The main legal point established in the judgment is that auditors have a duty to diligently carry out their role, assess fraudulent transactions, comment on internal control procedures, and maintain necessary working papers and documents. Failure to fulfill these obligations can constitute professional misconduct under relevant provisions of the Companies Act, 1956 and the Chartered Accountants Act, 1949.

Pradeep Nandrajog, J.

1. A complaint dated December 26, 2000 was received by the Council from the Assistant General Manager, State Bank of India, New Delhi against G.S. Jauhar & Co. of which the respondent was a partner alleging that acting on behalf of the partnership firm which was the Statutory Auditor of M/s. Pertech Computers Ltd. (hereinafter referred to as PCL), while carrying out the audit the respondent was guilty of various acts of commission and omission and thus action needs to be taken against the respondent for professional misconduct. Respondent admitted being incharge of the audit team.

2. Briefly put, the complaint was to the effect that various financial institutions and banks, including the complainant bank (acting in a consortium), sanctioned and granted various capital facilities from time to time to PCL in respect of its business of marketing computers and software. That as per terms of the sanction of the capital it was incumbent upon PCL to ensure that drawings on the account were covered by the advance value of the stock hypothecated to the complainant bank. Various banks and financial institutions had also extended financial assistance to M/s. Altos India Ltd. (hereinafter referred to as AIL), a sister concern of PCL. In a special audit carried out of the stock etc. of AIL, glaring acts of commission and omission committed by AIL surface. That IDBI, a creditor of PCL circulated a background note to the effect that with effect from 1988-89 the increase in stock of PCL was much higher than the profits generated and similar was the position with AIL with effect from the year 1992-93. That the two companies had adopted a modus operandi, being, booking as sales of software reported developed by PCL was shown to third parties who would in turn show delivery to AIL as a purchaser and from AIL sales were shown to PCL. This loop was repeated many times. IDBI estimated the value of current assets generated through the said process to the tune of Rs.362 crores being only paper entries, required to be written off. In these circumstances the consortium became suspicious and directed to carry out a special audit. M/s. G. Jai & Associates was assigned the job to carry out a special audit of the stock of PCL. Report submitted by the special auditor made starting revelations regarding financial irregularities by PCL; fraud and breach of trust by the Directors of PCL. Serious irregularities committed by the statutory auditors in discharge of their statutory duties were highlighted. Confronted with the special audit report Sh. Dadan Bhai, Chairman of PCL confessed that the accounts of PCL for the years in question did not correctly reflect the financial position of the company.

3. The complaint was forwarded to the respondent who submitted a written statement of his defence on April 05, 2004, taking the stand that an auditor cannot be held responsible for preventing fraud by a company. The respondent also disputed the report submitted by M/s. G. Jai & Associates. The response was submitted for rejoinder to the complainant who filed the rejoinder on August 09, 2004. Respondent was handed over the rejoinder and he submitted his comments thereto on November 29, 2004. Prima-facie opinion being formed that the respondent was guilty of professional and other misconduct, in May 2005 the matter was referred to the Disciplinary Committee.

4. The Disciplinary Committee submitted a report on February 03, 2010. The findings returned are that the main charge against PCL were arising out of the allegation that there were overstatement/under-statement of the stocks, debtors, inflation of sales and manipulation of accounts and that the auditor failed to comment on the same, which in turn established that the auditor was in connivance with the management of the company to defraud the bank and the public. That the respondent was the statutory auditor of PCL since inception and lastly audited the balance sheet for the year ending De