Expert Advisory Committee

1.41 Query

Acceptance of Audit in certain cases

Whether acceptance of audit in the following cases would amount to professional misconduct?

(a) A public trust wherein the father of the Auditor is a trustee.

(b) In a co-op. organisation wherein the father of the Auditor is a Director or a promoter or a chairman.

(d) An Institution or Association of which the Auditor is a member.

Opinion September 17, 1977

Attention is drawn to the following notification issued by the Council of our Institute as appearing on page 57 of the Member’s handbook under the Chartered Accountants Act, 1949 (corrected up to 1^st January 1977): -

“No. 1-CA (44)/71: In exercise of the powers conferred by clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute Chartered Accountants of India specifies that a member of the Institute shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statement of any business or enterprise in which one or more persons who are his “relatives” within the meaning of Section 6 of the Companies Act, 1956 have either by themselves or in conjunction with such member a substantial interest unless he discloses the interest also in his report.

Explanation : For this purpose the expression “substantial interest” shall have the same meaning as is assigned thereto under Explanation 3 to Section 13 of the Income Tax Act, 1961”.

It will be observed from the above Notification that a disclosure would be necessary in cases where “relatives” within the meaning of Section 6 of the Companies Act, 1956 have either by themselves or in conjunction with such member a “substantial interest”.

The expression “substantial interest”, however, has been assigned the same meaning as is assigned thereto under Explanation 3 to Section 13 of the Income-tax Act, 1961, vide Explanation to the above Notification. The relevant provisions of Explanation 3 to Section 13 would apply to a concern which is a company if 20% of the voting power are held by the concerned persons. If it be any other concern, “substantial interest” would be determined with reference to entitlement of not less than 20% of profits of the concern.

The cases referred to by the querist in his query do not relate to a company. The queries will, therefore, require to be dealt with as in relation to any other concern referred to in clause (ii) of Explanation 3 to Section 13. The very nature of this Clause indicates that it could possibly apply only to profit making organisations. Applying this test, the acceptance of the audit of a public trust where the father of the Auditor is a Trustee should not attract the provisions of the Notification.

In the case of a Co-operative organisation, the position would be the same if the father of the Auditor is merely holding a place of management without being entitled to profits.

If, however, all the relatives of the Auditor taken together are in law entitled to 20% or more of the profits of the Co-operative organisation, then a disclosure as contemplated in the Notification would become obligatory.

The same would be the position with regard to situation (c) raised in the query.

With regard to the last query, the concerned Auditor would be entitled to accept the audit of the institution or association on the assumption that he is not a member of the Managing Committee of such institution or association as in such a case there could be no conflict of interest.

It may, however, be pointed out that even if the aforesaid Notification may not strictly apply to the above-mentioned situations, yet in accordance with the ethical standards of our Institute, it should be interpreted with strictness and scrupulosity so that the image of the professional integrity and independent judgement of the Auditor is not impaired. It is, therefore, suggested that in such cases it would be desirable to make a proper disclosure of the relationship of the Auditor in his report.

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