Facts of the Case

The complainant, CA Ashish Chhabra, was the statutory auditor of M/s ROC Foods Limited for nearly ten years and completed his term during Financial Year 2017-18. During the course of audit, disputes arose between the complainant and the company regarding audit observations and pending professional fees. The complainant indicated that a qualified audit report would be issued for Financial Year 2018-19.

Subsequently, the respondent, CA Neha Bansal, was appointed as statutory auditor of the company for Financial Years 2018-19 to 2023-24. It was admitted on record that prior to acceptance of the audit appointment, the respondent did not communicate in writing with the complainant, who was the previous auditor, as required under Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 read with the Code of Ethics, 2009. Disciplinary proceedings were initiated under Section 21A of the Chartered Accountants Act, 1949.

Issues Involved

Whether the respondent Chartered Accountant was guilty of professional misconduct under Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 for accepting statutory audit appointment without prior written communication with the outgoing auditor, whether reliance on the auditee’s instructions absolved the respondent of ethical responsibility, and whether such conduct warranted disciplinary action.

Petitioner’s Arguments

The complainant contended that the respondent accepted the statutory audit assignment despite clear ethical requirements mandating prior written communication with the outgoing auditor. It was argued that the respondent’s conduct facilitated unethical change of auditor to avoid a qualified audit report and undermined the safeguards intended to protect audit independence and professional discipline. The complainant submitted that non-payment of professional fees and allegations of mala fide intent by the company did not dispense with the respondent’s ethical obligations.

Respondent’s Arguments

The respondent submitted that she was informed by the company that the complainant had mala fide intentions and that the company had specifically requested her not to communicate with the outgoing auditor. It was contended that professional courtesy should not override statutory provisions and that she had acted bona fide in accepting the audit assignment. The respondent also relied upon email exchanges and contended that there was no deliberate violation of ethical standards.

Court Order / Findings

The Board of Discipline examined the provisions of Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 and the Code of Ethics, 2009, and observed that two mandatory conditions are prescribed: prior communication with the outgoing auditor and such communication must be in writing. The Board noted that the respondent expressly admitted, both in written submissions and during the course of hearing, that no written communication was made with the complainant prior to acceptance of the statutory audit appointment.

The Board further held that the obligation to communicate with the outgoing auditor rests squarely on the incoming auditor and cannot be shifted to the auditee. Allegations regarding mala fide intent of the outgoing auditor or instructions of the company cannot justify non-compliance with ethical requirements. The Board concluded that the respondent failed to adhere to the mandatory safeguards prescribed under Item (8) of Part I of the First Schedule and was therefore guilty of professional misconduct.

Important Clarification

The Board clarified that prior written communication with the outgoing auditor is a substantive ethical requirement and not a mere formality. Incoming auditors must independently evaluate objections or circumstances communicated by the outgoing auditor, and failure to comply with this obligation constitutes professional misconduct irrespective of the auditee’s instructions or disputes over professional fees.

Final Outcome

The Board of Discipline held the respondent, CA Neha Bansal (M. No. 411989), guilty of professional misconduct under Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949. A monetary penalty of ₹25,000 was imposed on the respondent.

Source Link- https://www.mytaxexpert.co.in/uploads/1768899214_CA.AshishChhabraM.No.507083ChandigarhvsCA.NehaBansalM.No.411989Ghaziabad.pdf

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