Facts of the Case

The complainant, CA Bhaven Shah, Director of M/s Modern Products Private Limited, filed a complaint against the respondent, CA Bharat Babubhai Shroff, who was the statutory auditor of M/s NAK Engineering Private Limited. The complainant alleged that the audited company was an illegal and unlawful occupant of premises owned by the complainant’s company and that eviction proceedings were pending before the Court of Small Causes, Mumbai.

Upon inspection of MCA records, the complainant alleged that the company had defaulted in statutory filings for about 13 years and subsequently filed multiple e-forms in 2018 under the Condonation of Delay Scheme, 2018 (CODS). It was alleged that the respondent, as statutory auditor, colluded with the company’s directors to backdate, fabricate and manipulate accounts and statutory filings from 2004 to 2017 to regularise illegalities.

Issues Involved

Whether the respondent Chartered Accountant was guilty of professional misconduct under Item (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949 for alleged failure to ascertain statutory compliance, falsification of audit records, and collusion in regularisation of company defaults, and whether the complainant had the requisite locus standi to maintain the complaint.

Petitioner’s Arguments

The complainant alleged multiple irregularities, including auditing financial statements without valid appointment for earlier years, false certification of profits when losses allegedly existed, filing of post facto ADT-1 forms, incorrect references to the Companies Act, 1956 instead of the Companies Act, 2013 in notes to accounts, certification of Form-23AC and Form-20B despite delayed AGMs, discrepancies in annual returns and AGM dates, and signing of multiple years’ financial statements on single dates. It was contended that these acts demonstrated deliberate collusion and professional misconduct.

Respondent’s Arguments

The respondent submitted that the allegations were technical and misconceived, that appointment of auditor is a contractual matter between the company and auditor, and that intimation to the Registrar is procedural. It was argued that the complainant was neither a shareholder, director, creditor nor previous auditor of the company and therefore lacked locus standi. The respondent further submitted that the dispute essentially arose from a tenancy conflict between the complainant’s company and the audited company, and that he was being made a scapegoat. The respondent also highlighted his age, long-standing ethical practice, and absence of public interest impact.

Court Order / Findings

The Board of Discipline examined the complaint, documentary material and submissions of both parties. The Board observed that while several allegations were made, the Director (Discipline) had found the respondent prima facie not guilty on all counts except one under Item (9) of Part I, which was limited to final hearing.

On appreciation of evidence, the Board held that the complainant failed to establish locus standi, as he was neither a shareholder, director, creditor nor auditor of the audited company. The Board further observed that no substantive evidence was produced to demonstrate that the respondent facilitated illegal occupation of premises, colluded in falsification of records, or acted beyond his role as statutory auditor. Procedural lapses such as alleged non-filing of certain forms were held insufficient to establish professional misconduct.

The Board concluded that the respondent acted within his professional capacity and that the complaint was driven by a private tenancy dispute rather than genuine audit-related misconduct.

Important Clarification

The Board clarified that disciplinary proceedings cannot be sustained on the basis of procedural allegations or third-party grievances unconnected with the auditor–company relationship. Absence of locus standi and lack of cogent evidence are fatal to allegations of professional misconduct under Item (9) of Part I.

Final Outcome

The Board of Discipline, ICAI, held that CA Bharat Babubhai Shroff was NOT GUILTY of professional misconduct under Item (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949. The complaint was ordered to be closed under Rule 15(2) of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, by order dated 27.08.2024.

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