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Liabilities of the Auditor under Companies Act 2013

Neethi V. Kannanth , Last updated: 10 April 2023  
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When a person who has engaged an auditor, has suffered some loss, damage or detriment due to non-performance of duty by such auditor in accordance with the accepted professional standards, it shall give rise to the liability of the auditor.

As per the Companies Act, 2013, the liabilities of the auditor are broadly classified as criminal liability, civil liability and liability under section 147.

Criminal Liability under Companies Act, 2013

Misstatement in Prospectus- As per section 34 of the Companies Act, 2013, where a prospectus which is issued, circulated or distributed, includes:

  1. A statement which is false or
  2. A statement which is misleading in form or context in which it is included or
  3. Where inclusion of omission of a matter would mislead

Then every person who authorizes such an issue of prospectus shall be liable under section 447 of the Companies Act, 201

Liabilities of the Auditor under Companies Act 2013

However, if such person proves that-

  1. Such statement or omission was immaterial or
  2. He had reasonable grounds to believe that such statement was true or such inclusion or omission was necessary and he continued to believe so up to the time of issue of prospectus,

Then the provisions of section 447 shall not apply.

False Statement

As per section 448 of the Companies Act, 2013, if any person makes statement:

  1. Which is false in any material particulars, knowing it to be false or
  2. Omits any material fact, knowing it to be material

In any report, return, statement, certificate, financial statement, prospectus or other document which is required by or for the purpose of any of the provisions of the Companies Act, 2013 or rules made thereunder, then he shall be liable under section 447 of the Companies Act, 201

Punishment for Fraud

As per section 447 of the Companies Act, 2013, any person who is found guilty of fraud involving an amount of at least Rs. 10 lakh or 1% of the turnover of the company, whichever is lower, then he shall be-

  1. Punishable with an imprisonment for a minimum term 6 months which may extend to 10 years, and
  2. Liable to fine which shall be equal to the amount involved in the fraud and may extend to 3 times the amount involved in the fraud.

It is also provided that, in case of a fraud which involves public interest the minimum term of imprisonment shall not be less than 3 years.

 

Civil Liability under Companies Act, 2013

Misstatement in prospectus- As per section 35 of the Companies Act, 2013, if a person has sustained any loss or damage as a consequence of subscribing to the securities of a company on the basis of any statement included or on the basis of inclusion or omission of any matter in the prospectus which is found to be misleading, then the company and every person who-

  1. Is a director of the company at any time during the issue of prospectus
  2. Has authorized himself to be named and is named in the prospectus as a director of the company or has agreed to become director of the company either immediately or after an interval of time
  3. Is a promoter of the company
  4. Has authorized the issue of prospectus
  5. Is an expert

Shall be liable to pay compensation to every person who has sustained such loss or damage.

Note- As per section 2(38) of Companies Act, 2013, the term expert includes a chartered accountant, company secretary, cost accountant, an engineer, a valuer and any person who has the power or authority to issue a certificate.

However, if such person proves that-

  1. Having consented to become the director of the company withdraws his consent before the issue of prospectus and that such prospectus was issued without his authority or consent or
  2. The prospectus was issued without his knowledge or consent and upon becoming aware of its issue has given a public notice that it was issued without his knowledge or consent or
  3. Regarded every misleading statement made to be correct and fair representation of the statement
  4. Had reasonable grounds to believe that the person making such statement was competent to make it and the said person making the statement had given his consent to the issue of prospectus and has not withdrawn his consent before filing of copy of the prospectus with the registrar or before allotment.

Liability under section 147 of the Companies Act, 2013

  1. Where an auditor has contravened any of the provisions of section 139, 144 or 145 of the Companies Act, 2013 he shall be punishable with a fine of Rs. 25,000 and may extend to Rs. 5 lakh or four times the remuneration of the auditor whichever is less.
  2. Where an auditor has contravened any of such provisions wilfully or knowingly with the intention to deceive the company or its shareholders or creditors or tax authorities, then he shall be liable for imprisonment for a term which may extend to one year and a fine which shall not less be Rs. 50,000 but may extend to Rs. 25 lakhs or 8 times the remuneration of auditor whichever is less.
 

In addition to the above, he shall also be liable to-

  1. Refund the remuneration received by him from the company
  2. Pay for damages to the company, statutory bodies or authorities or to the members or creditors of the company for loss arising to them due to incorrect or misleading statements made in his audit report.
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Neethi V. Kannanth
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Category Audit   Report

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