Interpreting “Professional Matters of Conduct” under Companies Act 2013

Under the Companies Act, 2013, a duty has been imposed on the Audit Committee/Board vide Rule 3 that “provided that while considering the appointment, the Audit Committee or the Board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or any Court.”

A question has arisen whether professional matters of conduct mean matters and proceedings dealing with complaints and enquiries relating to professional misconduct initiated vide the provisions of CA Act by ICAI or pending before National Financial Reporting Authority to be constituted as per Section 132 of the Companies Act, 2013, as the case may be or cases/proceedings pending before other forums are also required to be disclosed?

OPINION

  1. Rule 3 the Companies (Audit and Auditors) Rule, 2014 (hereinafter referred to as ‘the Rules’) indicate the manner and procedure of selection and appointment of auditors. While considering the appointment of auditors, the Audit Committee or the Board, as the case may be, is mandated to have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or any Court. Under Rule 4, the auditor appointed needs to submit a certificate, inter alia, that the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
  2. “Professional matters of conduct” has not been defined under the Companies Act, 2013 (in short ‘Act’ or ‘the Act’). The Act also contemplates constituting National Financial Reporting Authority (NFRA) under section 132 and NFRA shall have, amongst others, the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949. The explanation attached to Section 132(4) of the Act, indicates that for the purposes of Section 132(4), the expression “professional or other misconduct” shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.
  3. Before we venture into meaning of “professional or other misconduct” as section 22 of the Chartered Accountants Act, 1949, we must conclude whether the terms “professional matters of conduct” and “matters of professional or other misconduct” used in the Act convey the same meaning. The Oxford dictionary defines the word ‘professional’ as ‘relating to or belonging to a profession’. Importing this meaning, the professional matters of conduct will ordinarily mean matters of conduct relating to a profession. The “matters of professional misconduct” also conveys the same meaning. The word ‘conduct’ connotes manner of behaviour and ‘professional misconduct’ would, therefore, mean to be behaviour in relation to a profession. We, therefore, do not find any perceptible difference in the meaning of two different phrases. The intent of law is the underlying factor.  The purpose, which the Rules seek to achieve, is to ensure that audit committee or board should take a decision after being fully aware of the pending proceedings in relation to conduct or misconduct of auditors relating to their profession. In a sense, the audit committee or board are concerned towards professional competence of the auditors and while deciding on their appointment must consider all pending cases of professional conduct (or alleged misconduct).
  4. Let us now proceed to look at the meaning of ‘professional misconduct’ under section 22 of the Chartered Accountants Act, 1949, which reads as under: “For the purposes of this Act, the expression” professional misconduct” shall be deemed to include any act or omission specified in any of the Schedules, but nothing in this section shall be construed to limit or abridge in any way the power conferred or duty cast on the Council under sub- section (1) of section 21 to inquire into the conduct of any member of the Institute under any other circumstances.”
  5. The aforesaid clearly implies any act or omission relating to professional conduct (or misconduct) or other misconduct of a chartered accountant. Such matters can be dealt with by the Institute of Chartered Accountants of India (ICAI) presently and by NFRA once section 132 is notified or brought into effect. In an appellate or writ proceeding, such matters could lie before the Appellate Authority constituted under the Chartered Accountants Act, 1949 or with any High Court or Supreme Court.
  6. The result of the above discussion is that professional matters of conduct will be confined to proceedings against a chartered accountant under the Chartered Accountants Act, 1949, irrespective of their pendency at ICAI/NFRA or writ/appellate level. The criminal or civil proceedings will not fall within the meaning of phrase “professional matters of conduct”. The intent of legislature is clear and unambiguous or else it would not have used the phrase ‘professional matters of conduct’. The matters relating to professional conduct (or misconduct) can be dealt only by ICAI/NFRA and not by any other court. If the intent was to include all pending cases against a chartered accountant/partner of audit firm, it was open to the Parliament to use different phrase. The civil or criminal proceedings have different connotations and consequences and though they may emanate from the act of omission or commission as a chartered accountant, they cannot fall in the domain of phrase “professional matters of conduct”.  Under civil or criminal laws of the country, a person cannot be held guilty for ‘professional misconduct’, which power vests with ICAI presently and may also vest in NFRA after notification of section 132. As an extension, any competent authority or court would mean appellate authorities or appellate/writ court dealing with “professional misconduct” under the Chartered Accountants Act, 1949.
  7. In the conspectus of the above discussion, only cases falling within the First Schedule or Second Schedule of the Chartered Accountants Act, 1949 need to be stated by the auditors, whether pending before ICAI/NFRA or at any appellate or writ stage. The pending proceedings before the civil court or criminal court, not being ‘professional matters of conduct’, need not be stated.

Disclaimer: This opinion is based exclusively based on my interpretation of law, which may differ to other person. Existence of any other factual or historical background  might require a conclusion different from the one expressed herein.

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