Facts of the Case

The complainant, CA Ashok Kumar Somani, was appointed as Statutory Auditor/Tax Auditor of M/s Sanwaliya Tractor Agency, M/s Sanwaliya Filling Station and M/s Sanwaliya Motors Private Limited for Financial Year 2017-18 and was reappointed for Financial Year 2018-19 onwards. During the course of audit for FY 2018-19, the complainant detected serious irregularities in the books of accounts and repeatedly requested the auditee entities to rectify the same. As there was no response, the complainant issued an email dated 22.10.2019 stating that a qualified audit report would be issued by 31.10.2019, being the last date for submission.

Subsequently, the respondent, CA Nilesh Jain, accepted appointment as Statutory Auditor/Tax Auditor of the said firms for FY 2018-19. Prior to acceptance, email correspondence took place between the complainant and the respondent on 29.10.2019 and 30.10.2019, wherein the complainant expressly objected to the respondent accepting the audit assignment, citing unethical removal of the auditor and pending issuance of a qualified audit report. Despite such objection, the respondent proceeded to accept the appointment and issued audit reports on 31.10.2019. 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 audit appointment without due regard to the objections raised by the outgoing auditor, whether mere email communication satisfied ethical requirements, and whether proceeding with audit in such circumstances violated principles of independence and professional ethics.

Petitioner’s Arguments

The complainant contended that the respondent accepted the audit assignment despite being clearly informed in writing that the complainant objected to such appointment due to serious irregularities and impending issuance of a qualified audit report. It was argued that the respondent failed to respect the ethical safeguard intended under Item (8) of Part I of the First Schedule, which exists to protect independence of the profession and prevent unethical removal of auditors. The complainant submitted that the respondent’s conduct undermined professional discipline and encouraged audit shopping.

Respondent’s Arguments

The respondent submitted that he had communicated with the complainant by email prior to acceptance of the audit and that email communication constitutes valid written communication as recognised by judicial precedents. He contended that professional courtesy does not override statutory law and that there is no absolute prohibition on accepting audit assignments merely because objections are raised by the outgoing auditor. The respondent further submitted that he completed the audit as per Auditing and Accounting Standards and there was no negligence in performance of audit work.

Court Order / Findings

The Board of Discipline examined the email correspondence exchanged between the complainant and the respondent and noted that the complainant had clearly and unequivocally objected to the respondent accepting the audit assignment due to ethical concerns, irregularities in accounts, and issuance of a qualified audit report. The Board observed that Item (8) of Part I of the First Schedule mandates not merely communication but due consideration of professional and ethical reasons communicated by the outgoing auditor prior to acceptance.

The Board held that although the respondent did communicate with the complainant by email, he failed to give due weight to the objections raised and proceeded to accept the audit assignment and issue audit reports within an extremely short timeframe. The Board noted that such conduct defeats the underlying objective of ethical safeguards, compromises independence of auditors, and encourages replacement of auditors for issuing inconvenient reports.

Accordingly, the Board concluded that the respondent violated Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 and was guilty of professional misconduct.

Important Clarification

The Board clarified that the requirement of prior communication with the outgoing auditor is not a mere formality. The incoming auditor must objectively evaluate and respect valid professional objections raised by the outgoing auditor, particularly where the change is motivated by avoidance of a qualified audit report. Failure to do so amounts to professional misconduct even if communication has technically taken place.

Final Outcome

The Board of Discipline held the respondent, CA Nilesh Jain (M. No. 403858), 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/1768899185_CA.AshokKumarSomaniM.No.076198vsCA.NileshJainM.No.403858Chittorgarh.pdf

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