Auditor should not sign the audit report in a hurry – Penalty of Rs. 10,000 u/s 271-J of Income Tax Act.

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With the last few days for Tax audit there are many people who have still not finalized their books of accounts and then they will go to the Chartered accountant on the last moment to finalize and file audit report for them. There are many young Chartered Accountant’s as well as some experienced CA who just with the fear of loosing a client conduct the audit without checking anything as they would think if I would refuse him there are many CA who would do such audit and take fees so it’s better we do it and such clients also don’t pay proper fees, as we all know how much fees a CA get’s for such small audit’s and we do such audit because there was not much liability on us, atleast not in monetary terms. However, now with the introduction of section 271J even the CA have monetary liability for signing such audit report.

Let’s read what section 271J has to say which was inserted by Finance Act, 2017 w.e.f. 01.04.2017 in the Income Tax Act:

“Without prejudice to the provisions of this Act, where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an accountant or a merchant banker or a registered valuer has furnished incorrect information in any report or certificate furnished under any provision of this Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct that such accountant or merchant banker or registered valuer, as the case may be, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate.”

From the above section it’s clear that this section is not only applicable to CA but also merchant bank and registered valuer for certificate as well as any report issued under provisions of this act i.e. it is applicable to valuation done for land in case of capital gain by registered valuer or valuation of unlisted shares by merchant banker and the penalty for providing and certifying such false information would be Rs. 10,000.

As mentioned above we all know we are not paid much fees for such audit and this penalty needs to be paid by auditor and not assessee and you will come to know about this after 1-2 year probably during the assessment proceeding of such assessee and there are chances that you will not be in contact of that assessee and more than that it will also create a bad impression of you as an auditor in front of the Assessing officer and with advancement of assessment proceedings and automation of penalty you can receive a penalty notice and you will have no chance but to pay such penalty from your earning and in last minute audit there are chances you make some unintentional error.

Now, I know we put some observations that we have not conducted full 100% audit and audit has been conducted on sample basis but there are many CA’s who don’t put any observations and give a clean report and are also pressurized by client’s to issue a clean report as they need to submit it somewhere, may be with the bank for a loan. At that time this young CA should also think of themselves and put the necessary observations rather than signing such Audit report just with the fear of loosing one client.

Since the client thinks of himself and wants to save himself from penalty of not conducting Audit, which is 0.5% of total turnover/ receipts or 1.5 lakh whichever is lower, we must also think of our penalty and reputation when we take such assignments and this would come only when all the practicing CA decide to conduct audit properly and not accept any last minute complicated Audit because there are various case laws and instances using which assessee can save himself from such huge penalty but a CA won’t be able to save himself from such penalty and this can also attract some disciplinary actions so it’s better to sign audit report which are properly examined by you.

In the last few years we have seen various cases of involvement of CA in issuing some incorrect reports which has lead to some fraud and various GST fraud as well. We must try to follow fair practice and keep the dignity of this profession maintained.

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