1955 Supreme(Cal) 154

HIGH COURT OF CALCUTTA
CHAKRABARTI, LAHIRI
DEPUTY SECRETARY TO THE GOVERNMENT OF INDIA MINISTRY OF FINANCE (DEPARTMENT OF ECONOMIC AFFAIRS) - Appellant
Versus
S. N. DAS GUPTA - Respondent
Matter 71  Of  1955
Decided On : AUGUST 01, 1955

Headnote:

CHARTERED ACCOUNTANTS ACT - DISCIPLINARY PROCEEDINGS - GROSS NEGLIGENCE IN THE DISCHARGE OF DUTIES AS AUDITOR - FAILURE TO VERIFY CASH IN HAND, TO DRAW ATTENTION OF SHAREHOLDERS TO WEAKNESS OF BANK'S POSITION, AND TO BRING TO BEAR ON WORK REQUIRED SKILL AND DILIGENCE - REMOVAL FROM ROLLS ORDERED.

Fact of the Case:

The respondent, a Fellow of the Institute of Chartered Accountants, was the Auditor of the Aryan Bank Limited for the years 1942, 1943 and 1944. The Bank failed and the respondent was a prosecution witness in the criminal proceedings against the Managing Director, the Director in Charge, the Secretary and another Director, which resulted 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. The Central Government addressed a letter to the Secretary of the Institute stating that the balance-sheets and the profit and loss accounts of the Bank for the years 1942, 1943 and 1944 did not exhibit a true and correct view of the state of the Bank's affairs and asked that such action as the Institute might deem fit might be taken against the respondent. The Institute issued the usual notice to the respondent who 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. The Committee found that the respondent had failed to verify the cash in hand in respect of the years 1942 and 1943, that he had failed to draw the attention of the shareholders to the weakness of the Bank's position in clear terms, in respect of the years 1942 and 1943, and that he had failed 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.

Finding of the Court:

The Court held that the findings of the Disciplinary Committee were justified and that the respondent had been guilty of gross negligence in the discharge of his duties as Auditor.

Issues: Whether the respondent had been guilty of gross negligence in the discharge of his duties as Auditor.

Ratio Decidendi: 1. An Auditor is required to exercise reasonable care and skill in the performance of his duties and is not required to begin with suspicion and to proceed in the manner of trying to detect a fraud or a lie, unless some information has reached him which excites suspicion or ought to excite suspicion, in a professional man of reasonable competence. 2. 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. 3. 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. 4. An Auditor is required to verify the existence of assets shown in the balance-sheet -- 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. 5. An Auditor's 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. 6. An 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.

Final Decision: The Court directed that the respondent be suspended from the membership of the Institute of Chartered Accountants and from practice for two years from the date of the order. Each party was directed to bear its own costs.