1.22     Query 

Appointment of a relative of a director of a

bank as  an auditor of the bank

1. Mr. ‘A’ is a Chartered Accountant, holding a certificate of practice. Mr. ‘A’ has been approached for appointment as an auditor of a scheduled bank. He does not suffer from any of the disqualifications mentioned in section 226 of the Companies Act.

2. Mr. ‘B’, the cousin of Mr. ‘A’, is one of the members of the Board of Directors of the scheduled bank, though they are not relatives as per the definition of relative, given in section 6 of the Companies Act.

            3.The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

            (1) Whether Mr. ‘A’ can accept the appointment as auditor of the scheduled bank.

(2)Whether Mr. ‘A’ is disqualified from accepting the appointment as auditor u/s. 226 of the Companies Act, or any other regulations of the R.B.I. applicable to the scheduled banks.

(3)Whether there will be any misconduct on the part of Mr. ‘A’ if he accepts the appointment as auditor in the aforementioned circumstances.

  Opinion                                                                                                                          July 11,1986

 1.  The Committee notes that Section 226 of the Companies Act, 1956, does not prohibit appointment of a relative of a director of a company. Section 30 of the Banking Regulation Act, 1949, prescribes that auditor of a bank should be qualified under section 226 of the Companies Act, 1956.

2.The Committee further notes that the Council of the Institute has issued the following Notification, which appears at page 57 of the ‘The Chartered Accountants Act, 1949,” published by the Institute:

“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 Institute of 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 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”.

3.            The Committee is of the view that as per the querist, since Mr. A’s relationship with Mr. ‘B’ is not covered by the definition of ‘relative’ under section 6 of the Companies Act, 1956, Mr. ‘A’ need not make a disclosure in his report as envisaged in the aforesaid Notification.

4. On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by querist is as below:

(i)            Mr. ‘A’ can accept the appointment as auditor of the scheduled bank.

(ii)        Mr. ‘A’ is not disqualified from accepting the appointment as auditor u/s 226 of the Companies Act, 1956 and Section 30 of the Banking Regulation Act, 1949.

(iii)       There will not be any misconduct on the part of Mr. ‘A’ if he accepts the appointment as auditor in the circumstances of the query.

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