Introduction
The Hon’ble Delhi High Court (‘Court’), in the case of Harinderjit Singh v. Disciplinary Committee ICAI,[i] delivered a crucial decision regarding the mechanism for preventing misconduct and preserving the integrity of Chartered Accountants (‘CA’). The decision sheds light on the importance of the Institute of Chartered Accountants of India (‘ICAI’) as a regulatory authority overseeing the professional and ethical conduct of accounting professionals. Emphasizing the importance of integrity in the accounting profession, the Court remarked that unethical conduct has far-reaching harmful consequences for society beyond legal ramifications or the erosion of client trust. The Court firmly established that firms cannot evade disciplinary actions by designating an individual as a scapegoat in the guise of a member answerable.
Brief Facts
Various accounting practitioners filed 10 writ petitions (‘WPs’) against ICAI concerning the disciplinary proceedings initiated by ICAI against them. The petitioners sought relief from the Court by relying on r. 8 of the Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007 (‘Rules’), which requires them to be the nominated member concerned, which they were not. The petitioners claimed they were partners in the firm, but they had not been identified as members answerable by the firm.
The firms identified and nominated the member answerable, and that member filed a declaration promising full cooperation with the disciplinary committee (‘DC’). ICAI submitted that the proceedings against Price Waterhouse Group (‘PWG’) were based on a report of Operation of Multi-National Accounting Firms (MNAFs) in India. The findings alleged that the petitioner firms were involved in securing professional business by means not permitted to members of the institute/firm. The petitioners were also found to have access to the common pool of resources of PWG, and their actions contravened item 7 of part I of the first sch. to the Chartered Accountants Act, 1949 (‘Act’).
It was further alleged that the petitioner's firms had contravened reg. 54 of the Chartered Accountants Regulations, 1988 (‘Regulations’), allowing the sharing of articled assistants among the PWG firms, which constitutes professional misconduct under item (1) of part II of the second sch. to the Act.
The primary issue before the Court was whether ICAI could take action against chartered accountant firms (‘CAF’) for professional misconduct under the existing provisions of the Act or if it could only proceed against an individual recognized by the firm. Meanwhile, the Court placed the disciplinary proceedings on an interim stay.
Held
The Court found the WPs untenable and, therefore, that the stay order did not need to continue. With this, the Court dismissed the WPs with costs of Rs. 1 lakh each, payable to the Court Bar Clerk Association. The DC was instructed to continue the inquiry proceedings, and the petitioners were instructed to cooperate.
The Court noted that when a complaint or allegation relates to a specific incident or action of an individual member, the firm can designate that person to address the alleged misconduct. However, when allegations involve long-term arrangements between firms and international partners, spanning multiple agreements over many years, holding a single individual accountable as the member answerable is impractical. In such cases, if found liable, the entire firm must be held responsible, ensuring the effectiveness of the Act.
The Court elaborated that if the DC believes a member is inappropriately claiming responsibility for broad allegations, ICAI has full authority to hold the entire firm accountable. It was noted that according to ss. 21A and 21B of the Act, in conjunction with r. 8 of the Rules, the DC can take action against the firm as a whole or individual members as it sees fit, and the parties will be responsible for addressing the allegations.
It was observed that ss. 21A and 21B of the Act supported ICAI’s authority to reprimand, remove, or fine members and firms. The Court rejected the narrow interpretation of r. 8(2) of the Rules proposed by the petitioner, which sought to limit ICAI’s disciplinary powers. The Court noted that different types of misconduct, whether individual-centric or firm-centric, must be addressed appropriately, with firms being held responsible for wide-ranging allegations.
The Court cautioned that it is unacceptable for a single individual to be made a scapegoat for extensive misconduct allegations against multiple groups, entities, or firms within PWG. This holds even if the individual voluntarily offers to take the blame and exonerate the firm and other responsible parties. Thus, the Court directed that ICAI could proceed with disciplinary actions against the firms and their members.
Our Analysis
The auditing profession requires proper oversight, and such mechanisms must be revisited periodically. Failure to revisit and restructure oversight mechanisms can adversely affect the existing chartered accountancy profession and potentially harm the country’s economy. The judgement underscores the critical role of CAs in maintaining financial integrity and economic stability. It emphasizes the profession’s dual responsibility to clients and regulatory compliance, highlighting the potential for widespread economic damage if duties are neglected. The establishment of regulatory bodies such as ICAI is crucial for maintaining professional standards. Any attempt to attribute wide-ranging misconduct to single individuals undermines the regulatory framework’s effectiveness.
The Court’s interpretation of r. 8 of the Rules is significant in allowing the DC to hold entire firms accountable for broad allegations of misconduct. It also signals the importance of regulatory bodies in maintaining public trust in financial reporting and auditing. This ruling addresses the challenge of pinpointing responsibility in complex, long-term cases involving multiple entities and will have a potent impact on professional ethics and conduct. Additionally, the Court’s call for expediting the notification of amendments passed by the Amendment Act of 2022 and addressing the operational framework of multinational accounting firms reflects a proactive approach to evolving regulatory needs in the profession.
End Note
[i] [2024] 164 taxmann.com 142 (Delhi), [03-07-2024].
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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