondent on 26-9-1955. 5-11-1955 and 25-8-1957 respectively; he appended to the balance sheets of these years a clean certificate in the usual form, namely, that he had examined the balance sheet and obtained all information and explanations required and that in his opinion the balance sheet and profit and loss accounts were drawn up in conformity with the law and that the balance sheet exhibited a true and correct view of the state of the company's affairs and that the books of account had been kept by the company as required by the Indian Companies Act. All was however not well with the Alagappa Textiles (Cochin) Ltd. Several of the financial transactions and those involving large amounts were closely inter-linked with several other companies promoted by the late Dr. Alagappa Chettiar whose death in April 1957 brought about repurcussion. The financial condition of Alagappa Textiles (Cochin) Ltd. was apparently in a mess and in September 1958 the Central Government appointed an Inspector to investigate the affairs of the company. The Inspector submitted his report in the following year and it disclosed Inter alia that the respondent did not carry out a proper audit after due verification of assets and liabilities and that the balance sheets and certificates appended thereto did not contain the necessary information. The Registrar of Companies, Kerala State, thereupon laid a complaint to the Council of Institute of Chartered Accountants, charging the respondent with professional misconduct. On the basis of the several instances of remissness in the performance of his duties, eight charges were framed against the respondent by the Council of Chartered Accountants; but the former denied all of them. An enquiry was then conducted by the Disciplinary Committee of the Institute of Chartered Accountants. It submitted its Report, which was accepted by the Council of the Institute, that the respondent was guilty of six out of the eight charges laid against him holding that he was guilty of gross negligence in the conduct of his professional duties in that he did notcarry out a proper and complete audit after making a proper verification of the assets and liabilities.
2. It must, however, be pointed out at the outset that we are not concerned in the present case whether the persons in management of the company were guilty of any malpractice in relation to the transactions entered into by them. There is nothing to show on the materials placed before us (and indeed this has been conceded) that the respondent was at any time aware of the somewhat questionable financial dealings on behalf of the company by those in management. The only charge against the auditor is that he was guilty of gross negligence in the discharge of his duties as auditor in having appended an unqualified and clean report to the balance sheet for the three years in question. The Disciplinary Committee of the Council in a carefully prepared report has dealt with the several charges laid against the respondent and Mr. Swaminathan who appears on his behalf did not contest the propriety of the conclusion arrived at by the Committee. But learned counsel has contended that the findings arrived at by the Disciplinary Committee as accepted by the Council did not reveal any moral turpitude on the part of the respondent but at its worst the case was one of inefficiency on the part of the auditor which does not merit any severe punishment. It is, therefore, necessary to examine briefly the charges which have been held to be proved against the respondent.
3. The first charge relates to the balance sheet of the year 1955. A sum of Rs. 11,90,081-5-7 was written off in the profit and loss account of the company for the year ended 31st December 1956. The actual resolution of the Board of Directors writing off the amount in question was passed after the close of the year, on 25th May, 1957. The sum in question consists of six items, namely:
(1) Rupees 10,000 due from Indo-Agencies; (2) Rs. 75000 due from Alagappa Estates Ltd., (3) Rs. 22,162-0-9 due from Umayal Weaving Establishment Ltd., (4) Rs. 57,062-14-7 due from Vijayakumar Trading Corporation; (5) Rs. 6,18,890-15-4 due from Alagappa Corporation Ltd. (in liquidation) and (5) Rs. 40,6958-6-11 due from Ramal and Company Limited, managing agents of Alagapoa Textiles Limited. It is not disputed that the late Dr. Alagappa Chettiar was the promoter and the moving spirit in all the debtor companies aforesaid and that he had the real and controlling voice therein.
4. Item 1 : This amount is alleged to have been advanced to the company in the year 1953 but there was no voucher to evidence the advance from any person who could bind the company, though there was a receipt given for the amount by Dr. Alagappa Chettiar. But Mr. Alagappa was not even a director of the company. The balance-sheet for the year 1953 which was certified by another auditor showed the debt as a good one. This was repeated in the balance-sheets for the years 1954 and 1955 for which the respondent was responsible. In the balance-sheet for the year 1956, however, relying on the profit and loss account prepared by the company and the resolution of the Board of Directors that was passed before the audit was made for that year, the debt was included among those written off. The respondent failed in his duty in not verifying while certifying the balance sheets for the years 1954 and 1955 whetherthere was a proper voucher for the debt in question which he accepted as a good one. Even in the year 1956, the respondent should have enquired as to the circumstances under which the debt came to be written off. Neither of these things was done by the respondent.
5. Item No. 2: This item is alleged to have been advanced in the year 1953. It is unnecessary to consider the circumstances under which the debit was actually made against the concerned debtor. It was considered as a doubtful debt in the balance sheet for 1953. This was repeated in the balance sheets for the two following years till it was ultimately written off. There was considerable doubt whether there was a liability on the part of Alagappa Estates Limited for the amount in question, credit having been originally given to another company of Dr. Alagappa, Jupiter Airways Limited, which had later gone into liquidation. A clear investigation and report was certainly called for in the circumstances of the case.
6. Item No. 3 was a liability of the years 1952-53 and in the balance sheet of 1953 it was considered doubtful but in the balance sheets of 1954 and 1955 which were certified by the respondent the debt was considered good though unsecured. Strangely enough the respondent simply accepted the profit and loss account writing off the debt in the year 1956. There was enough material before the respondent from the various balance-sheets themselves to rouse his suspicion as to how this debt which was in its origin considered doubtful became good during the year 1954 and 1955 and how strangely enough it came to be written off in the following year. That matter required a closer attention but the respondent did not bestow the same nor did he make any reference to it in his certificate.
7. Item No. 4: This is a liability which came into existence on 31-12-1952. In the balance sheet for 1953 it was considered as doubtful, but in the balance sheet of 1954 it was shown as good, the respondent being in a way responsible for the preparation of the later balance sheet. In the next year this debt was referred to as doubtful and in the following year (1956) it was written off. No verification appears to have been done by the respondent at any time about the asset. He merely accepted what the profit and loss account of the company stated.
item No. 5: This is a liability on a running account in the books of the company. The debit against the company was for more than six lakhs by the end of 1953. It was considered doubtful at the time of the audit for that year. It continued to be shown as, doubtful during the following years, till it was actually written off. Alagappa Corporation Limited went into voluntary liquidation in 1954. The respondent did not take pains to enquire whether any claim was made in respect of the amount due. In fact no claim was made. It was the duty of the respondent to have looked into the matter further and disclosed it in his audit report.
8. The last item is a debit against the managing agents. It was the duty of the auditor to have investigated the accounts to find out whether the various amounts that were transferred against the managing agents were properly done. This is one of the instances where scrutiny was necessary as a closer examination mighthave led to the detection of improper dealings in regard to the moneys of the company. For example, remuneration was credited to the account of the managing agents when such remuneration was not at all payable. There were transfers of the liabilities of the other companies. Why and under what circumstances such transfers wers made, had never been looked into by the respondent. All such transfers of liabilities followed a pattern, namely, of advances made to companies in which Dr. Alagappa Chettiar was presumably interested. Some of those advances were transferred to Ramal and Company Limited, managing agents and ultimately after the liability swelled to the amount referred to earlier, the whole sum was written off. There can be little doubt that the Council' was fully justified in coming to the conclusion that in respect of transactions aforesaid the auditor was grossly negligent in not qualifying his reports annexed to the balance sheets.
9. The next charge relates to the failure of the respondent to investigate the existence of cash vouchers for payments made by the company during the year 1956 to the extent of Rs. 37,000. The third charge relates to certain unauthorised loans made to Dr. Alagappa Chettiar College Endowment Trust. Although the investments can be said to be good ones in a sense, it was the duty of the auditor to have pointed out that the advances were made without proper sanction. Charge No. 4, another charge which has been held to be proved concerns the balance sheet of the year 1955, which show-ed that certain shares owned by the company in another company as fully paid up while in fact it was not so. There was a further charge in regard to the omissions on the part of the auditor to verify certain stock entries. These omissions which were the result of his under dependence on the apparent entries in accounts maintained by the company and on the word of the persons in management of the company show beyond doubt that the auditor did not apply his mind and verify the correctness of the accounts. In several cases he had even failed to investigate into the existence of the assets and he evidently assumed as true the particulars referred to in the earlier balance sheets.
10. The true purpose of an audit is to examine the accounts and records maintained by the company with a view to establish whether the former completely reflected the transactions to which they purported to relate. It is part of the duty of an auditor to see whether the transactions referred to in the accounts are themselves supported by authority. Section 145 of the Indian Companies Act, 1913 (which corresponds to Section 227 of the 1956 enactment) deals with the duties of a person auditing the accounts of a company. In Re London and General Bank (No. 2), 1895 2 Ch 673, Lindley L. J. referring to the duties of an auditor of a company observed at pp. 682-683:
'His business is to ascertain and slate the true financial position of the company at the time of the audit and his duty is confined to that; but then comes : the question how is he to ascertain that position? The answer is, by examining the books of the company. But he does not discharge his duty by doing this without enquiry and without taking any trouble to see that the books themselves show the company's true position he must take reasonable care to ascertain that they do so unless he does this his audit would be worse than an idle farce. Assuming the books to be so kept as to show the true position of the company the auditor has to frame the balance sheet showing that position according to the books and to certify that the balance sheet presented is correct in that sense. But his first duty is to examine the books not merely for the purpose of ascertaining what they do show but also for the purpose of satisfying himself that they show the true financial position of the company .... an auditor, however, is not bound to do more than exercise reasonable care and skill in making enquiries and investigations. He is not an insurer; he does not guarantee that the books do correctly show the true position of the company's affairs. He does not even guarantee that his balance-sheet is accurate according to the books of the company. If he did he would be responsible for error on his part; even if he were himself deceived without any want of reasonable care on his part say, by the fraud on concealment of a book from his; his obligation is not so enerous as this. Such I take to be the duty of the auditor, he must be honest, i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion very little enquiry will be reasonably sufficient, and in practice I believe businessmen select a few cases at haphazard to see that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary; but still an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required.'
11. Thus when the auditor in the instant case found that in the year 1954, large sums of money due from others were consolidated and written off as bad debts while the very same debts in the balance sheets of We previous years were shown as good ones, he was certainly bound to investigate into the circumstances leading up to the writing off of such debts, to ascertain whether there were vouchers for such debts and If he was of the opinion from the vouchers maintained in respect of those debts that they were valueless, to disclose that fact in his report and not merely give a clean certificate to the balance sheet in the way he did. Even if there were vouchers, which were apparently regular it would nave been necessary for him to see that those vouchers were for the amounts received and were given by persons entitled to bind the debtor company. In short if there were circumstances in the accounts of the company which caned for an enquiry, the auditor must have made that enquiry and disclosed the result of such enquiry to the directors and the share-holders.
12. In re Kingston. Cotton Mill Co. (No. 2), 1396 2 Ch. 279, Lopes L. J. observed:
'It is the duty of an auditor (of a company) to bring to bear on the work he has to perform that skill and care and caution which a reasonable, 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. He is a watchdog but not a blood-hound..... if there is anything calculated to excite suspicion he should probe it to the bottom but in the absence of any-thing of that kind he is only bound to be reasonably cautious and careful.'
13. As we pointed out earlier there was sufficient material before the auditor to excite his suspicion and the least that he should have done was to apprise the share-holders in his report of the circumstances under which the debts came to be written off which were once shown to be good.
14. Mr. Swaminathan appearing for the respondent (auditor) has contended that as it had not been found by the Council of the Institute of Chartered Accountants that the debts were not really bad debts, a resolution authorising the writing off of the such debts was perfectly valid and that the conduct of the auditor in accepting the profit and loss account could not be considered as improper. There is a confusion of ideas in this. It may be that the writing off of the debts as irrevocable was justified. Why they came to be treated as bad debts was the question that should have engaged the attention of the auditor. Suppose in origin a debt was a bogus one and later it was written off as a bad one. The writing off was justified; but the auditor should find the reason, viz., that the debt was bogus one. He should first have referred to the existence of the debts and enquired into the circumstances that led up to their being treated as bad debts. We, therefore agree with the Council ot the Institute of Chartered Accountants that the respondent had been grossly negligent in auditing the accounts of Alagappa Textile (Cochin) Ltd. and failed thereby to discharge his duties.
15. The Council has recommended that the respondent should be removed from membership of the Institute for a period of two years. Ordinarily, the punishment suggested cannot be said to be inappropriate in cases of this kind. But we must refer to certain circumstances which will have a bearing on the question before considering the appropriate punishment. There is more than suspicion in our minds that the management of the company conscious of their irregular way of dealing with the finances of the concern pitched upon this comparatively unsuccessful auditor who could be over-awed by the status and apparent respectability of those in virtual control ot the management and persuaded him to accept their own statements and assurances as to the propriety of their dealings. The respondent evidently subscribed to the certificate believing that everything was above board in the conduct of the financial affairs of the company by the directors. It is, no doubt, true that he could not start his work of auditing with a presumption that everything that he was asked to audit was suspicious; but as stated earlier there were circumstances in the account books ot the company to excite his suspicion. In such cases he failed in his duty when he accepted the assurances of persons like Dr. Alagappa Chettiar and persons who had the management of the company after his death. He should never have taken into account the social position of those in management of the company while he was doing his duties as auditor. We have no hesitation in holding that the respondent did not conform to the high standards of efficiency and integrity which the Institute of Chartered Accountants expects of its members, but at the same time we consider that in the circumstances of the case when practically (sic) particularly there has been no suggestion of any moral turpitude on the part of the respondent, it would be sufficient if we administer which we hereby do a severe reprimand to the respondent for his gross negligence in discharging his duties as an auditor. Learned counsel forthe respondent assures us on behalf of his client that infuture he would do his duties as auditor in strict conformity with the standards of efficiency and integrityexpected of him by the Institute of Chartered Accountants.No order as to costs.