Judgment :- RAMACHANDRA IYER C.J. This is a reference under section 21 of the chartered Accountants Act, 1949, by the council of the Institute of chartered Accountants, which found the respondent guilty of professional miscounducy, namely, gross negligence in the conduct of professional duties. the respondent is a chartered accountant at Madras who commenced practicing as an auditor in the year 1931. After a few years of practice he left the profession and took up war service. t was during the years 1944 to 1946. On being discharged form the service he was employed in one of the several of the companies promoted by the late Dr. Alagappa chettiar, a prominent businessman and a great philanthropist of his tom. But the respondent did not continue there for any lengths of time: he reverted to his profession as auditor in 1951. It is stated on hi behalf that he has not been very successful in the profession either. His previous association with Dr., , Alagappa chettiar presumably secured for him a place as an auditor in the Alagappa Textiles (kitchen) Ltd., for the years 1954, 1955, and 1956. Alagappa textiles (Cochin) Ltd. was register3d on November 23, 1943. the respondent does not appear to have been connected with it in any way till he was actually appointed as auditor of the company for the year 1954. Till then audit ;was conducted by other auditor. Audit for the years 1954, 1955 and 1956 of alagappa Textiles (cochin) Ltd. was completed by the respondent on September 26, 1955, November 5, 1956, and august 25, 1957, respectively: he appended to the balance sheets of these years a clean certificated in the usual form, namely, that he had examined the balance-sheet and obtained all information and explanations required and that in hi opinion the palace-sheet and profit and loss accounts were dawn up in conformity with the law and that the balance-sheet exhibited a true and c or34eat view f the state of the company's affairs and that the books of account had ;been ;kept by the company as required by the Indian Companies Act. All was however not well with the Alagappa Textiles (Cochin) Ltd. Several of the financial transactions and those involving large amounts were closely inter-linked with several them companies promoted by the late Dr. Alagappa Chettiar whose death in April, 1957, brought about repercussions. All was however not well with the Alagappa Textiles (Cochin) Ltd. Several of the financial transactions and those involving large amounts were closely inter-linked with several them companies promoted by the late Dr. Alagappa Chettiar whose death in April, 1957, brought about repercussions. the financial condition of Alagappa Textiles (Cochin) Ltd. was apparently in a mess and in September, 1958, the Central government appointed an inspector to investigate the affairs of the company. the inspector submit his report in the following year and it disclosed, inter alas, that the respondent did not carry out a proper audit after due convocation of the assets and liabilities and that the balance-sheets and certificates appended there to did not contain the necessary information. the Registrar of companies, Kerala State, there upon laid a compliant to the council of the Institute of chartered Accountants, charging the respondent with professional misconduct. On the basis of the several constancies of reminiscence in the performs of his duties, eight charges were framed against the respondent by the Council of chartered Accounts: but the former denied all of them. an enquiry was then conducted by the disciplinary committee of the Institute of chartered Accountants. It submitted its report, which was acted by the council of the Institutes that the respondent was guilty of six out of the eight charges laid against him holding that he was guilty of gross negligence in the conduct of his professional duties in that he did not carry out proper and co plate agate after making a proper verification of the assets and liabilitiesIt must, however, be pointed out at the outset that wet are not concerned in the present case whether the person in management of the company were guilty; of any malpractice in relation to the transactions entered in.9 by them. there is nothing to show on the material placed before us (and indeed this has been conceded) that the respondent was at any time aware of the somewhat quotable financial dealings on behalf of the company by those in management. The only charge edgiest the auditor is that he was guilty of gross negligence in the discharge of his duties as an auditor in having appended an unqualified and clean report to the balance-sheet for the three years in question. The only charge edgiest the auditor is that he was guilty of gross negligence in the discharge of his duties as an auditor in having appended an unqualified and clean report to the balance-sheet for the three years in question. The Disciplinary committee of the Council in a carefully prepare report has dealt with the several charges laid against the respondent and Mr. swaminathan, who apparatus on his behalf, did not contest the propriety of the conclusion arrived at b;y the Committee. But learned counsel has contended that the findings arrived at by the Disciplinary committee as accepts4d by the ?council did not reveal any moral turpitude on the part of the respondent but at is worst the cas4e was one of inefficiency on the part of the auditor which dies not merit any sever punishment. It is, therefore, necessary to examine briefly the chargeable which have been held to the proved against the respondent The first charge relates to the balance-sheet of the bar 1956. A sum of Rs. 11, 90, 081-5-7 was written off in the profit and loss account of the company for the year ended 31st December, 1956. The actual resolution of the board of did4actors writing ;off the amount in question was passed after the case of the year, on 25th May, 1957. the sum in question consist of six items, namely (I) Rs. 10, 000 die form Into-Agencies; (2) Rs. 75, 000 die form Alagappa Estates Ltd. (3) Rs. 22, 162-0-9 due form Umayal weaving establishment Ltd. (4) Rs. 57, 069-14-7 due form vijay kumar Trading corporation; (5) Rs. 6, 18, 890-15-4 due form alagappa corporation Ltd. (n liquidation) and (6) Rs. 4, 06, 958-6-II due form Ramal and co. Ltd., managing agents of Alagappa Textiles Ltd. It is not disputed that the late Dr. Alagappa chettiar was the promoter and the moving spirit in all the debtor companies aforesaid and that he had the real and ;controlling voice thereinItem No. 1; this am out is alleged to have been advance to the companion the year 1953 but there was no voucher to evidence the advance form any person who could bind the company, though there was a receipt given for the amount by Dr. Alagappa chettiar. But Dr. Alagappa was not even a director of the company. Alagappa chettiar. But Dr. Alagappa was not even a director of the company. the balance sheet for the year 1953, which was certified by another auditor, showed take debt as a good one. this was repeated in the balance-sheets for the years 1954 and 1955 for which the respondent was rest9endurable. In the balance-sheet for the years 1956, however, relying on the profit and so account prepared by the companioned the resolution of the board of directs that was passed before the audit was ;made ;for that year, the debt was included among those written-off. the respondent failed in his detain not verifying while certifying the balance-sheets for the years 1954 and 1955, whether there was a proper voucher for the debt in question which he accepted as a good done. Even in the year 1956, the respondent hassle have inquired as to the circumstance user which the debut came to be written off. Neither of these things was done by the respondent Item No. 2: This item is alleged to have been advance in the year 1953. It is unnecessary to consider the circumstances under which the debit was actual made agent the concerned debtor. It was considered as a doubtful debt in the balance-sheet for 1953. This was repeated in the believes-sheets for the tow following years till it was ultimately written off. there was considerable doubt whether there was a liability on the part of Agappa Estates Ltd. for the amount in question, credit having been originally given to another company of Dr. Alagappa, Jupiter Airways ltd., which had later gone into liquidation. closer investigation and report was certainly called for in the circumstance of the caseItem No.3 was a liability of the years 1952-53 and in the balance sheet of 1953, it was considered doubtful but in the palace- sheets of 1954 and 1955 which were certified by the respondent the debt was considered god, though unsecured. straggly enough, the respondent simply accepted the profit and loss account writing off the debt in the year 1956. there was enough material before the respondent form the various palace-sheets themselves to rouse his suspense as to how this debt which was in its origin considered doubtful became good during the years 1954 and 1955 and how stodgily enough it came to be written off in the following year. there was enough material before the respondent form the various palace-sheets themselves to rouse his suspense as to how this debt which was in its origin considered doubtful became good during the years 1954 and 1955 and how stodgily enough it came to be written off in the following year. that matter required a cover attention but the resident did not bestow the same nor did he mad annoy reference to it in his certificate Item No.4 This is a liability which came into existence on December 312, 1952. In the balance-sheet for 1953, it was considered as doubtful, but in the balance-sheet of 1954, it was shown as gods the respondent being in a way responsible for the preparation of the later balance-sheet. In the next year this dot was referred to a doubtful and in the following year 1956 it was writer off. No verification appears t have been done by the respondent anytime about the asset. He merely accepted what the profit and slow account of the ;company stated Item No. 5 this is a liability on a running account in the books of the company. the debit against the company was for more than six lakhs by the end of 1953. It was kindred doubtful at the time of the a8unit for that year. It continued to be shown as doubtful during the following years, till it was actually written off. the Alagappa corporation Ltd. went into votary liquidation in 1954. the respondent did not take pains to enquire whether any claim was made in respect the respondent to have looked into the matter further and disclose it in his audit reportThe last item is a debit against the managing agents. It was the duty of the auditor to have investigated the accounts t find out whether the vows amounts that were transferred against the managing agents were properly done. this is one of the instances where scrutiny was necessaries a closer examination might have led to the detection of improper dealings in regard to the moneys of the ;company. for example, remuneration was cr.4edited to the account of the managing agents when such remuneration was not at all payable. There were transfers of the liabilities of the other companies. Why and under what circumstances which transfer were made had never been looked into by the respondent. for example, remuneration was cr.4edited to the account of the managing agents when such remuneration was not at all payable. There were transfers of the liabilities of the other companies. Why and under what circumstances which transfer were made had never been looked into by the respondent. All such transfers of liabilities follows a pattern, namely, of advances made to companies in which Dr. Agappa Chettiar was presumably interested. some of those advances were transferred to Ramal and Co. Ltd., managing agents and ultimately, after the liability swells to the amount referred t earlier, the whole sum was written off. there can be little doubt that the counsel was fully justified incoming to the concession that in respect of the transactions aforesaid the auditor was grossly;negligent in not qualifying his reports annexed to the balance-sheets The next charge relates to the failure of the respondent to investigate the existence of cash vouchers for payment made bathe company during the year 1956 to the extent of Rs. 37, 000. The third charge relates to certain unauthorized loans made to Dr. Alagappa chettiar college Endowment Trust. Although the investment can be said to be good ones in. sense, it was the duty of the auditor to have pointed out that the advance were made without proper sanction. charge No. 4, another charge which has been held to be proved, concerns the balace sheet of the year 1955, which showed that certain shares owned by the company in another companies fully paid up which infant it was not so. there was a further charge in regard to the missions which were the result of his undue dependence on the apparent entries in accounts maintained by the company and on the word of person in management of the company show beyond doubt that the auditor did not apply how mains and verify the correctness of the amounts. In several cases he had even failed to investigate into the existence of the assets and he evidently assumed as true the particulars referred to in the earlier balance-sheetsThe true purpose of an audit is to examine the accounts and record maintained by the company weather view to establish whether the former completely reflected the transaction to which they purported to relate. It is par of the duty of an auditor to see whether the transactions refer4d to in the accounts are themselves supported by authority. It is par of the duty of an auditor to see whether the transactions refer4d to in the accounts are themselves supported by authority. Section145 of the Indian companies Act, 1913 (which corresponds to section 2 27 of the 1956 enactment), deals with the duties of a person auditing the account of a company. In In re London and General Bank (No.2) Lindley L.J., referring to the duties of an auditor of a company, observed at page 682 "His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty; is ;confined to that. But then comes the question, How is he to ascertain that portion? the answer is, By examine the books of the company. at he dies not discharge his duty by doing this without inquiry and without taking unutterable3e to see that the books them selvbes when the company true portion. He must take reasonable care to ascertain that they do so. Unless he does this his audit would be worse than an idle farce. Assuming the books to be so kept as to shoo the true portion of the company the auditor has to frame the balance-sheet showing that position according to the books and to certify that the balance-sheet presented is correct in that sense. But his first duty is to examine the books, not merely; for the pure9se of asserting what they do show, but also for the purpose of satisfying himself that they show the true financial portion of the company...Am auditor, however, is not bold too more than exercise reasonable case and skill in making inquiries and investigation. He is ;not an insurer; he dies not guarantee that the book do correctly show the true portion of the affairs He dies not even guarantee that the books do correctly show the true portion of the company affairs he dies ;not even guarantee that this balance-sheet is accurate according to the books of the company. if he did he would be responsible for error on his part, even if he were himself divided without any want of reasonable case on his part, say, by the framudulent concealment ;of a book form hi. His obligation is not sonorous as this. if he did he would be responsible for error on his part, even if he were himself divided without any want of reasonable case on his part, say, by the framudulent concealment ;of a book form hi. His obligation is not sonorous as this. Such take to be the duty of the auditor ' he must be honest--i.e., homiest not certify what he dies not believe to be true, and he certifies it true. what is reasonable ace in any particular case must depend upon the circumstances of that case. where there is nothing to excite suspicion every little inquiry will be requirable sufficient, and in practice I believe business men select a few cases at fissured, see that they are right, and assume the other like them are correct ;also. where suspicion is aroused more case is obviously necessary: but still an auditor is not but t exercise ;more than risible care an skill, evening a cased of suspension, and he is perfectly justified in acting on the opinion of an expert where special knowledge is require." * Thus when the auditor in the instant case found that in the year 1956 large sums of maunder form other were consulted and written off as bad debts while the very same debts in the balance-sheets of the previous years are shown as good ones, he was ;certainly bond to investigate into the circumstance leading up to the writing off of such debts, to as certain whether there were vouchers for such debts and if the away of the opinion for ;the voucher amount owned in respect of those debts that they were valueless, to discloses, that fact in his report and not merely give a clean certificated o the believes-sheet in the way he did. Even if there were vouchers, which were apparently require, it would have be necessary for him to see that those voucher were for the amounts received and were given by person entitled to bind the debtor company. In Exhort, if there were circumstances in the accounts of the company which called for an enquiry, the auditor must have made that enquiry ;and disclosed the result of such enquiry to the direct5tore and the shareholders In In re Kingston Cotton Mill Co. In Exhort, if there were circumstances in the accounts of the company which called for an enquiry, the auditor must have made that enquiry ;and disclosed the result of such enquiry to the direct5tore and the shareholders In In re Kingston Cotton Mill Co. (No.2.) at page 288, Lopes L.J. observed "It is the duty of an audit (of a company) to bring to bear on the work he has to perform that skill, care, and caution which reasonably competent, careful, and caution auditor would use. what is reasonable skill, care, and coercion must depend on the particular circumstances of each case. An auditor is not bold to be a detective or, as was said to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watchdog but not a bloodhound... If there is any thing calculated to excuse suspicion he shout probe it to the motto/. but in the absence of anything fog that king he is ;only bold to be risible cautions and careful." * As we pointed out earlier, there was sufficient material before the auditor to excite his suspicion and the lead that he should have done was t apprise the shareholders in his report of the circumstances under which the detbs came to be written off which were once shown the god Mr. Swaminathan appearing for the respondent (auditor) has contended that as it had not been found by the Council of the Institute of chartered Accountants that the debts were not really bad debts, a resolution authorizing the writing off of such debits was perfectly valid and that the conduct of the auditor in accepting the profit and loss account could not be considered as improper. there is a confession so ideas i this. It may be that the writing off of the debts as irreverable was justifies. why they came to be treated as bad debts was the question that shout have engaged the attention of the auditor. Suppose in origin a debt wa a bogus one and later it was written off as a bad one. the writing off was justified, but the auditor should find the reason, viz., that the debt was a bogus one. He should first have referred to the existence of the detbs and inquired into ;the circumstances that led up to their being treated as bad debts. the writing off was justified, but the auditor should find the reason, viz., that the debt was a bogus one. He should first have referred to the existence of the detbs and inquired into ;the circumstances that led up to their being treated as bad debts. We, therefore, agree with the council of the Institute of chartered Accountants that the respondent had been grossly negligent in auditing the accounts of the Alagappa Textiles (Cochin) Ltd. and failed thereby to discharge his ;duties The counsel had recommended that the respondent should be removed form membership of the Institute of a period of two years. Ordinarily, the punishment ;suggested cannot be said to be inappropriate in cases of this king. But we must refer to certain circumstances which will have a veering on the question before considering tree appropriate punishment. There is more than suspicion in our minds that the management of the company conscious of their ;irregular waif deluding with the finances of the concern pitched upon this comparatively unsuccessful auditor who could be overawed by the status an apparent respectability of those in virtue control of the management and persuaded him to accept their ;own statements and assurances as to the property father dealings. the respondent evidently subscribed to the certificate believe being that everything was above board in the conduct of the financial affairs of the company by the directors, It is, no doubt, true that the could not state his won of auditing with; a presumption that everything was above board in the conduct of the financial affairs of the company by the director. It is, no doubt true that he could not start his work of auditing with a resumption that every thing that he was asked to audit ;was suspicious; but as stated earlier there were circumstances in the account books of the company; to exist his suppose. In such cases he faced in his duty when the accepted the assurance of person like Dr. Alagappa chettiar and persons who had the management of the company; after his death. He should never have taconite into account the sessile portion of those in management of the comply while he was done his duets as auditor. In such cases he faced in his duty when the accepted the assurance of person like Dr. Alagappa chettiar and persons who had the management of the company; after his death. He should never have taconite into account the sessile portion of those in management of the comply while he was done his duets as auditor. We have no hesitation in holding that the respondent did not conform to the stags of efficient and entirety with the institute of Chartered Accountants expect of its member, but at the same time we consider that in the circumstances of the case when particular there has been no suggestion of any moral trapped on the part of the responds, it would ;be sufficient if we administrative, which we here by do, a sever reprimand to the respondent for his grow negligence in discharging his duties as an auditor. Learned causal for the respondent assures us on behalf of his ;alien that if future he would do his ;duties as auditor in stretch conformity with the standards of efficiency and integrity expected of him by the Institute of chartered Accountants. No order as to costs.