1. The respondent, Sri S. N. Das Gupta, is a Fellow of the Institute of Chartered Accountants and practices his profession in Calcutta. For the years 1942, 1943 and 1944 he was the Auditor of the Aryan Bank Limited, which has since gone into liquidation and in fact acted as such Auditor. The reports he made were in terms of the usual formula, but those for the first two years were made subject to special reports.
After the failure of the Bank, certain criminal proceedings were commenced against its Managing Director, the Director in Charge, the Secretary and another Director, which resulted, in the end, in the conviction of the first two accused persons of conspiracy to falsify the accounts of the Bank and of publication of false balance-sheets.
In those criminal proceedings, the respondent was a prosecution witness and it appears that not only the records of the Bank, but his personal papers as well were seized in the course of the investigation. The criminal proceedings terminated with the appellate judgment of this High Court, given in August, 1952.
2. On 4-2-1954, one Sri B.K. Kaul, Deputy Secretary to the Government of India, Ministry of Finance, Department of Economic Affairs, addressed a letter to the Secretary of the Institute in which he stated that the balance-sheets and the profit and loss accounts of the Aryan Bank Limited for the years 1942, 1943 and 1944 did not exhibit a true and correct view of the state of the Bank's affairs and he asked that such action as the Institute might deem fit might be taken against the respondent.
According to the informant, the Bank had resorted to manipulation of accounts on an extensive scale during the period covered by the respondent's audit. As instances, he alleged that in 1943, the Bank had purported to allot a pro'digious number of shares to certain concerns in which the Managing Director or his relatives were interested and this it had done not on receipt of any actual payment in cash, but by opening fictitious loan accounts in the names of the allottees or non-existent persons and showing the money as paid out of such loans.
In the same year, the Bank had purported to pay a large sum to one A.C. Chakraborty, one of its Directors, as commission in respect of the sale of those very shares. In 1944, the Bank had shown in its Fixed Deposit Ledger certain large sums as received on. fixed deposit on a single day from certain concerns in which the Managing Director was interested, but the Cash Book of the Bank did not show any corresponding entries on the relevant date. It was also alleged that on a certain date in 1944, the Cash Book showed a cash balance of about Rs. 5,00,000/-, although the actual balance on that date was a little over Rs. 1,000/- only.
3. On receipt of the complaint, the Institute issued the usual notice to the respondent who filed his written statement in due course. With respect to the issue of the shares, his defence wad that he had examined the relevant books and papers and found them to be in order and it was not possible for him, nor was it his duty as a statutory Auditor, to do more or investigate whether the allottees were relatives of the Managing Director or concerns in which he was interested or whether they existed in fact. If loans had been granted to share-holders, there was nothing per se illegal in such transactions. As regards the fixed deposit receipts, the respondent pleaded that the entries in the Fixed Deposit Ledger, which was only a subsidiary book, could not be decisive, because the entries might be wrong, but if the General Ledger was tallied with the Cash Book, the deposits would be found to have been actually made, it might also be that the entries in the Fixed Deposit Ledger related only to renewals. As to the payment of a commission to A.C. Chakraborty the respondent pointed out that in 1943 there was no Director of the Bank of that name at all, but, in any event, payment of a commission to a Director for the sale of shares was not illegal, if the same was permitted by the Articles of Association. As regards the cash balance on a certain date in 1944, the respondent pleaded that an Auditor was concerned only with the cash balance on the day of the closing of the accounts, but it was not his duty to check and certify the cash balance on any particular day in the middle of the year. While taking these specific pleas, the respondent also stated that he had been unable to obtain his papers from the Courts and the police within the short time given to him and he had, therefore, been compelled to rely entirely on his memory.
4. After the respondent had filed his written statement, the matter was referred by the Institute to the Disciplinary Committee for an enquiry. The Committee treated the complaint as one alleging that the respondent had been grossly negligent in the performance of his professional duties as Auditor of the Bank in respect of the years mentioned in the complaint. It will be noticed that although the actual items of specific information which the informant had given related only to the years 1943 and 1944, the enquiry covered 1942 as well.
5. At the enquiry, the Disciplinary Committee had to contend against the difficulty that practically none of the records of the Bank was made available to them. Besides the balance-sheets and the profit and loss accounts for the years in question and two special reports made by the respondent in respect of the years 1942 and 1943, they had before them only the Share Allotment Register for 1943, the Articles of Association and certain share application forms produced by the Court Liquidator. The only other papers they had before them were certain personal files of the respondent which were produced by the Police Officer who had investigated the criminal charges against the Directors and the Secretary.
6. I find it impossible not to remark that in certain respects the enquiry can hardly be said to have been satisfactory. Besides making a complaint, the Central Government took no part in the proceedings and gave no assistance to the Committee, whether by producing any papers or by calling any witnesses. They did not produce even the Cash Book which was obviously available to them and on which two of the items of information were based. It is not easy to see why the Committee did not direct the Central Government to appear before them like any other complainant and prove their case. The complaint itself cannot be said to have been drawn up and presented with the care one might expect, because while purporting to attach a statement said to have been submitted by A.C. Chakraborty in respect of his commission, it attached a piece of paper which contained at the bottom the letters 'Sd.', but against those letters no name or signature of anybody. The Committee again made no attempt to ascertain whether the special reports made by the respondent had been actually placed before the shareholders, nor did they refer to the Articles of Association whicn, had been produced before them and see whether the Articles imposed any specific duties on the respondent in addition to the statutory duties, although they could not have exempted him from his statutory duties and liabilities. Lastly, the Committee appear to have allowed themselves to be almost obstructed by the respondent's representative, another Auditor named Sri J.B. Maulik, who not only made his submissions to the Committee which he was entitled to do, but also took up the questions as to matters of fact addressed by the Committee to the respondent and answered them himself as if he was the witness. These defects, I must hasten to add, do not affect in any manner the findings arrived at by the Committee on the materials before them & a word of praise is due to the admirable report in which they have given the reasons for their findings.
7. It will be convenient to clear the ground by stating first the matters of which the Committee have not found the respondent guilty. In so far as the complaint was based on certain alleged manipulations of the accounts of the Bank in respect of loans, overdrafts and fixed deposits, the Committee have pointed out that an audit, particularly a Bank audit, is concerned with verification and not investigation and that an Auditor cannot be expected to detect deep-laid plots of fraud conceived and carried out by dishonest directors, unless he has some information before him which excites or ought to excite his suspicion. In the case before them, the books and records of the Bank were not available and therefore theCommittee were not in a position to say whether there was anything in them which ought to have caused some suspicion to the respondent and put him on further enquiry beyond the matters which he had himself admitted in the course of his evidence to be of a doubtful nature.
8. The facts found by the Committee against the respondent may now be stated. The balance-sheets in question were consolidated balance-sheets for the Head Office of the Bank as also its branches. The reports made by the respondent in respect of the years 1942 and 1943 were in the form of a certificate, merely answering the four questions specified in Section 145(2) of the Indian Companies Act in the affirmative and they were subject in each case to a special report. The Committee appears to have proceeded on the basis that the special reports were actually placed before the shareholders. As regards 1942, the special report stated specifically that the respondent had not audited the accounts of the Branches, but certified returns made by the Branch Managers had been incorporated in the balance-sheets. Then occurred the following sentence: 'All the loans and overdrafts of Branches are shown in the Balance-sheet as good.' Questioned as to what that sentence meant, the respondent stated that he had added it, because he had some doubt as to some of the loans. In the next place, the balance-sheet showed a cash balance of Rs. 2,21,276-13-5 of which Rs. 1,95,253-9-4 was cash in hand and the rest was in Banks in Current Accounts, but with regard to which the respondent stated in his special report that he had not verified the cash in hand by counting, but it had been certified by the Management. That statement was prefaced by the following remark: 'Thus huge amount of cash has always been kept in hand at Head Office'. Questioned next as to why he had not verified the cash, the respondent replied that his Impression was that it was not essential, though in his written statement ne had made an exception in respect of the cash balance at the date of the closing of accounts. Questioned as to why he had not included the Branches in his remark, although his case was that the cash. in hand was not only cash of the Head Office but also of the Branches, the respondent made no reply and when it was pointed out to him that he appeared to have been slightly critical of the Bank keeping such huge balances in hand, then also he remained silent. As regards the loans which were shown in the balance-sheet as fully secured, the special report contained the following sentence: 'These have been granted to eight, parties against the fixed Deposit Receipts of Debtors.' The respondent was unable to explain why he had thought it necessary to include that sentence in his report, since there was nothing unusual in granting loans against the Bank's own Fixed Deposit Receipts but if, on the other hand, if he had felt that there was something unusual in the transaction, why he had not enquired into the matter further. No answer was given. Then as regards the year 1943, the special report with regard to that year did not specifically state that the respondent had not audited the accounts of the Branches, but it stated that the Balance-sheet; and Profit and Loss Accounts of the Branches prepared by the Chief Accountant of the Bank from returns as certified by the respective agents of the Branches, had been incorporated in the books of the Bank which implied that the respondent had not personally checked the Branch accounts. In fact, the respondent did not check the accounts of the Branches for any year, as he admitted in the course of his evidence. The Balance-sheet for the year 1943 showed a Cash Balance of Rs. 3,85,943-5-2, of which Rs. 3,62,749-6-2 was cash in hand. The special report for the year 1943 did not state specifically that the respondent had not verified the cash, but it stated that the Cash Balance had been certified by the Management. In the course of his evidence, the respondent admitted that he had not actually verified the cash. Then there was a general statement in the special report to the following effect: 'The remarks given on the last account generally hold good for the year under review.' When asked what that statement meant and what information was intended to be conveyed by it to the share-holders and that if the respondent had thought that certain of the entries in the Balance-sheet were not well-founded, .whether this was adequate information, the respondent gave no answer and had to admit that the statement really meant nothing at all or could mean anything. Lastly, as to the year 1944, there was no special report for that year and the certificate, which I may call the main report was unqualified. The report itself stated that as regards the Branches, the Balance-sheets and Profit and Loss Accounts, as certified by the Branches as well as by the Managing Director, had been incorporated in the Balance-sheet and Profit and Loss Account of the Head Office & it was the latter which the respondent had audited. The Balance-sheet for the year 1944 showed a Cash Balance of RS. 46,15,212-7-10 1/2, of which Rs. 16,82,461-2-5 was cash in hand. The respondent's evidence was that of the latter amount the cash in hand at the Head Office was Rs. 73,827/- which had been checked, though not by himself but by his Assistants who were -Matriculates or Intermediate passed and had been in his employment for three or four years. The cash at the Branches had not been checked by anyone. The respondent also stated that although the major part of the investments was shown as made by the Branches and kept there and although the major part of the cash in hand was shown as held by the Branches, that fact did not arouse any suspicion in his mind. He claimed that except that the cash in hand at the Head Office in respect of the years 1942 and 1943 had not been verified, the accounts of the Head Office had been properly audited and when it was pointed out to him that his personal files produced by the police did not contain any trace of any audit notes which he claimed he had maintained, he replied that those might have been mislaid. He gave a similar reply when it was pointed out to him that his personal files did not also contain any certificate from the Management as regards the existence of the cash in hand. When asked how he could have signed the Balance-sheet and the Profit and Loss Account for the year 1944 in April 1945, when some of the letters of confirmation from the banks, to which enquiries had been addressed, had been received in May or June, the respondent appears to have replied that he had checked the cash by reference to Pass Books. When it was pointed out to him that such a thing was impossible, he made no reply.
9. On the above facts the Committee held that in examining the Balance-sheet, it was the duty of the respondent to verify the cash in hand and that by failing to do so in respect of the years 1942 and 1943, he had failed to discharge the duty which lay on him under the law and the approved audit procedure. The fact that he had stated in the special report that he had not personally verified the cash could not absolve him from his statutory liability. The Committee held further that if the respondent felt some doubt as to some of the loans, overdrafts and fixed deposits, as he said he had felt, and if he found it necessary to qualify its reports by certain reservations made, in the special reports, he should have expressed himself unequivocally on the suspected items instead of making cryptic statements which might mean anything or nothing. It was further held that his duty was to give information and not merely means of information. The Committee also held that the alleged verification of the cash in hand at, the end of the year 1944 was falsified by the fact that the confirmation letters from other banks had been received after the respondent had already signed the report. In conclusion, the Committee-summarised their findings in the following language'.
'We have come to the conclusion that the respondent was grossly negligent in the discharge of his duties as auditor of the Bank, in that he failed (1) to verify the cash on hand at Head Office on 31-12-1942 and 31-12-1943, (2) to draw the attention of the share-holders to the weakness of the Bank-in clear terms, in respect of the years 1942 and 1943, and (3) to bring to bear on his work that skill and diligence in the performance of his duties which was required of him as an auditor of the Bank for the years 1942, 1943 and in particular for the year 1944.'
10. The conclusions of the Disciplinary Committee have been confirmed by the Council of the Institute and those have been forwarded to this Court for consideration under Section 21(1) and Section 21(3) of the Chartered Accountants Act.
11. I must point out that the second finding does not appear to be wholly consistent with the first and the third and, in any event, it is not accurately expressed. Negligence in respect of carrying out the work of audit is one thing, negligence in giving full information to the shareholders is another. The Committee have found the respondent guilty of both, but if the respondent failed to verify the cash in hand in respect1 of two of the years and also failed generally in respect of all the three years to perform his duties, as Auditor with due diligence and skill, as found by the Committee, that finding means that the-respondent failed to inform himself of the true position of the Bank by checking the accounts and asking for explanations and information in a proper manner. If so, he could not, at the same time, be charged with having failed to draw the attention of the share-holders to the weakness of the Bank in the years 1942 and 1943, because such a charge presupposes that the weakness was known to him and that he was convinced of it. What the Committee really meant was perhaps that since' the respondent had admittedly felt some doubt as to some of the entries in the Balance-sheet it was his duty to communicate his doubt to the shareholders in specific terms and with the reasons therefor and that in that regard he had failed to perform his duty.
12. On behalf of the Institute, Mr. Meyer contended that the findings arrived at by the Disciplinary Committee and confirmed by the Council of the Institute were clearly right and his further submission was that inasmuch as the misconduct found was of a kind which the Act itself had named as misconduct which would render a Chartered Accountant unfit to be a member of the Institute, this Court could only direct the removal of the respondent's name from the rolls. On behalf of the respondent, Mr. Sen did not dispute the factual part of the findings, but he contended on various grounds that they did not establish negligence. He submitted further that, in any event, the Court was not bound to impose the maximum penalty of removal from the rolls, but might pass any other order.
13. Before considering whether the respondent has been guilty of negligence in the discharge of his duties as Auditor, it is necessary to see what the duties of a statutory Auditor are. The statute, which in this case is the Indian Companies Act, offers little guidance. All that Section 145(2), so far as is material, says is:
'(2) The auditors shall make a report to the members of the company on the accounts examined by them, and on every balance-sheet and profit and loss account laid before the company in general meeting during their tenure of office, and the report shall state:
(a) whether or not they have obtained all the information and explanations they have required;
* * * * and(c) whether or not such balance-sheet exhibits a true and correct view of the state of the company's affairs according to the best of their information and the explanations given to them, and as shown by the books of the company.'
Clauses (b) and (d) of the sub-section which require the Auditors to say whether the balance-sheet and the profit and loss account have been drawn up and the books of the company kept in accordance with law, may be left out of account for the present purpose. It will be seen that the Act says nothing as to what the Auditor is to do in the course of his audit in order to form an opinion on the affairs of the company, except that it is indirectly suggested that he must call for information and explanations. The details of what he must do have therefore to be collected from certain general rules which have been held to govern the duties of Auditors and those rules are derived from the ordinary law and the terms under which Auditors are employed. In the case of a company, the terms are to be found in the Articles of Association, but such terms, while they may lay down the duties of the Auditor more specifically or even provide an immunity for him in respect of certain matters, cannot exempt him from any statutory duty or liability. We have referred in this case to the Articles of Association, but we do not think that they really add anything to the duties imposed by the statute. Article 99 undoubtedly says that once in every year the accounts of the company shall be examined and the correctness of the balance-sheet and the profit and loss account ascertained by one or more Auditor or Auditors -- a provision which might be thought to go a little beyond Section 145(2)(c) but Article 100 further says that the rights and duties of the Auditor appointed at the ordinary general meeting of the company shall be regulated by Ss. 144 and 145 of the Indian Companies Act. We are, therefore, thrown back on the Act and the general rules.
14. The duties of a statutory Auditor under the general rules' will be understood better if we remember the place of an Auditor in the scheme of the Companies Act. A joint stock company carries on business with capital furnished by persons who buy its shares. The owners of the capital are, however, not in direct control of its application which is left to the executive of the company, composed of the directors and the superior officers. It is true that the directors are chosen by the share-holders, but once chosen, they move away to the eminence and isolation 'of the Board and are left to carry on the administration of the company according to their discretion and without any reference to the share-holders. In those circumstances, some arrangement is obviously called for by which those who provide the capital know periodically what is being done with theirmoney, how the affairs of the Company stand and what the present value of their investments is The Companies Act, therefore, provides for the employment of an Auditor who is the servant of the share-holders and whose duty it is to examine the affairs of the company on their behalf at the end of a year and report to them what he has found. That examination by an independent agency such as the Auditor is practically the only safeguard which the share-holders have against the enterprise being carried on in an unbusiness like way or their money being misapplied or misappropriated without their knowing anything about it. The Act provides the safeguard in two forms. It makes it the duty of the Auditors to give an expression of opinion on certain specified matters of a vital character and it makes him liable, along with the directors, for misfeasance, if he fails to perform his duties as required by law and the approved audit procedure.
15. What exactly are the details of the duty which an Auditor has to perform? I may point out that although the details of the duties of an Auditor are not specified in Section 145(2) of the Indian Companies Act, the scope of the enquiry to be made by him and the nature of the facts which he has to certify have been held to be indicated. He has to ascertain and report not merely whether the balance-sheet exhibits the true state of the company's affairs as shown in the books of the company, but also whether the books of the company themselves exhibit the true state of the company's affairs.
'The words 'as shewn by the books of the company' seem to me', observed Rigby L. J. in the case of In re London and General Bank (No. 2), (1895) 2 Ch 673 (692) (A) 'to be introduced to relieve the auditors from any responsibility as to the affairs of the company kept out of the books and concealed from them, but not to confine it to a mere statement of the correspondence of the balance-sheet with the entries in the books.' (See (1895) 2 Ch 673 (692) (A).
The observation was made with reference to Section 7 of the English Companies Act of 1879, but the provision contained in Sub-section (6) of that section was in all material respects the same as the provision contained in Section 145(2)(c) of the Indian Companies Act. Indeed, the relevant provision in the Company Law of England has remained the same through successive statutes, though it has been samewhat elaborated and it is that provision which has been adopted by the Indian Act. It is now well-settled that it is the duty of an Auditor to verify not merely the arithmetical accuracy of the balance-sheet but its substantial accuracy and to see that it includes the particulars required by the Articles and the statute and contains, a correct representation of the state of the company's affairs. (See Halsbury's Laws of England Hailsham Edition, Vol. 5, page 385).
16. Next as to the method the Auditor must follow. He must of course examine the books of the company to see what they contain, but he must also ask for further information and for explanations when such are required. In performing that function, he is required on the one hand to employ reasonable skill and care, but on the other hand, he is not required to do more. He is not required to begin with suspicion and to proceed in the manner of trying to detect a fraud or a lie, un-less some information has reached him which excites suspicion or ought to excite suspicion, in a professional man of reasonable competence. An Auditor's duty is to see what the state of the company's affairs actually is and whether it is reflected truly in the accounts of the company upon which the balance-sheet and the profit and loss account are based, but he is not required to perform the functions of a detective. As has been said, he is a watch-dog but not a blood-hound and, as the same thing has been said without the aid of a metaphor, his duty is verification and not detection, although in performing the duty of verifier tion he must employ reasonable care and skill What is reasonable care and skill must depend on the circumstances of each case. Where there is nothing to excite suspicion and there is an atmosphere of complete confidence, based on the record of continued success in financial matters, less care and less severity of scrutiny may be considered reasonable, whereas reasonable care and skill may be regarded as not exercised when, in spite of the presence of unusual features in the accounts or other 'prima facie' reasons for believing that the affairs of the company may not be in order the examination is perfunctory & not sufficiently detailed. One aspect of the question of reasonable care and skill is whether the Auditor may properly rely on the statements of the director-in-charge or the managing director, but that again must depend on the circumstances of each case and on the nature of the subject-matter which requires explanation. The information and explanations must necessarily come from the 'management and, except in the case of matters which are capable of direct verification, it may not be improper for an Auditor to accept their statements when they are persona of accepted competence and integrity, when there is nothing unusual in the accounts and when the subject-matter is such that were the Auditors to verify the result themselves, they would have to tally a multitude of entries in several linked accounts. If in such circumstances, that is to say, when the subject-matter is one which is not capable of direct verification and when to verify property the result presented in the balance-sheet, it would require investigation rather than checking and where there is nothing at all to excite suspicion, if in relying upon the statements of the nanagement in such circumstances, the Auditor is himself deceived, he will not be held to have failed in the discharge of his duties. In the next place, in judging whether an Auditor exercised reasonable care and skill, it will not be correct to proceed on matters which have subsequently transpired, but one must place oneself in the position of the Auditor as it was when he audited the accounts and see how the matters appeared or ought to have appeared to a man of reasonable care and skill. Provided the Auditor exercises reasonable care and skill, he will be regarded as having discharged his duty properly, even if his certificate turns out to be inaccurate, either as to the true position of the affairs of the company or as to the correctness of the balance-sheet in relation to the books. He is, as has been said, not an insurer and does not guarantee the absolute accuracy of what he certifies. But if he does not take reasonable care and skill before he comes to believe that what he certifies is true or even when he generally displays the highest degree of care and skill but fails short of the strict duty of an Auditor even in one instance, he must be held to have been negligent, if not worse.
17. The audit with which we are concerned in the present case is the audit of a banking company. Such an audit has been called a balance-sheet audit, meaning thereby that it is primarily-confined to the verification of the existence of assets shown in the balance-sheet, because on account of the multitudinous character of the transactions of a bant, it is not ordinarily possible to examine everyone of them, nor is it usuallydone except with reference to matters. If any, which provoke enquiry. But the existence of the assets must be strictly verified -- cash in hand by actual counting cash in banks by reference to the Pass Book or letters of confirmation, securities by inspection and uncashed cheques by presenting them for being cashed. In the case of securities, it has been said that if some of there are said to be in the hands of a third party, the Auditor has to see whether the alleged custodian is a party in whose' hands the securities might normally be placed under the approved commercial practice or in the ordinary course of the bank's business, and if that condition is satisfied and the party is also a trustworthy party, the Auditor may, accept a certificate from him instead of verifying' the existence of the securities by actual inspection. But verification of the existing assets in some satisfactory form is essential.
18. So much as to the scope of an audit and the manner of making it. The next duty of an Auditor is to make a report to the share-holders. I doubt if the Act intends that a report may be a mere certificate to the effect that the Auditor has been satisfied as to the particular matters specified in Section 145(2). Such a certificate conveys nothing to the share-holders beyond an assurance that, in the opinion of the Auditor, the books of the company are in order and the position of the company is as stated in the balance-sheet. Such an assurance can hardly serve the purpose of giving adequate information to the share-holders as to the state of the company's affairs, because most of the items in a balance-sheet are generally of an omnibus character -- large sums being shown under a general or composite heading. Unless the composition of those sums is explained by the Auditor's report and where the sums are 'sums of loans or liabilities, the nature of the investment or of the debt is fully explained, it is difficult to see how the share-holders are enlightened. Be that as it may, as to the general duty of the Auditor in regard to his report, it has been said that his duty is to give information and not merely means of Information. In other words, he must communicate facts so that, on those facts, the shareholders may judge the position for themselves and not merely throw out hints which might put the shareholders on enquiry and induce them to take steps for ascertaining what the facts were or which might be missed by the share-holders altogether. When the facts are such as cause a doubt in the mind of the Auditor as to the accuracy of certain entries in the balance-sheet or they are such that, if disclosed, they would show the balance-sheet in a different light, those facts must be conveyed to the share-holders. They cannot be suppressed, nor can doubt or dissent be expressed but the reasons therefor, withheld. In India the Act deals with the last matter in Sub-section (2A) of Section 145 which says that where any of the matters referred to in Sub-section (2) is answered in the negative or with a qualification, the report shall state the reasons for such answer. Vis-a-vis the share-holders, the Auditor holds a position of trust and it is his bounden duty to honour that trust by being candid with the shareholders and telling them frankly and fully everything with regard to the affairs of the company which has come to his knowledge and which it is material for the shareholders to know. It is only fair to add that there may be circumstances in which it will not be to the interest of the share-holders themselves that all the information regarding the company should be included in a public and printed document like the Auditor's report. To give an instance a foreign company may invade the market so long occupied by the products of a home company and may suffer loss in the course of the competition. If the home company has also suffered loss, it will obviously not be prudent to state that fact in the published report of the Auditor, because it might encourage the foreign company to persist in the adventure, whereas in the absence of information about the home company's loss, it might have withdrawn from-the trade rivalry, it has been said that, in such cases, the Auditor may make a confidential report to the share-holders and tell them where it is to be found. But whether or not an Auditor conveys all material information in his public report or in a report confidentially made, this duty it is to make a full, careful and truthful report, in default of which he must be held to have failed in the discharge of his obligations.
19. The principles which I have tried to summarise have been laid down in certain authoritative pronouncements of English Courts. They are also subscribed to by the members of the profession, as would appear from text books on auditing and as it transpired in the course of the trial of Mr. Morland, the Auditor of the Royal Mail Steam packet Co., who was prosecuted along with Lord Kylsant, Chairman of the Board, in respect of one ol the balance-sheets. (See the evidence of Lord Plender and other distinguished Auditors including the President of the Incorporated Society of Accountants, in the account of trial in Butterworth's Notable British Trials Series.) In the argument before us, reference was made to the cases of (1895) 2 Ch. 673 (A) and In re Kingston Cotton Mill Company (No. 2), (1896) 2 Ch. 279 (B), of which the former was referred to as the leading case. But a fuller statement is to be found in the subsequent case of 'In re City Equitable Fire Insurance Company' Limited', (1925) 1 Ch 407 (C), not cited at the Bar, where the judgments spread over a hundred pages and all the previous decisions are reviewed. The case is very near to the present case on the facts, the only difference being that after the liquidation of the bank and the conviction of the Managing Director, the Auditor was proceeded against for misfeasance and not in the disciplinary jurisdiction.
20. I may now take up the findings made against the respondent. With regard to the first of them which relates to the failure to verify the cash in respect of the years 1942 and 1943, Mr. Sen contended that since the respondent stated in his special report that he had not verified the cash, he had absolved himself from liability. I am afraid the argument was entirely misconceived. The respondent is not being proceeded against under the criminal law, nor for misfeasance; and the particular finding does not relate to his failure to give, information to the share-holders or to concealment of anything, but to his failure to perform one of the essential duties of an Auditor. The fact that he did not conceal the omission from the share-holders is not therefore material. If an Auditor does not do what it is his duty to do, it is no defence for him to say in a disciplinary proceeding started under the Chartered Accountants Act that he had told the share-holders that he had not done it. The lapse is constituted by his failure to perform a duty without which an audit is meaningless and it is not excused by giving information of the omission to the share-holders. The reason is that the object of the Act is to ensure in public interest that those who practise the profession of Auditors shall perform in their actual practice at least the essential duties of an audit and shall bring to bear on their work attention to matters to which their duty requires them to pay attention. If Mr. Sen's argument were correct,an Auditor might do nothing at all, nor even look into the accounts and yet say with complete immunity in his report to the shareholders that he had done nothing and assumed no responsibility whatever for any inaccuracy or untruth in the balance-sheet or profit and loss account. The absurdity of such a contention, if advanced, would be obvious. It was next contended by Mr. Sen that the respondent did pay attention to the matter of the cash in hand and that he was entitled to be content with the certificate of the Management. NO such certificate was traceable among the personal files of the respondent and it is not known who had given him the certificate which he had accepted. But assuming that there was a certificate and that it was the Managing Director or the Director in Charge who had given it, even then the respondent failed in his duty in not verifying the cash himself. Authorities, both legal and professional, are unanimous that in a bank audit, the cash balance claimed by the Management must be verified by the Auditor, because otherwise the Management might remove the greater part of the funds and show them falsely as lying in hand in cash and thereby relieve themselves of the necessity of even making up accounts, showing the disposition of the money. Among the duties of an Auditor which Lindley L. J. enumerated in the case of 'In re London and General Bank (No. 2) (A) and which he found the Auditor concerned in that case had performed, was the actual counting of cash. The authoritative work of Dicksee to which the Disciplinary Committee have referred states that
'the audit of a bank balance-sheet involves the thorough examination and exhaustive testing of every account in the general ledger, the counting of balance of cash in hand.....'
I need not quote the rest. A certificate from the Management can obviously be no substitute for such verification. The whole object of an audit is an examination of what the Management have done and if the statements of the very persons who constitute the Management were to be accepted in all matters, even in matters capable of direct verification, an audit would be, in the words of Lindley L. J., 'an idle farce'. Mr. Sen referred to the decision in the case of (1896) 2 Ch. 279 (B), in aid of his contention that the respondent had not been negligent in the discharge of his duties by accepting the certificate of the Management. 1 do not think that the case is of any assistance to him. It was a case where the stock-in-trade of a Cotton Mill Company, as shown in the balance-sheet, had been acceptPd by the Auditors on the certificate of the Manager and they had stated in their balance-sheet that they were accepting the figure 'As per manager's certificate'. The Stock-in-trade was shown not by quantity but in value and the actual fact was that the Manager who . had, up to the time of the audit been regarded as a man of acknowledged competence and a high degree of integrity had systematically manipulated the accounts and overstated the value of the stock-in-trade. The Auditors had taken the figure from a Stock Journal which contained several accounts, each one of which showed the stock-in-trade in that account and the total of such accounts was taken as the resultant stock-in-trade which was shown in the balance-sheet. The Auditors had checked whether the sum total of the figures shown under each of the contributory accounts agreed with the figure inserted in the balance-sheet, but having done so, they did not go further and examine into the contributory accounts themselves. It was in those circumstances that the Court of Appeal field that it was no pan of the duty of an Auditor to take stock and since there was nothing to excite suspicion at the time of the audit, since the Manager was a man of accepted competence and integrity up to that time and since to ascertain the real figure of the stock-in-trade the Auditors would have to compare an enormous number of books and also take into account the wastage in the process of manufacture of yarn from cotton as well as fluctuations of prices in the market, it could not be said that they had been negligent in accepting the certificate of the Manager. I do not think that a decision that an Auditor is not bound to take stock and that he is entitled to rely upon the certificate of a Manager of accepted integrity in respect of the value of the stock-in-trade when there is nothing to excite suspicion, is any authority for holding that, likewise, an Auditor may even in respect of cash in hand merely accept the certificate of the Management and refrain from counting the cash himself. A nearer case is the case of the 'City Equitable Fire Insurance Co. (C)', to which I have already referred. There, a sum shown in the balance-sheet as cash in hand included an amount in the hands of the company's brokers, the major part of which had already been earmarked for transmission to America for use in connection with a branch, which the company owned at'Brazil. The Auditors had called for and seen a letter from the brokers in which they had admitted that they were holding this amount and they passed the entry in the balance-sheet, although the amount was in the hands of the- brokers. The Court of Appeal held that the amount Was not really cash in hand, but it was in the nature of an amount lying in the hands of the brokers or a debt due from them and that since there was no question of the solvency of the brokers and since the Auditors had every reason to believe that if the company called for a cheque from the brokers, it would be forthcoming, the error the Auditors had committed was only an error of misdescription. They however added that even if it was negligence, it might be disregarded, since it had caused no damage to anyone. It will, however, be found that although, in that case, an amount which was not cash in hand was described in the balance-sheet as such, the Auditors made all the requisite enquiries which would be appropriate to the case, of money held by a third party, as in fact the amount in question really was, but even then the Court did not say without qualification that the conduct of the Auditors did not amount to negligence. That case also, in my view, would not support a claim that an Auditor can omit to verify cash actually in hand and accept instead a certificate from the Management. In my view, the first item of negligence found by the Council is amply established.
21. Proceeding to the next second item, I have already pointed out that it is inconsistent with the first and the third and that the negligence which can be properly charged against the respondent is not that he failed to inform the share-holders of the weakness of the Bank's position, but that he failed to inform them clearly and directly of his doubts and the facts by which those doubts had been caused. As to this item of negligence, little need be said. In respect of the year 1942, the Auditor admittedly felt some doubt as to some of the loans and overdrafts granted by the Branches. He must also have had some reason for stating specifically that certain secured loans shown in the balance-sheet had been granted against fixed deposit receipts held by the borrowers, because unless some reason existed, it is notpossible to see why he should have thought it necessary to draw attention to what were perfectly normal transactions. In respect of the year 1943 as well, he must have felt the same uneasiness as in respect of the previous year, because the statement in the special report in respect of 1943 imports all the criticism he had made in the special report for 1942. The remark included in the special report for 1943 cannot be explained on any other hypothesis. In spite of having felt these doubts and such uneasiness, the respondent did not inform the share-holders frankly and directly what the facts were which had cause misgivings in his mind, but he chose to employ some euphemistic or enigmatical language which might or might not be taken by the share-holders to be of any significance and which certainly conveyed no definite information. Of such conduct of the respondent two explanations are possible. Either he knew that some of the debts were bad and some of the so-called secured loans were not genuine, but he did not wish to inform the share-holders of that fact but wanted, at the same time, to provide for his own safety and therefore he inserted certain cryptic remarks in his special report; or, he was careless and neglected to give the share-holders the information which it was his duty to give. The Council of the Institute has adopted the more charitable explanation and found the respondent guilty only of negligence. In my view, that finding also is amply justified.
22. I may add at this stage one word as to the case of (1895) 2 Ch. 673 (A), which also was relied on by Mr. Meyer as an authority on this point. That case has got to be carefully read. It appears that in that case the Auditors had carried out a thorough examination of the loans and securities which constituted the principal asset of the bank and they had come to be of the view that the nature of those loans and. securities was extremely unsatisfactory and that the prospect of their realisation was problematic. In that view, they made a detailed report to the Board of Directors' and in the statutory report which they originally prepared, they used the following language: 'The value of the assets as shown on the balance-sheet is dependent upon realization. And on this point we have reported specifically to the board'. Ultimately they were persuaded by the Chairman of the Board of Directors of the company to omit the last sentence and the report went only with the statement that 'the value of the assets as shown on the balance-sheet was dependent upon realization'. With reference to the charge that the Auditors had failed to give full information to the share-holders, Lindley L. J. observed that if the Auditors, had laid before the share-holders the balance-sheet and profit and loss account accompanied by a certificate in the form in which they first prepared it, they would perhaps have done enough under the peculiar circumstances of that case. The learned Lord Justice proceeded to utter a warning that if, even in such circumstances, an Auditor chose to give means of information rather than information, he would do so at his own risk, because he might be held judicially to have failed to discharge his duty. But the fact remains that in the opinion of the learned Lord Justice, a reference to the confidential report, if included in the statutory report, might have absolved the Auditor from responsibility in the circumstances of the case. In the present case, the statutory report did contain a reference to the special report and the negligence which can be charged against the respondent must be on the basis that unlike the case of 'London and General Bank (No. 2), (A)', even the Special report in this case did not give adequate information. The decision thus is not a direct authority on this point, as Mr. Meyer contended.
23. The third item in the findings is a general one and finds the respondent guilty of failing to perform his duties in respect of all the three years with the requisite skill and diligence. It is impossible to read the evidence of the respondent without feeling convinced that the finding is entirely justified. His personal files did not contain any audit notes or memoranda of queries or certificates or explanations. But the fact that the file had been in the custody of the Police enabled him to say that the relevant papers might have been mislaid. It is regrettable that the Committee did not ask the investigating police officer to produce the search list which might have shown whether any other papers had also been seized. But since they did not do so, it is not possible to draw any inference against the respondent from the absence of any audit notes in his personal file, but the other facts referred to by the Disciplinary Committee remain. To refer to them would be only to repeat the facts which have already been stated. It will be recalled that although he felt some doubt as to some of the loans and overdrafts, he did not take any further steps or make any further enquiry and although he commented even in respect of the year 1942 on the unusual fact that the Bank was holding such a large amount in cash, he did not verity the cash even in the subsequent years, although the cash in hand swelled in 1943 to Rs. 3,62,749-6-2 and in 1944 to Rs. 16,82,461-2-5. Throughout he seems to have maintained an attitude of passivity and incuriosity. Similarly, the very unusual fact that the major part of the investments was said to have been made by the Branches and to have been kept there, and the major part of the cash also was said to lie in the branches, did not move him to any further enquiry. The peak of negligence was reached when he signed the report for 1944 in anticipation of letters of confirmation from the banks in respect of the cash said to be lying with them. Mr. Sen contended that the amounts lying in Current Accounts might be checked from the pass Books and amounts lying in fixed deposit might be checked from the fixed deposit receipts. But there must have been some reason why, in spite of those materials being available to him, if they were available, the respondent asked for letters of confirmation. Why, having felt the necessity of confirmation and asked for it, he should have hurried to certify the balance-sheet before the confirmation was received, was not explained. In my view, the third item of negligence has also been established.
24. Before we proceed to consider what order we ought to make, I desire to refer to one matter. Admittedly the respondent did not examine the accounts of any of the Branches in any of the years and he accepted the certificates of the different Branch Managers or balance-sheets and profit and loss accounts prepared by the Chief Accountant at the Head Office from the returns made by the Branch Managers. The Indian Companies Act provides in Section 145(3) that if a banking company has branch banks beyond the limits of India, it shall be sufficient if the Auditor is allowed access to such copies of and extracts from the books and accounts of any such branches as have been transmitted to the head office of the company in India. It will be noticed that nosimilar exception is made with respect to branches in India and that even in respect of branches outside India, a reference to copies of or extracts from the accounts is made necessary. It is therefore a question whether an Auditor of a banking company in India can be said to have performed his duties properly if, in respect of branch office, he merely accepts the returns of the Branch Managers and does not even call for relevant extracts from the books and accounts, so that he might make some kind of a personal examination. As this matter was not gone into by the Institute, it must await consideration in a future case when it arises.
25. It remains to consider what order we should make against the respondent. Mr. Meyer referred to the decision, 'In the matter of J.K. Ghose, : AIR1954Cal299 (D,), and contended that S.R. Das Gupta J. and myself had already held in that case that where the misconduct found was, according to the Act itself a misconduct which rendered a person unfit to be a member of the Institute, the High Court had no option, but to order the name of the offender to be struck out from the rolls. It was pointed out that the misconduct found in the present case was under item (q) of the Schedule which, sets out the acts or omissions which render a Chartered' Accountant unfit to be a member of the Institute. On behalf of the respondent Mr. Sen contended that the effect of our decision was not as claimed by Mr. Meyer and, further, that even where the misconduct found was one of the types of misconduct named in the Act as misconduct which rendered a Chartered Accountant unfit to be a member of the Institute, the High Court was not bound to direct his name to be struck out from the rolls, but might impose any lesser penalty which it might consider sufficient in the circumstances of the case. In support of the latter proposition, Mr. Sen referred us to the decisions in 'Sarupsing Mangatsing v. Nilkant Bh'askar', : AIR1953Bom109 (E); 'In re W.G. Ambekar', 1952 Nag 393 (AIR V39) (P) and 'The Council of Institute of Chartered Accountants v. Rajamany', : AIR1953Mad310 (G).
26. In the case of : AIR1954Cal299 (p), to which Mr. Meyer referred the present point was not decided. The question for decision in that case was whether the Act at all contemplated misconduct less than misconduct rendering a Chartered Accountant unfit to be a member of the Institute and whether for such misconduct, the High Court could impose a penalty of lesser gravity than removal of the offender's name from the Membership Register. Incidentally, certain observations as to the scope of certain sections were made, but the present point was not decided. That decision, therefore does not conclude the matter. The decisions of the Bombay, Madras and Nagpur High Courts relied on by Mr. Sen certainly support his contention, but with great respect, I have not found much assistance in the reasons given by them in overcoming the difficulty which, to my mind, is created by certain sections of the Act.
27. The draftsmanship of the sections which deal with misconduct and disciplinary action is extremely clumsy. It would appear that before adopting the words 'conduct which will render a person unfit to be a member of the Institute', the Legislature did not take their measure and after introducing them in several sections, it failed to co-ordinate the provisions made, so that it is impossible to read the words as bearing a consistent or intelligible meaning. The words first appear with a slight variation in Section 20(2) of the Act, but that section is not the first in order of time. The section first in order of time is Section 21(1) which says that if on receipt of information or a complaint, the Council comes to be of opinion that a member of the Institute has been guilty of conduct which, If proved, will render him unfit to be a member of the Institute, it shall cause an enquiry to be made. Similarly, where a complaint is made against a member of the Institute by or on behalf of the Central Government, an enquiry shall be directed. Pausing here for a moment, I may point out that the first part of the section hardly makes any sense, because if some conduct remains to be proved and, if proved, will lead to a certain consequence, it is impossible to see how the Council can, at the stage of the complaint, be of opinion that the member complained against has ben guilty of it. Obviously, what the draftsman wanted to say is that if the Council finds that the conduct alleged against a member is such that, if proved, it will render him unfit to be a member of the Institute, it will direct an enquiry. Be that as it may, on reading the section, one would naturally ask what kind of conduct would render a Chartered Accountant unfit to be a member of the Institute. That question is answered by Section 22 which says that that
'the expression 'conduct which, if proved, will render a person unfit to be a member of the Institute' snail be deemed to include any act or omission specified in the Schedule'.
The acts or omissions specified in the Schedule thus all constitute conduct which will render a person unfit to be a member of, the Institute, though, since the section uses the word 'include', there may be other such acts and omissions. The Schedule sets out twenty-six items, twenty-five of which name certain acts or omissions, but the twenty-sixth is of a residuary character and provides for other acts or omissions as may be specified by the Council of the Institute by a notification in the Gazette of India. It is important to note the opening words of the Schedule which read thus:
'A chartered accountant shall be deemed to be guilty of conduct rendering him unfit to be a member of the Institute, if he......'.
Then follows an enumeration of the acts or omissions contemplated. The result is that by the words of Section 22 and the opening words of the Schedule, the Act enjoins that !f a Chartered Accountant does any of the acts or be guilty any of the omissions mentioned in the Schedule, he must be deemed to have rendered himself unfit to be a member of the Institute. In the light of this provision, Section 21(3) assumes a somewhat strange hue. It says that after the finding of the Council has been forwarded to the High Court and after the High Court has given an opportunity to the Council, the member concerned and the Central Government to be heard, it 'may pass such final orders on the case as it thinks fit', if it does not refer it back to the Council for further enquiry. Therefore, even where the Council finds that a member has been guilty of one or more of the acts or omissions enumerated in the Schedule and even where the High Court accepts such findings, the High Court may make any order it deems fit and not necessarily an order for the removal of the member's name from the rolls. The language of Section 21(3) is capable of no other meaning. But a strange anomaly results from the section when It is read with Section 22 and the Schedule, to which I have already referred. Those provisions declare that certain acts or omissions, if committed by a Chartered Accountant, will render him unfit to be a member of the Institute and indeed the acts or omissions are set out as illustrations of conduct which will bring on unfitness. Read with those provisions, the effect of Section 21(3) is that the High Court may, on the one hand find a person guilty of conduct which, according to the statute itself, renders him unfit to be a member of the Institute and yet may, at the same time, keep him on as a member and inflict on him some punishment less severe than expulsion from membership, These provisions lead to the result that the moment the High Court finds a Chartered Accountant guilty of one or more of the acts or omissions enumerated in the Schedule, It finds him necessarily to be unfit to be a member of the Institute, because the statute says so, but, on the other hand, the High Court is given the liberty not to remove the member concerned from membership, if it so pleases, although he has been found to be unfit to be a member. The High Court may thus find the offender at once unfit and fit. This odd position has been created, because when enacting Section 21(3), the Legislature obviously remembered that there might be degrees of the same offence, meriting different punishments, but they forgot it while enacting Section 22 and the Schedule and made a provision in absolute terms, declaring that certain acts or omissions would per se render a Chartered Accountant unfit to remain a member. However, in spite of the anomaly, the clear language of Section 21(3) cannot be disregarded and it must be held that, so far as that section is concerned, it gives to the High Court an unqualified liberty to pass any order it likes, even if the act or omission founts against a Chartered Accountant may be such as under the provisions of the Act itself, renders him unfit to be a member of the Institute. The only difficulty in adopting that construction Is caused by the terms of Section 20(2) to which I may now turn. That sub-section reads as follows:
'The Council shall remove from the Register the name of any member who has been found by the High Court to have been guilty of conduct which renders him unfit to be a member of the Institute'.
If the words 'conduct which renders him unfit to be a member of the Institute' be taken in the sense of the definition sections, it must follow that once the High Court has found that a Chartered Accountant has been guilty of one of the enumerated acts or omissions, the Council must remove his name from the Register. It is to be noticed that Section 20(2) does not say 'if the High Court holds him to be unfit to be a member of the Institute' or 'if the High Court directs his name to be struck out', but says if he 'has been found by the High Court to have been guilty of conduct which renders him unfit to be a member of the Institute', As I have said, if one takes the language of this sub-section in the sense which the definition sections give to it, it is impossible to come to any other conclusion than this, that the moment any of the specified acts or omissions is found against a Chartered Accountant, his name can no longer remain on the rolls. No room is left for the High Court, after it has found one or more of such acts or omissions to exercise any discretion with respect to the penalty. But the words of Section 21(3) to which I have already referred are there. In my view, the only way in which Section 20(2) can be reconciled with Section 21(3) is by reading the form as referring not to the finding of any act or omission, but referring to the order made by the High Court or to put it in another way, by reading the words 'found by the High Court to have been guilty of conduct which renders him unfit to be a member of the Institute' as meaning not 'found by the High Court to have committed one or other of the acts or omissions which under the statuterenders a Chartered Accountant unfit to be a member of the Institute', but as meaning 'held by the High Court to be unfit to be a member of Institute'. It is useless to pretend that this construction of the section does not, in view of- the definition sections, involve some straining of its language in order to make it yield a different meaning, but I think that for the sake of consistency as also for the sake of conformity with good reason, it ought to be so construed and taken as referring to the actual order made by the High Court in exercise of its discretion on its own view of the fitness of the Chartered Accountant to remain a member of the Institute rather than to the finding of some act or omission carrying with it the liability for removal from membership under the provisions of the Act. This construction satisfies good reason, for otherwise the only penalty would be the maximum one for acts or omissions enumerated in the Schedule, whenever found against a chartered Accountant, regardless of the nature of the act or omission in a particular' case and the degree of culpability involved. I would accordingly hold that even where a Chartered Accountant is found guilty of one or more of the acts or omissions specified in the Schedule as instances of conduct which will render a Chartered Accountant unfit to be a member of the Institute, the High Court is not bound to impose the maximum penalty of removal from the rolls, but is entitled to impose a lesser penalty in its discretion.
28. It only remains to consider what order we should pass against the respondent. There can be no question that Auditors occupy an essential position in the commercial life of a country. The accountability to them is a potent inducement to honest and businesslike conduct on the part of the directors of joint stock companies. On the other hand, their integrity and the care and skill which, it is assumed, they will bring to bear on their work, are almost the only guarantees which the shareholders have that they will be kept informed periodically of the true state of the affairs of the company in which they have invested their money. An Auditor who pays more regard to his fees or patronage from the directors than to his duty to the share-holders or who construes his duty to the share-holders too narrowly, does a positive disservice, not only to the share-holders who employed him, but to the cause of joint stock enterprise in the country in general. He does so, because by not bringing to the notice of the share-holders matters which it is material for them to know and leaving the directors free to deal with the funds and the business of the company as they choose, he makes it possible for them to bring the company to ruin and thereby he contributes to the destruction of public confidence in joint stock enterprise. It is therefore, not possible to regard the lapse of the respondent too lightly. We have given this matter our careful consideration and we think that, in all the circumstances of the case, the ends of justice will not be served, unless the penalty imposed be substantial.
29. We direct that the respondent be suspended from the membership of the Institute of Chartered Accountants and from practice for two years from the date of this order.
30. Each party to bear its own costs.
31. I agree.