1.6       Query

Treatment of “Mehta-Sukhdi” in Accounts.

As per trade practice prevailing in certain mercantile communities there is a system of collecting a certain percentage of Mehta-Sukhdi on sales made or brokerage paid to others, and it is paid away to the staff openly from the proceeds credited in the books of accounts.  However, some business houses do not credit in their books that Mehta-Sukhdi was received, for instance, from brokers on payment of brokerage, because brokers pass receipts for the full amount.  But there is some narration or mark in pencil to indicate the Mehta-Sukhdi deducted from brokerage which is paid in cash. Then the company would pay the Mehta-Sukhdi to its staff as and when it likes. But this payment will be outside the books of accounts.  There will be no Board’s resolution and no system about its distribution. It will depend upon the sweet will of the boss and, therefore, likely mismanagement about it. Under these circumstances, the questions confronting the auditor are :

(1)        Is he to ignore the pencil deduction of Mehta-Sukhdi from brokerage paid, as receipt for brokerage is passed in full?

(2)        Can he inquire about the distribution of Mehta-Sukhdi not treated in the books of accounts?

(3)        Can he compel the board of directors to credit and debit Mehta-Sukhdi in the books of account?

(4)        How far the auditor will be expected to probe into this affair and liable for any misfeasance considering the fact that he has the knowledge of such collection and distribution as an open secret?

(5)        Will it be his duty to inquire from the board or report to the shareholders in this respect ? It is to be borne in mind that the Company does deduct such Mehta-Sukhdi and distributes it without treating it in the books of account.

                                            Opinion                                                                January 30, 1962                                                   

            (1)      Under the mercantile system of accounting which is normally followed by companies, it is necessary to bring into account                  in the books the deduction made for Mehta-Sukhdi and the amounts so deducted should be recorded in the books of account.

            (2)     As the Mehta-Sukhdi should be recorded in the books, the auditor would be entitled to examine all entries relating to the                  account.

            (3)     Covered by the above.

            (4)    The liability of an auditor for misfeasance is in accordance with the normal law on the subject and the Committee is unable                  to advise further in the matter.

            (5)            If in connection with the verification of entries relating to the Mehta-Sukhdi account the auditor finds any matters                  which have a material bearing on the accounts, in respect of each of the items on which he has to report under Section 227 of                  the Companies Act, then he should qualify his report accordingly.

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