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Chapter X on Audit and Auditors

P.R. Sethuraman 
on 08 February 2018

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The Companies Act 2013 vis a vis Amendment to the chapter
(Sections 139 to 148)

Introduction:

Any amendment is to 'mend' so as to 'end' any confusion that has set in the provisions of any Act. In other words, amendments are made to bring the provisions of any Act update to the present day 'tinge', so that the provisions of the Act echo the sentiments of the time for better serve.

As has been spelt out in my earlier article on Chapter IX on Accounts Of Companies, The Companies Amendments Act 2017 covers a wider range of The Companies Act 2013. Quick studies of the amendments will high light three broad categories -

  • Certain amendments involve omission of existing provisions,
  • Certain amendments are new additions and
  • Certain other amendments are substitution of existing provisions.

Since Chapter X deals with audit and auditors, these amendments are to be addressed with all the merit it deserves especially by auditing community. Some of the amendments are cosmetic or clarificatory in nature. But, there are other amendments with reference to section 141 on Eligibility, Qualifications and Disqualifications of auditors that auditors have to take note of to avoid any untoward/ improper. Refer details underneath. There are other amendments that inter-alia cover fine and Penalty that offer certain relaxation.

Certain amendments may still be necessary to make a fair play in relation to rotation of auditors (videSec.139 (2) 0f the Companies Act 2013

Section 139 on Appointment of Auditor:

By omitting the first proviso to sub section 1 that provided for ratification of members at every General meeting of the appointment made as per the provisions of sub section 1 and under Rules framed there under, the ritual of ratification at every general meeting is done away with.

The amendment is primarily to cut short avoidable repletion to allow more time for the other most important jobs of the General Body Meetings.

Section 140 on Removal, resignation of auditor and giving of special notice:

The Auditor who has resigned from a company shall file with the Registrar within 30 days from the date of resignation or in the case of Government companies vide Section 139(5) with the CAG indicating the reasons and other facts culminating to his resignation. If not complied with, it is punishable under sub section 3 with fine which shall not be less than Rs 50 thousand with potency to extents to Rs 5 Lakhs which has been relaxed in the Amendment to fifty thousand rupees or the remuneration of the auditor, whichever is less, but which may extent to Rs. 5 Lakhs.

This is apparently to take care of small auditors.

Section 141 on Eligibility, qualifications and disqualifications of auditors:

Clause (i) of sub section of 3 is wholesale substituted. The said sub clause deals with non-eligibility for appointment as an auditor of a company.

To understand the gravity of the amendment, the original clause as well the amended one are quoted verbatim to appreciate the ineligibility for appointment of auditor of a company.

' any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in section 144' - the original/ old one

The amended one reads as follows:

' a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company.

Explanation. - For the purposes of this clause, the term "directly or indirectly" shall have the meaning assigned to it in the Explanation to section 144'Amended One

A cursory study of the amendment vis a vis the primary Act quoted above speaks volume - 'the term "directly or indirectly" employed in Section 144 of the Act has been highlighted in the explanation to the amended clause to alert the auditors of the looming consequence. In other words, the primary section only speaks of specialized services in Section 144, the amended one is also emphasizing on the term 'directly or indirectly' that is explained vividly to the proviso to Section 144(1) 0f the Act. Therefore, the auditing community has to necessarily make a proper examination to study as to whether they have any assignment of that nature that may infringe the provisions of the said Amendment. In this respect, abundant caution is needed to cull out any such assignments .If there is, it is attended to immediately to avoid any untoward.

Section 143 on Powers and duties of auditors and auditing standards:

There are 3 amendments in the form of substitutions which are more in the nature of clarification.

The proviso to sub section (1) is amended to include the right of access to the records of the Associate companies also beside subsidiaries.

In terms of the Amendment to clause (i) of sub section (3), internal financial controls with reference to financial statements" are emphasised in the place of Internal Financial Control in place. To some extent, it is a sort of relief in limiting the function.

In sub section (14) the word ' in Practice' with reference to Cost accountant in practice is omitted.

Section 147 on Punishment for contravention:

Under the provisions of sub section (2), if an auditor contravenes any of the provisions of section 139, 143, 144 or section 145, the auditors shall be punishable which shall not be less than Rs. 25 thousand but which may extent to Rs. 5 Lakhs. But, as per the amendment, an another scale for counting fine for extended level is introduced, that is, four times of auditor's remuneration (whichever is less). This may help the auditors in computing the penalties in the event of extension of penalties.

If an auditor contravenes such provisions with intention to deceive the company or its shareholders etc vide the proviso to sub section (1), apart from the imprisonment for a term which may extend to one year as prescribed in the Act, there is also a fine that is now modified with fine which shall not be less than fifty thousand rupees (against one Lakhs in the original Act) but which may extend to twenty-five lakh rupees or ' eight times the remuneration of the auditor, whichever is less' as amended in the act.

In sub-section (3), in clause (ii), for the words "or to any other persons", the words" or to members or creditors of the company" shall be substituted.

This will limit the vicinity of liabilities.

in sub-section (5), the following proviso shall be inserted, namely:

'Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable'.

This Amendment makes it clear that involved partner will only be liable.

Section 148 on Central Government to specify audit of items of cost in respect of certain companies:

The Amendment is more related to cost accountants. In the Amendment, cost accountant is retained and ' in practice' is omitted. (sub section 3 and in the proviso to sub section 5)

The Institute of Cost accountant of India is substituted in the place of Institute of Cost and Works Accountants of India vide explanation to sub section 1.

Conclusion:

The amendment to various sections under Chapter X on Audit and Auditors are already handled with all the ramifications under respective sections. These amendments are mainly to mend so as to end the confusions that crept in respective provisions of the primary Act.

Now, it is the time to focus on amendments that are required to have a fair play on 'Rotation of Auditors' under section 139(2) of the Act to be read with Rule 5 under Chapter X on ' Audit and auditors'. Nobody questions rotation of auditors but the manner in which it is done is questionable and highly shocking. Rotation per se is cosmic activity. Blood rotates to eschew clot. But, the way in which rotation is prescribed and launched appears to be highly hasty, rash and rushed with attended consequences that are highly vivid to see by one and all. A lion's share of audits have moved to Top four (?) , no to Big four leaving the Indian audit firms in the lurch loitering without direction. ICAI are to take care of the entire auditing community and not a segment. If a part of the body 'bloats', it is only 'swelling' that is bad health and not symptom of good health. This is to be nipped in the bud before taking alarming proportion. What's the way out?

The only remedy is to go for a joint audit with one constituent to be mandatorily an Indian audit firm in respect of listed companies or companies belonging to such class or classes as prescribed under rules related to the section. If it is not attended to, by ICAI through the good office of MCA, sooner than later, it is apprehended there will be only uncertain future for the Indian audit firms. Let ICAI arise, awake, stop not till the gloomy picture is erased lock, stock and barrel. Cartel appears to be on the horizon that should not be allowed.

The next amendment that is required is not to the Companies Act but to the Annexure 1 on illustrative Annual Firm Personnel Independence Confirmation (vide SQCI).

The first declaration is 'During the period, I or my immediate family members did not have any investments in an entity to which I rendered assurance services etc. Read this with Section 141(3)(1)) to be read with the rule concerned 10 on disqualifications of auditor.

To quote, (1) For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh:

Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities:

Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest

It is high time the ICAI has make necessary amends in line and tune with The Companies Act.


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