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Smartphonelog.com—spotdeal--charurajat Companies Bill’12 — Auditing the Auditors

Auditors as a profession are bound to be unhappy with the provisions of Companies Bill 2012 since the Bill seeks on multiple checks & controls to impose on their functions. Hefty penal provisions are also have casting The Statutory Regulator, the Institute of Chartered Accountants (ICAI) is faced with marginalisation with the creation of the National Financiial Reporting Authority (NFRA). A statutory body vested with quasijudicial powers, NFRA is authorised to investigate and penalise Auditors and Accountants for misconduct with the power to even bar Auditors from practising in extreme cases – thereby intruding into what has been ICAI’s exclusive turf. NFRA is also authorised to recommend Accounting and Auditing Policies and Standards directly to the Government, again the sole prerogative of ICAI. Further, if NFRA initiates proceedings, no other Institute or body can initiate or continue proceedings in the same matter. Effectively this will restrict ICAI’s role to acting as a cer tifying body. In undertaking audit assignments, a limit of twenty companies has been fixed for the individual Auditor. In case of Audit firms, the limit is applicable to each partner. Intended to improve the quality of audit, it appears that the approach has been adopted without taking into account the structure, number of businesses, or the classification of companies. What the Bill does not appear to have considered is that all classes of companies that the Bill provides for, such as, One Person Company, Small Company, Dormant Company, Associate Company, as well as the existing versions, listed and unlisted Public and vanilla Private Companies, are to be audited by the same thumb rule. That the basic principles in undertaking the audit of a private company, closely held or otherwise, which is not reliant on debt or any third party funding, would not merit such a rigorous regime, is an issue that should be addressed before the Bill becomes a law. The mechanism of appointment of Auditors has not been substantially changed, except that it is no longer vested with the Board. Auditors are to be appointed at the First Annual General Meeting (AGM) of

the value the continuation of an Auditor can bring in the long term to a company is substantial. Such protections have to be in place and are critical to ensure that people of integrity and quality are attracted to the profession. Sadly – that is what is likely to happen. An Auditor may be removed only by way of a Special Resolution. No re-appointment is permitted. Disqualifications/ restrictions have been imposed on acquiring of the Company’s securities by the Auditor and relatives – nothing new in that one. in the event of acquittal or discharge. III: Audit and Auditors • Every company shall appoint an individual or a firm as an auditor at the first annual general meeting. investment banking and other financial and management services is fully justified on grounds of conflict of interest. There is an additional mechanism for listed companies. are not deterred by the Big Brother is watching you approach. but found innocent? The Bill does not address this. instead of being reappointed. nor any of its agencies. No individual Auditor can continue for more than five years and an Audit firm can serve a maximum two terms of five consecutive years. The 1956 Act on the other hand till the 2000 amendment removed the provision. who shall hold office till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.default to comply can result in a hefty fine. in respect of any liability or costs incurred in defending such action. the Auditor has to submit a statement within thirty days thereof. On resignation. such as internal audit services. no less. Section 245 of the Bill entitles Members and / or Depositors. This is yet another assault on shareholder autonomy and again unwarranted for the smaller classes of companies. The Auditor is expected to be a whistle blower if he comes across any suspect fraud. but subject to Central Government’s prior approval. And this filing does not have to be made with theMCA. provided it is validated at every AGM. What if the Auditor is prosecuted. under the 1956 Act the Auditor was entitled to attend but not bound. Though specifically not provided for. but with the Office of the Comptroller & Auditor General (CAG). The Firms engaging in such activities have to be weaned off within a time frame. This could be subjected to the Audit Committee’s review. That the Bill restricts Auditors from providing other services. Apart from NFRA. The Bill makes it mandatory for the Auditor to attend the AGM. actuarial. taking into account that the track record of the Auditor is unblemished.the Company for a duration of five years. again subject to shareholders ratification. Holding all partners of an Audit firm liable if the representative partner has colluded or abetted in a fraud is only extending the law under the Partnership Act. accounting. this is envisaged under Section 245 of the Bill -the Class Action provision. under Section 201 thereof required the Company obligation to indemnify Auditors. in cases of breach of trust. . misfeasance etc. to claim damages or any appropriate action against Auditors for any improper or misleading statement made in the Audit Report or any fraudulent. unlawful or wrongful act or conduct. providing reasons for the resignation .

documents. • Companies having subsidiaries are required to prepare consolidated financial statement of the company and all the subsidiaries. • Concept of Corporate Social Responsibility (CSR) has . its holding company. management services etc.• In case of listed companies and certain other class of companies as may be prescribed. • Members of the Company may resolve to rotate auditing partner and his team at specific interval. records. However. compulsory rotation of individual auditors in every five years and of audit firm every 10 years has been provided. • Certain new disqualifications for the Auditors have been prescribed including indebtedness to holding/ subsidiary companies. • Limited Liability Partnership is allowed to be appointed as auditor. • Auditor can render additional services as approved by Board or Audit Committee. Subsidiary shall for the purpose of this requirement include associate company and joint venture. investment advise. • In addition to accounting standards. to be presented at Annual General Meeting. register or minutes etc may be kept in electronic form also. its subsidiary like internal audit. Salient features of the financial statement of its subsidiary shall also be attached. auditor cannot render services directly or indirectly to the company. limit is made applicable to each partner • Appointment of first auditors for 5 years shall be subject to ratification by members at every Annual General Meeting IV: Accounts of Companies • The Bill now recognises the fact that books of accounts. • The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as 20 companies. In case of firm. • Companies existing on or before the commencement of this Act are required to comply with the provision of rotation of auditors within a period of 3 years from the commencement of this Act. • The requirement of attaching annual report of subsidiaries under section 212 of the Companies Act 1956 has been dispensed with. auditing standards have also been made mandatory.

• The Board of every company has to ensure that the company spends at least two percent of the average net profits of the company made during the three immediately preceding financial years. The committee shall recommend the policy for CSR to the Board. The Bill provides for conduct of internal audit of certain companies. in every financial year in pursuance of its CSR Policy and in case of failure to do so. out of which at least one director shall be an independent director.been included in the statute and every company having net worth of rupees five hundred crore or more. CSR should preferably be spent in local areas where the company operates. or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors. it shall report the necessary reasons for not spending the same in their Board’s report. .

since public stake is involved in them. there were recommendations that ranged from ensuring more independence to auditors. and so on. prohibiting them from providing non-audit services. The deficiencies and ambiguities in the existing Companies Act. . however. and the ‘audit firm’ cannot be appointed for more than two terms of five consecutive years. However. This will ensure that a company will not have the same auditor for very long. It was also felt to make auditors more accountable to the various stakeholders who rely heavily on their assessments. APPOINTMENT OF AUDITORS The auditors can now be appointed for five years. In the case of a casual vacancy arising because of ‘resignation’ of an auditor. The Companies Bill has incorporated these recommendations. The Bill was passed by the Lok Sabha in the recently concluded winter session. provides that casual vacancy has to be filled by the board of directors within 30 days. 1956. This is rightly so.New Companies Bill — auditing the auditors Soon the financial statements and watchdog’s (read as auditor’s) report will be read with greater reliance and trust --. they can be appointed again after a cooling-off period of five years from their last term of appointment. Listed companies have been put on a more stringent footing. 1956. an auditor’s term is from one annual general meeting to the next one — usually for a year at a time. the Companies Bill also permits members of a company to rotate an auditor partner and his team at such intervals as the shareholders want. The Companies Bill. Realising this need. Under the Companies Act.thanks to the far-reaching changes proposed by the new Companies Bill with respect to auditors and the manner in which the audits will be conducted. Listed companies and such other classes of companies as may be prescribed by the Centre will not be permitted to appoint an ‘individual’ as auditor for more than one term of five consecutive years. 1956. A need was felt to upgrade the audit standards to bring them in line with globally-accepted practices. This is a welcome step. with yearly ratification by the shareholders in the annual general meeting. does not provide for any period within which the casual vacancy in the office of auditor has to be filled. it will need to be filled by the shareholders of the company within three months from the date of recommendation of the board of directors. with respect to audits were felt after a spate of scams that shocked India Inc. To avoid longevity for any auditor. The Companies Act. punishing those guilty of fraud or abetting or colluding in any fraud. providing for rotation of auditors. An auditor cannot audit more than 20 companies.

it misses some crucial reforms. (The author is a partner with J. The final say for the choice of auditor rests with shareholders. have business interest with the company or a relative who is a director of that company. Further. Sagar Associates. however. the appointment of auditors requires approval of an independent audit committee. 2012) Keywords: Companies Bill and auditors . only provides for seeking the recommendation of the audit committee in matters of appointment and filing casual vacancy of an auditor. audit firms will not be able to wash their hands of corporate scams perpetrated in connivance with their audit partners. These steps will help ensure independence of auditors. The Companies Bill. In order to ensure independence. statutory bodies or authorities. A welcome change which will make the auditors more accountable to punish the auditor. REPORTING OF FRAUD The Companies Bill casts an obligation on the auditors to report to the Central Government offence involving fraud. no auditor will be allowed to provide non-audit services such as accounting and book keeping. which means a large controlling shareholders’ decision can influence the choice of auditor. be indebted to it. Therefore. if the auditor has reason to believe that such an offence has been committed against the company by its officers or employees. and so on. an auditor is prohibited from holding any interest in the company or its subsidiaries. In some of the most developed economies. now. for loss arising out of incorrect or misleading statements in the audit report. This will ensure vigilance by the auditors in the performance of his duties. In such cases. internal audit. Further. actuarial services. an auditor can be imprisoned and made liable to pay damages to the company. The views are personal. if found guilty of abetting or colluding in any fraud. such as the role of audit committee in the appointment of auditors.Although the Companies Bill attempts to reform the audit system. Such an auditor will be removed and debarred to act as auditor of any company for a period of five years. both the firm and the partner concerned will be jointly and severally liable. But audit committee can only recommend. for certain violations of duties and obligations.) (This article was published on December 23.

This should be done after careful evaluation as several clauses are intended to be applied to all the 800. It has also brought in more clarity on criminal liability of auditors. Grant Thornton India LLP. a clear majority of businesses across India (90%) believe the need for a more diverse audit market. 66% support mandatory rotation of audit firms (with 6% opposing mandatory rotation) to address the risks of 'over familiarity' between the auditor and the audited company." said Vishesh C Chandiok. However. Further.000+ companies or the 8. Besides. should first be applied to a small subset of the 8000 listed companies." said Chandoik. where the rules need to be prescribed. "There are over 300 places. The other highlight of the Bill is the extent of subordinated legislation. The survey was conducted by a leading global independent research agency (Experian) in August and September 2012 as part of the Grant Thornton International Business Report. changes should be rolled out in phases or applied to a smaller set of companies first. limits the number of companies an auditor can serve to 20. said the survey.000 businesses of which 100 were from India. independent directors and auditors have also been dealt with . whilst again welcome. "I am very glad to see the long awaited bill go through and all steps that even only have a perception of increasing corporate governance should be hailed. According to the survey. The new set of rules are expected to improve the quality of governance as it prescribes for stringent rule for auditors and strengthens the hands of the Serious Fraud Investigation Office (SFIO).Companies Bill prescribes stringent rule for auditors The long awaited Companies Bill was finally passed by the Lok Sabhayesterday. A recent survey conducted by Grant Thornton said that drastic changes in the role of auditor needs to be applied in phases. The roles and responsibilities of directors. National Managing Partner. and 79% believe it would help market confidence if every large public company was audited by two firms rather than one. the approved amendments also include annual ratification of appointment of auditors for five years. Such clauses in the Bill would only be effective when the related rules are framed and notified. provisions like those on rotation of directors and auditors.000+ listed companies. The amended legislation. and based on experience extended further. with 470 clauses. Mandatory rotation may enhance auditor independence by reducing the average audit tenure. a quarterly global business survey of 3. But industry experts are of the view that though the amendment is welcome. It may however also has the unintended consequence of actually increasing the dominance of the largest 5-10 firms in lieu of a number of well-established medium sized firms.

it would be good to ensure when the rules are framed to bring in adequate checks and balances. said the note from the company. to serve as anti-abuse provisions. however.in great detail. .

2013 Audit and Auditors 2.or provide guarantee to the company (including subsidiary/ holding/ associate) . Mandatory Firm Rotation  6.Design and implementation of any financial information system . .  9. Audit Under Companies BillPresentation Transcript   1. Members of the company to decide need for joint audit Joint Audit .5 years for an individual and . 28.10 years for a firm (two consecutive terms of five years) Audit firms having common partner or partners to the outgoing audit firm will also not be eligible for appointment till the cooling off period of the outgoing firm has expired.Accounts &amp.Who has direct/ indirect business relationship with company/ subsidiary/ holding/ associate . A body corporate other than LLP A person . Restriction extended to holding company / subsidiary company. Prohibition on auditor rendering specified non-audit services to the auditee company.12.12 Companies Bill.Investment banking services .Whose subsidiary or associate company or any other form of entity.Who is or his relative or partner holds security. and any other service which may be prescribed Non Audit services – Contd…. Appointment of Auditors Disqualification Mandatory Firm Rotation Non-audit services Joint Audits Power & Duties of an Auditor Additional responsibilities of the Auditor Auditors Liability Role of regulators Removal and Resignation As may be prescribed: 17 times Audit and Auditors . To be appointed for 5 years subject to AGM ratification every year Limited Liability Partnership (LLP) eligible to become Auditor Majority partners should be practicing CA’s Only CAs sh all be authorized to act and sign Intimation of appointment to RoC within 15 days Appointment of auditors  4.Agenda  3. is engaged as on the date of appointment in consulting and non-audit services NEW Disqualification  5.Actuarial services . excludes associate company (transition period: 1 year) Restriction apply to entities associated with audit firm directly/ indirectly Auditor is restricted from providing certain specific services: .  7.Who is auditor in more than 20 companies ..Investment advisory services .Rendering of outsourced financial services Management services. or is indebted .Accounting and book keeping services .Whose relative is a director or key managerial person .Who is convicted of fraud (10 years have not lapsed) .Internal audit Non Audit services  8. Members of a company may rotate audit partner at such intervals as they decide Cooling off period: 5 years Transition period: 3 years Mandatory Firm Rotation – Condt…. Mandated for listed companies (and other companies as may be prescribed) Compulsory rotation of audit is provided for: .

imprisonment introduced in several sections ‘Fraud’ now defined and extreme penalties prescribed in case of conviction (in approximately 18 different situations): .Contravention of specific provisions of the Law knowingly or willfully with the intention to deceive the company/ shareholders/ creditors/tax authorities and . apart for the balance sheet and Profit & Loss account Mandatory attendance of auditor or auditor’s authorized representative who is qualified to be appointed as an auditor at the AGM of the company. new forms of liability Professional or other misconduct: Empowerment of NFRA Punishment for contravention of the law: .Observations or comments on ‘financial transactions’ or matters having adverse effect on the functioning of the company . Institute of Chartered Accountants of India Tribunal – power change / debar auditor / audit firm New regulator – NFRA (replaces NACAAS) with substantial power . 10. An auditor may resign.Any qualification.Auditor to report to the Central Government: offence involving fraud is being committed or has been committed against the company by its officers or employees Additional matters to be reported in the Auditors Report: .fine which not less than the amount involved in the fraud. The auditor of a holding company will have right of access to the records of all its subsidiaries so far as it relates to consolidation of financial statements. he has to file a statement in a prescribed form within 30 days with the Company and Registrar of Companies giving facts and reasons for the resignation Removal and Resignation  17.Imprisonment: Minimum 3 years – Maximum 7 years . 10 lakhs Defense of default not committed willfully removed in many clauses  16.imprisonment .Fine: Rs. Auditor shall now also report on the cash flow for the year and such other matter as prescribed in his Report.Further.6 months to 10 years and . Substantially enhanced. Miscellaneous Punishment for false statement .. .Other contraventions Penalty for fraud Class Action suit Auditors Liability  13.not just standard setter – but also enforcer and monitoring agency and regulator NFRA: Power to debar member/firm : 6 month to 10 years Tribunal: Power to debar member/firm: 5 years Role of Regulators  15.may extend to 3 times the amount involved in the fraud . A company may remove the auditor before the expiry of five year term by passing a special resolution and obtaining prior approval of the Central Government. reservation or adverse remark relating to maintenance of accounts Additional responsibilities of the Auditor  12. Penalties increased by many folds in almost all cases. Thank you . .Adequate internal financial controls system and operating effectiveness of such controls .imprisonment shall not be less than 3 years Auditors Liability – Contd….Penal provisions of clause 447 (fraud) Punishment for false evidence . where the fraud in question involves public interest.  14. The Act provides that it is the duty of the auditor to comply with the auditing Standards Power & Duties of an Auditor  11. However. Whistle Blower: .