Audit & Auditors under the Companies
Bill-2012
The Companies bill,
2012 (Bill No. 121-C of 2011) was passed in Lok Sabha (Lower house of Indian
Parliament) on 18th December, 2012. It is steadily moving towards
becoming new legislation for corporate India. The Companies Act, 1956 suffers
from some defects in the provision relating to audit. These were surfaced after
various scams and fraud that shocked the corporate India. Therefore, it was
important that the entire audit standards and systems were upgraded to bring
them in line with globally accepted practices and make auditors more liable. Therefore,
Companies Bill, 2012 provides for certain reformed provisions in respect
thereof. Provisions related to Audit
& Auditors are mentioned in Sections 139 to 148 of chapter X.
Eligibility, Qualifications of Auditor [Section
141] :
As provided in Section
141(1), a person who is Chartered Accountant is eligible for appointment as an
auditor of the company. If majority of partners of a firm are practicing
Chartered Accountants in India, then such a firm may be appointed as an
auditor. Where a firm including Limited Liability Partnership (LLP) is
appointed as an auditor then only partners who are Chartered Accountants shall
be authorized to act & sign on behalf of the firm.
Disqualifications of Auditor [Section
141(3)] :
The following persons
shall not be eligible for appointment as an auditor of a company –
a) A
body corporate other than LLP
b) An
officer or an employee of the company
c) A
person who is partner or who is in employment of an officer or employee of the
company
d) A
person who or his relative or partner –
i.
is holding any security or interest
(of Face Value more than Rs. 1000) in the company or its associate or its
associate
ii.
is indebted to the company or its subsidiary
or its associate in excess of amount as may be prescribed
iii.
has given guarantee or provided any
security in connection with indebtedness to the third party to the company or its subsidiary or its
associate in excess of amount as may be prescribed
e) A
person or a firm who has direct or indirect business relationship
f)
A person whose relative is a director or
in employment as key managerial personnel
g) A
person who has got audit of more than 20 companies at the time of appointment
or reappointment
h) A
person who has been convicted by court of an offence involving fraud &
period of 10 years has not been elapsed
i)
Any person whose subsidiary or associate
company or any other form of entity which is engaged in rendering of services
which are prohibited under Section 144
Section
141(4) has made it clear that if a person incurs any of the disqualification
mentioned above after his appointment then he shall vacate the office.
Appointment of auditors
[Section 139] :
Every
company shall appoint an individual or a firm as an auditor at its first annual
general meeting. Such auditor shall hold the office till conclusion of 6th
annual general meeting and thereafter till conclusion of every 6th
annual general meeting. Though appointment is for 5 years ratification is
necessary at every annual general meeting.
In
case of listed companies and certain other classes of companies to be
prescribed, compulsory rotation is provided for :-
a)
In case of an individual as an auditor after
one term of 5 years
b)
In case of a firm as an auditor after 2 terms of 5 years
The
auditor after completion of his term/(s) shall not be eligible for
re-appointment for a period of 5 years. If a firm which has common partners
with outgoing firm on the date of appointment, then such firm can not be
appointed as an auditor of the company. Every company shall need to comply with
these requirements with 3 years from date when provisions come into force.
Members
of company may resolve to provide :-
a) The
auditing partner or auditing team shall be rotated at such intervals
b) The
audit shall be conducted by more than one auditor
Remuneration
of Auditors [Section 142] :
The remuneration of
auditors shall be decided at general meeting. First auditor’s remuneration may
be fixed by the board. The remuneration shall include the expenses incurred by
the auditor in connection with the audit and any facility extended to him but
does not include any remuneration paid to him for any other service rendered by
him at the request of the company.
Powers &
Duties of Auditors [Section 143] :
Every auditor shall have right of access of books of accounts and
vouchers of the company. He may also call for information and explanation which
may be necessary for performance. The auditor of the holding company shall have
right to access records of all its subsidiaries in relation to consolidation of
financial statements. The auditor shall make report on account examined by him.
He shall state his opinions of the matters laid down under Section 143(3). If
the auditor has any qualification in any matter, then it shall be supported by
reasons. Section 143(9) states that it is a duty of the auditor to comply with
auditing standards. In the case of a Government company, the Comptroller and
Auditor-General of India (CAG) shall appoint the auditor and direct such
auditor the manner in which the accounts of the Government company are required
to be audited and thereupon the auditor so appointed shall submit a copy of the
audit report to the Comptroller and Auditor-General of India (CAG) which, among
other things, include the directions, if any, issued by the Comptroller and
Auditor-General of India, the action taken thereon and its impact on the
accounts and financial statement of the company. If a company has branch office
outside India then accounts of that branch shall be examined by the auditor or
any accountant or any other person who is duly qualified to do so in accordance
with laws of that country. He is required to prepare and send audit report of
that branch to the auditor of the company. As stated in Section 143(12), if the
auditor has found an offence involving fraud has been committed by officers or
employees against the company then he shall immediately report the matter to
Central Government within prescribed time and manner. If he fails to do so,
then he shall be punishable with fine of between Rs. 1 lakh to Rs. 25 lakhs.
Prohibition of
undertaking of certain services [Section 144] :
Auditor shall not provide following services directly or indirectly to
the company or its subsidiary or its holding company :-
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
i)
Any other kind
of services as may be prescribed
Provided that an auditor or audit firm who or which has been performing
any non audit services on or before the commencement of this Act shall comply
with the provisions of this section before the closure of the first financial
year after the date of such commencement.
The term “directly or indirectly” shall include rendering of services :-
i.
In case of
auditor being an individual, either by himself or through his relative or any
other person connected or associated with such individual
ii.
In case of
auditor being a firm, either itself or through any of its partners or through
its parent, subsidiary or associate entity
Auditors to sign
audit report [Section 145] :
The person appointed as an auditor shall sign auditor’s report or certify
any other document of the company in accordance with provisions of Section
141(2).
Auditors to
attend general meeting [Section 146] :
All notices, communication relating to any general meeting shall be
forwarded the auditor. The auditor himself or his authorized representative,
who shall be qualified to be an auditor shall have right to be heard on any
part of business which concerns him as an auditor.
Removal,
resignation of auditor [Section 140] :
The appointed auditor may be removed from his office before expiry of his
term by special resolution after obtaining previous approval of Central
Government in that behalf. The concerned auditor shall be given opportunity of
being heard.
The auditor who has resigned from company shall file a statement in
prescribed form with the company and the registrar within 30 days from date of
resignation. If the auditor fails to do
so, then he shall be punishable with fine of between Rs.50 thousands to Rs. 5
lakhs.
Special notice is required for a resolution at an annual general meeting
for appointment of an auditor other than retiring auditor. Copy of such notice
is to be sent to the retiring auditor.
Punishment for
contravention [Section 147] :
If provisions of sections 139 to 146 are contravened then company shall
be punishable with fine of between Rs. 25 thousands to Rs. 5 lakhs. Every
officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to one year or fine of
between Rs. 10 thousands to Rs. 1 lakh.
If the auditor contravenes any provisions then he shall be punishable
with fine of between Rs. 25 thousands to Rs. 5 lakhs. If the auditor has
deceived the company or its shareholders or tax authorities, then he shall be
punishable with imprisonment for a term which may extend to one year or with
fine of between Rs. 1 lakh to Rs. 25 lakhs.
Cost audit in
respect of certain companies [Section 148]:
Companies engaged in production of goods or providing such services as
may be prescribed shall be directed to include utilization of material or
labour or to other items of cost in the books of accounts. The audit of cost
records shall be conducted by Cost Accountant in practice who shall be
appointed by board and remuneration shall be decided by members is the manner
as may be prescribed. No person appointed under section 139 as an auditor of
the company shall be appointed for conducting the audit of cost records.
Secretarial
audit of large companies [Section 204]
Every listed company and such class of companies as may be prescribed to
annex with its Board’s report a Secretarial Audit Report, given by a Company
Secretary in Practice, in such form as may be prescribed.
Constitution of
National Financial Reporting Authority [Section 132] :
The Central Government may by notification constitute a National
Financial Reporting Authority to provide for matters relating to accounting and
auditing standards under this Act.
National Financial
Reporting Authority shall :-
a)
make
recommendations to the Central Government on the formulation and laying down of
accounting and auditing policies and standards for adoption by companies or
class of companies or their auditors
b)
monitor and
enforce the compliance with accounting standards and auditing standards in such
manner as may be prescribed
c)
oversee the
quality of service of the professions associated with ensuring compliance with
such standards, and suggest measures required for improvement in quality of
service and such other related matters as may be prescribed
d)
perform such
other functions relating to clauses (a), (b) and (c) as may be prescribed.
Any person aggrieved by any order of the National
Financial Reporting Authority, may prefer an appeal before the Appellate
Authority constituted in such manner as may be prescribed.
Conclusion
Minister for Corporate Affairs (in 2011), Veerappa Moily, had said “Mandatory
rotation of statutory auditors every five years to make them more practical. This
would ensure that promoter or company or management does not change auditor who
is doing good job prematurely.” There are a number of issues regarding
interpretation of these provisions on which clarifications would be required.
The Companies bill, 2012 has bestowed powers to the auditor with certain
responsibilities. The proposed provisions in new act have ensured auditor’s
independence and duties of auditors have been enhanced.
This Article has been shared by Saurabh Wagle. He can be reached at saurabh.wagle@gmail.com
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