ICAI Fines Auditor Rs 2 Lakh for Failing to Flag Rs 29 Crore Bank Fraud in Audit Report
The Respondent, CA Sunil Kumar, was appointed as the concurrent auditor of the Rajendra Place branch for one year from May 2014 to April 2015. At this branch, a fraud worth Rs 29.22 crore was discovered involving fake LCs (letters of credit). The bank was involved in the unethical practice of discounting fake LCs. The bank accepted LCs that were issued on plain paper signed by two officials of the bank, without looking for any authentication or confirmation from any local branches. The beneficiaries had opened new accounts, and the bills were discounted on their behalf without checking the transactions in the accounts. These irregularities were never reported by the auditor, which caused a huge loss to the bank.
As per the respondent, he had checked the LCs’ discounts, and these documents were properly signed and stamped, so he did not suspect anything. He submitted that there was no data related to the position of bills discounted or purchased, and therefore, there was no question of suspecting it.
As an auditor, the respondent was supposed to check the transactions and report any suspicious activity. His duty was to monitor the use of newly opened accounts and ensure that they were genuine. He was supposed to raise red flags when the discounting of LCs was done by opening new accounts. However, in his audit reports, he mentioned “no record found” and failed to point out the irregularities, even though the LCs were of high value in nature.
The Disciplinary Committee of ICAI noted that the auditor must verify not only the documents but also the internal records of the Branch to check whether these are overdue or the outstanding amount is within the delegated powers of the respective officers. The committee further said that if records were not provided, the respondent auditor should have raised the issue with higher authorities of the bank instead of mentioning “No record found.”
The committee concluded that the auditor failed to show due diligence and did not report the irregularities regarding the discounting of LCs and the fraudulent methods used by the branch in his audit reports. Due to this, the auditor was found guilty of professional misconduct within the meaning of Items (5), (6), (7) and (8) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, and the committee reprimanded CA Sunil Kumar and also levied a fine of Rs 2 lakh.
