Failure To Exercise Due Diligence By CA Is Professional Misconduct, No Dishonest Intent Needed: Gujarat High Court

The Gujarat High Court has recently held that a Chartered Accountant can be found guilty of professional misconduct solely for failing to exercise due diligence, rejecting the argument that absence of dishonest intent shields an auditor from liability.

A Bench of Justices A.S. Supehia and Pranav Trivedi, interpreting the provision in the Chartered Accountants Act that defines professional misconduct (Clause 7 of Part I of the Second Schedule), said, “Thus, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he does not exercise due diligence or he is grossly negligent in the conduct. The Disciplinary Committee and the Council is not required to examine the professional misconduct by including both the contingencies as prescribed in Clause-7, i.e, failure to exercise due diligence and grossly negligence. The Chartered Accountant's misconduct is, thus, required to be examined either he fails to exercise due diligence or he is grossly negligent in his professional duties.”

The ruling came on a reference made by the Council of the Institute of Chartered Accountants of India against Jignesh V Shah, who had served as a concurrent auditor at a Vijaya Bank branch in Ahmedabad.

The case stemmed from an internal inspection carried out in October 2003, which flagged serious irregularities at the branch. These included lending far beyond sanctioned limits, the purchase of bills without authority, and failure to report overdrafts to the controlling office.

As a concurrent auditor, Shah was expected to examine such transactions on a daily basis and immediately report irregularities. Instead, he submitted the required flash reports on December 30, 2003, after the inspection had already revealed the lapses. Earlier reports did not capture several of these issues.

Before the disciplinary authorities and the High Court, Shah argued that there was no allegation of mala fide intent or personal gain. He said the delay was due to personal circumstances, including the death of his father and his wife's surgery. Relying on a Calcutta High Court judgment in Council of Institute of Chartered Accountants vs. Somnath Basu, he contended that negligence without ill-motive should not amount to professional misconduct and that the proposed penalty was excessive.

The High Court rejected this line of defence. Addressing the argument directly, it held, “Such observation if applied in the present case or in the cases of auditor who has failed to exercise his due diligence or is gross negligent in performing his professional duties.” The Bench further said, “The negligence in the performance of duty or errors of judgment in discharging of such duties, as highlighted by the Calcutta High Court will definitely form the expression 'does not exercise due diligence' and the failure of due diligence cannot be subject to any involvement of element of ill-motive.”

On facts, the court found that Shah remained inactive for nearly two months even after the irregularities came to light during inspection. It noted that his explanation based on personal circumstances was “not palatable” and appeared to be an afterthought.

While upholding the finding of professional misconduct, the court reduced the punishment from removal for six months to a reprimand, noting that nearly two decades had passed since the events in question.