Facts of the Case

The complainant, CA Manoj Kumar Jain, proprietor of M/s Manoj Santosh & Co., was appointed as statutory auditor of M/s Fortune Machines Private Limited for a continuous period from 01.04.2015 to 31.03.2020, with his appointment for FY 2019–20 being ratified in the AGM held on 30.09.2019. The complainant neither resigned nor was removed from the office of auditor.

It was alleged that despite this, the respondent, CA Nishant Agarwal, partner of M/s Amit S. Agarwal & Co., accepted appointment and signed the audit report of the company for FY 2019–20 on 30.12.2020 without first communicating in writing with the complainant and without verifying compliance with Sections 139 and 140 of the Companies Act, 2013.

Issues Involved

Whether the respondent Chartered Accountant was guilty of professional misconduct under Items (8) and (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949 for accepting statutory audit without prior written communication with the previous auditor and for signing the audit report before being legally appointed in a general meeting.

Petitioner’s Arguments

The complainant contended that his firm continued to be the statutory auditor till completion of the audit for FY 2019–20 and that no resignation or removal had taken place. It was argued that the respondent failed to obtain written communication or NOC as required under Item (8) and also failed to ascertain statutory compliance under the Companies Act before accepting and performing the audit, thereby violating Item (9) of Part I.

Respondent’s Arguments

The respondent submitted that he was appointed by the Board of Directors on 03.10.2020 to fill a casual vacancy arising after the AGM dated 30.09.2020 and that the complainant had failed to complete the audit within time. The respondent admitted that no written communication was made with the complainant prior to accepting the assignment and attempted to justify the same as a procedural lapse. The respondent further contended that he had complied with Section 139 requirements and that his appointment was subsequently ratified in the EGM held on 20.01.2021.

Court Order / Findings

The Board of Discipline examined the pleadings, documentary evidence and the respondent’s own admissions. The Board recorded that the respondent expressly admitted absence of any written communication with the complainant prior to accepting the audit assignment. Accordingly, the Board held that the respondent violated Item (8) of Part I of the First Schedule by accepting the audit without prior written communication with the outgoing auditor.

The Board further examined the sequence of events and observed that although the respondent signed the audit report on 30.12.2020, his appointment as statutory auditor was approved only in the EGM held on 20.01.2021. The Board held that under Section 139 of the Companies Act, 2013, appointment of auditor can only be made in a general meeting and not merely by a board resolution. Consequently, the respondent signed the audit report before being legally appointed, thereby violating Item (9) of Part I for failure to ascertain statutory compliance prior to accepting and executing the audit.

The Board rejected allegations of solicitation and collusion under Item (6) and also rejected the allegation relating to signing during extended due date period, holding those charges as not proved.

Important Clarification

The Board clarified that compliance with prior written communication under Item (8) is mandatory and cannot be treated as a procedural formality. Further, a Chartered Accountant cannot sign an audit report unless validly appointed in accordance with the Companies Act, 2013, and failure to ascertain such compliance constitutes professional misconduct under Item (9) of Part I.

Final Outcome

The Board of Discipline, ICAI, held that CA Nishant Agarwal was GUILTY of Professional Misconduct under Items (8) and (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949. In exercise of powers under Section 21A(3), the Board imposed a fine of ₹25,000 upon the respondent, by order dated 15.07.2024.

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