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March 25, 2022

Know New Liabilities of CA Firms in case of Misconduct of Partners

by Mahesh Mara in Circular and Notifications, ICAI

Know New Liabilities of CA Firms in case of Misconduct of Partners

The Chairperson of the Standing Committee on Finance having been authorised by the Committee present this Forty-fifth Report on ‘The Chartered Accountants, The Cost And Works Accountants And The Company Secretaries (Amendment) Bill, 2021’

‘The Chartered Accountants, The Cost And Works Accountants And The Company Secretaries (Amendment) Bill, 2021’, introduced in Lok Sabha on 17 December, 2021 was referred to the Committee on 22 December, 2021 for examination and report thereon, by the Speaker, Lok Sabha under Rule 331E of the Rules of Procedure and Conduct of Business in Lok Sabha.

An independent witness submitted the following suggestion: “Establishment of Indian Institutes of Accounting. This proposal is for establishing a string of Indian Institute of Accounting (HA) that will raise the standards of accounting education and offer competition to the Institute of Chartered Accountants of India.

On the issue of the liability of firms for misconduct of partner, firms are not covered in the existing Acts and the proposed changes in the Bill are as under:

“21A(6) Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Board of Discipline is of the opinion that any such member who is a partner or owner of a firm, has been repeatedly found guilty of misconduct mentioned in the First Schedule during the last five years, the following action may also be taken against such firm, namely:

  1. prohibit the firm from undertaking any activity or activities relating to’ the profession of a chartered accountant in practice for such period not exceeding one year; or
  2. impose such fine as it may think fit, which may extend to twenty-five Ian rupees.

B(6)Where on the basis of evidence brought on record or during the course of an inquiry pertaining to a member, the Disciplinary Committee is of the opinion that any such member, who is a partner or owner of a firm has been repeatedly found guilty of misconduct mentioned in the Second Schedule or in both the First Schedule and the Second Schedule, during the last five years, the following actions may also be taken against such firm, namely:—

  1. prohibit the firm from undertaking any activity or activities relating to the profession of a chartered accountant in practice for such period not exceeding two years; or
  2. suspend or cancel the registration of the firm and remove its name from the Register of firms permanently or for such period as it may think fit; or
  3. impose such fine as it may think fit, which may extend to fifty lakh rupees.”

The ICAI submitted the following suggestion on this issue:

“Clause (a) of sub-section (6) regarding imposing penalties on firm needs to be re-worded having regard to the following instances (which are not exhaustive).

  • ‘A’ is a partner simultaneously in more than one firm at the time of commission of misconduct and repeatedly found guilty. In such case, whether on all the firms penalty is liable to be imposed or only on one firm.
  • At the time of commission of misconduct, ‘A’ is a partner in one firm and subsequently becomes partner in another. In such cases, whether penalty is imposed on both the firms or on which firm the penalty can be imposed is not getting cleared.
  • After committing repeated misconducts and found guilty thereof, if ‘A’ dissolves the said firms and establishes a new firm, whether the new firm can be penalised for his misdeeds.
  • At first time, A is found to be guilty for misconduct as defined under first schedule and second time, he is found to be guilty for misconduct as defined under second schedule or both schedule. There can be a reverse situation also. The provisions need to be more clarificatory.
  • There may be a situation where four partners of a single firm are found to be guilty of misconduct as defined under first schedule and I or second schedule, but none of them have been found repeated guilty. Now it is not clear whether any action can be contemplated on the said firm in this case. Further to above, ICAI is also concerned for a firm having multiple partners, paid assistants, employees and article assistant. As per the proposed provision, if any one of the partner is found to be repeated guilty, action would be initiated against the entire firm including removal of its name from the register. However, it is felt that this would lead to unnecessary hardship to all other partners, paid assistants, employees etc. who are dependent for their livelihood on the firm without any fault of them.”

The Ministry of Corporate Affairs furnished the following comments on the above suggestion.

“With regard to liability of firm, it is submitted that the proposal of fixing liability of firm has been introduced in all the three Acts through the present amendment bill along with a separate chapter on registration of firms. It is also relevant that the Institute has raised no objection as regards introduction of separate chapter on registration of firms rather there was a longstanding demand of including a separate chapter on firms and also the power to the Council to penalise them.

The action against member who is a partner or owner of a firm has been provided in the bill for misconduct under the First Schedule to be inquired by Board of Discipline and for misconduct under the Second Schedule to be inquired by Disciplinary Committee. The repeated misconduct on part of a partner of a firm in Ise last five years (rather than the same or identical offence) would be considered for taking action against the firm also. Here repeated misconduct refers to misconduct on part of a partner or owner of a firm on more than one occasion. Therefore, different formUlation based on times of repeated offences is not required.

A professional charged with misconduct and found guilty may be partner in more than one firm. However, for the purpose of this clause, partner(s) of the firm on behalf of which he/she has carried out the audit/certification and is found to be involved in a misconduct would only be covered

The proposed formulation in the Bill has been vetted by Legislative Department.”

The recommendation of the High Level Committee Report on the above issue is as under:

“At present, the jurisdiction of the disciplinary mechanism (in all three
professional Institutes), extends only up to its individual member and does not in

any manner implicate the firm/partnership with which such member is associated
or may be so employed. Following the Satyam scam, a High Powered Committee appointed within the ICAI, had proposed to Government of India, Ministry of Corporate Affairs in 2010 that the Chartered Accountants Act, Regulations and Rules be amended such that ICAI could “proceed against the flan, including imposition of ban, where the partners and the members of an audit Learn are found to he guilty of gross negligence / fraudulent activities”.

With reference to the disciplinary process, this High Level Committee, recommends that:

  1. It is logical and also high time that the firm must also be held culpable to the extent as may be prescribed for the specific misconduct of the defaulting professional.
  2. In any disciplinary proceeding, the Complainant must furnish the name of the firm/ partnership to which the CA/CS/Cost Accountant belonged at the time when the lapse in professional conduct took place.
  3. Similarly, in the final order passed by the adjudicating bodies of the three Institutes, the name of the firm must be stated upfront in terms of specific penalties imposed, as relevant.
  4. And finally, in order to bring the firms of members also under the umbrella of disciplinary mechanism, the HLC recommends that the proposal of lCAI contained in letter dated 15th December 2010 should now be considered as soon as feasible. If accepted, this would require amendments in the Acts and Rules of the respective Institutes.

The inclusion of firms under the purview of the disciplinary mechanism is one of the objectives of the Bill. This was necessitated by various incidents including the major corporate accounting scandals, huge scams that shook the economy, the discovery of shell companies after demonetization and the lack of action taken or inability to take action against firms. In this regard., the Committee are surprised that the Ministry has taken an unduly long time in taking action on the recommendations of the High Level Committee in 2017. The Committee feel that the ICAl’s opposition to penalising firms for the repeated misconduct of its partners is unfounded as the firms have a fiduciary relationship with their partners and are equally responsible for their deeds. Further, it may be noted that the Bill does not intend to penalise firms for a single misconduct of its partner but repeated misconduct within a span of five years. The Committee, therefore, endorse the amendment and hope that these are not cosmetic changes and would rather go a long way in preventing financial scams in the future.

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