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Audit and Auditors under the Companies Act, 2013 & Draft Rules

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     on  18 November 2013    

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There is a huge tremendous Change in new Provisions under the Companies Act, 2013 with respect to Auditors as compared to the old Companies Act, 1956. The new Act intents to improve Corporate Governance and to further strengthen regulations. The Onus and responsibilities of Auditors becomes cumbersome. The Auditors should be very careful in their work. They cannot simply rely upon their juniors. Lot of responsibilities imposed under the Act & Rules.

 

From the perusal of the provisions with respect to Auditors, it clearly reveals that, Auditor should not listen to management advice during the finalisation of accounts and it should be purely independent finalisation and Financial statement should reflect true and fair view of the business otherwise auditor is held responsible.

 

In this article, I try to enlighten some of the provisions deals with auditors, their responsibilities and penalties.

 

Considerable Changes were made considering the interest of the all stakeholders.

 

Chapter X of the Companies Act, 2013 (Section 139 to 148) dealt with Audit and Auditors.

 

Sl No

Section

Provisions

1

139

Appointment

 

First Auditor to be appointed in a Board Meeting within 30 days of registration of the Company else within 90 days in an EGM.

 

Appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

 

Ratification by members at every annual general meeting

 

Written consent of the auditor to be obtained

 

The Company has to inform the auditor  and  file form for appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed

 

Listed company or a company belonging to such class or classes of companies as may be prescribed ( Still has not prescribed even in the rules) , shall appoint or re-appoint—

 

(a) an individual as auditor for more than one term of 5 consecutive Years ; and

(b) an audit firm as auditor for more than two terms of five consecutive years

 

3 years transition period will be given to comply this requirement. However, according to the draft rules,  period of   5 years will be calculated from retrospective effect

 

In case of  casual vacancy caused, vacancy can be filled by  the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting

2

140

Removal of Auditor

 

Auditor cannot be removed from the Company without Central government approval and member’s approval by special resolution is required

 

The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar indicating the reasons and other facts as may be relevant with regard to his resignation.

 

If the auditor does not comply with above said requirement  he or it shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees

 

Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years

3

141

Disqualifications

 

The following persons shall not be eligible for appointment as an auditor of a company, namely:—

 

(a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;

 

(b) an officer or employee of the company;

 

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;

 

(d) a person who, or his relative or partner—

 

is holding any security  or indebtedness or guarantee or provided any security in connection with the  indebtedness of any third person to the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company exceeding Rs.1 Lakh

 

(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary  of such holding company or associate company.

 

(f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;

 

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;

 

(h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;

 

(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.

4

142

Remuneration of auditors.

 

Board may fix remuneration of the first auditor appointed

 

Remuneration of the auditor of a company shall be fixed in its general meeting

5

143

Powers and duties of auditors and auditing standards.

 

In case the auditor has sufficient reason and information to believe that an offence involving fraud which is likely to materially affect the company, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than thirty days of his knowledge or information, with a copy to the audit committee or in case the company has not constituted an audit committee, to the Board.

 

Materiality shall mean: (a) fraud(s) that is or are happening frequently; or (b) fraud(s) where the amount involved or likely to be involved is not less than five percent of net profit or two percent of turnover of the company for the preceding financial year.

 

The auditor’s report shall also state—

 

(a) whether he has sought and obtained all the information and explanations;

 

(b) whether, in his opinion, proper books of account as required by law have been kept by the company;

 

(c) whether the report on the accounts of any branch office of the company audited by a person other than the company’s auditor has been  sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

 

(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;

 

(e) whether, in his opinion, the financial statements comply with the accounting standards;

 

(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;

 

(g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

 

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith

 

(i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls;

 

(j). Such other matters as may be prescribed.

6

144

Auditor not to render certain services.

 

(a) accounting and book keeping services;

(b) internal audit;

(c) design and implementation of any financial information system;

(d) actuarial services;

(e) investment advisory services;

(f) investment banking services;

(g) rendering of outsourced financial services;

(h) management services; and

(i) any other kind of services as may be prescribed:

7

145

Auditor to sign audit reports

 

Auditor  shall sign the auditor’s report

 

Any  qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

8

146

Auditors to attend general meeting

 

All notices and other communications relating to any general meeting shall be forwarded to the auditor of the company.

 

Auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor

9

147

Punishment for contravention.

 

If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

 

if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

 

Where an auditor has been convicted under above provision, he shall be liable to— (i) refund the remuneration received by him to the company; and (ii) pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

 

Other Penalties on Auditor

 

Class action suit against the Auditors U/s  245 .

 

To protect investor interest, Section 245 of Companies Act 2013 has introduced the concept of class action suits, through which shareholders, depositors can initiate legal action against the company and auditors in the event of fraudulent activity. A class of shareholders or deposit holders  can now claim damages or compensation or demand other suitable action against the auditor, including the audit firm, by filing an application with the NCLT.

 

Prosecution by NFRA (National Financial Reporting Authority)  U/s 132

 

NFRA may investigate either suo moto or on a reference made to it by the Central Government on matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949 chartered accountants. If professional or other misconduct is proved, NFRA has the power to make order for

 

(A) imposing penalty of—

 

(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and

 

(II) not less than ten lakh rupees, but which may extend to ten times of the fee  received, in case of firms;

 

(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

 

Punishment for fraud U/s 447

Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

 

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

 

What is Fraud?

 

“fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

 

Punishment for false statement U/s 448

 

If  any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,—

 

(a) which is false in any material particulars, knowing it to be false; or

(b) which omits any material fact, knowing it to be material, he shall be liable under section 447.

  

Conclusion

 

Role and responsibilities of the Professionals have got amplified in the Act & Draft Rules. Punishment and penalties are huge.... apart from the ICAI Disciplinary committee, there will be a NFRA.  One thing is very clear that, we should act in our own and no one should influence us otherwise we have to face the consequences.

 

Prepared by:

CS.P.Eswaramoorthy,

B.Sc., FCS.,

Published in Corporate Law
Source : No Source Specified
Views : 25217

Other Articles by P ESWARAMOORTHY




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