Auditors penalized for failure to comment in the audit report about

the non-compliances in the financial statement

Prof R
Balakrishnan
FCS - FCWA

A small brief about this case

1. This is a case where the statutory auditors were penalized for their failure to comment on
certain non-disclosure by a company in their financial statement. Company Law provisions
makes is clear that the financial statement should be in the specified form as provided for
difference class (s) of companies in Schedule III of the Companies Act 2013. The financial
statements prepared should be in accordance with the accounting standards.

While preparing the financial statement, in respect of non-current investments the company
is required to disclose in its balance sheet under each classification, the details of
investments made with various body corporate such as subsidiaries, associates, joint
ventures, controlled special purpose entities etc. Further to the above, the company also
need to disclosure the aggregate value of quoted and unquoted investments and diminution
in value of investments

In this particular case under discussions, the company has not disclosed the above in its
financial statements which is a contravention of the provisions of the companies Act which
affecting the true and fair view of the state of affairs of the company. Consequently the
statutory auditor had not made any comment on these non-disclosure in their audit report
and therefore, failure to make the comment on this aspect in the audit report, was the
default / non-compliance committed by the auditors for which the Registrar of Companies of
Patna & Official Liquidator levied penalty on the statutory auditors by passing an
adjudication order.

Audit report and Auditors' responsibility

2. The statutory auditor is required to carry out the audit of the financial statements along
with statement of changes in equity and statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies and
other explanatory information and to provide an opinion that to the best of their information
and according to the explanations given to them, the aforesaid financial statements give the
information required by the Companies Act, 2013 in the manner so required and give a true
and fair view in conformity with the accounting principles generally accepted in India, of the
state of affairs of the Company as at the yearend date and total comprehensive income
(comprising of profit and other

comprehensive income), changes in equity and its cash flows for the year then ended. The
auditors are also required to state the basis for their opinion in the audit report
In short, any non-disclosure, non-compliance committed by the company is required to be
commended upon in the audit report which is affecting the true and fair view of the financial
statement by way of qualifications, comments, and observations and even drawing the
attention of the members by way of emphasis of matter.

Relevant provisions under the Companies Act 2013 on disclosure requirement in

financial statement. (relevant to this case)

3. As per Schedule III of the Companies Act 2013, under the head "Non-current Investment"
the Company is mandatorily required to disclose in its balance sheet under each
classification, details of the names of the body corporate indicating separately whether such
body corporates are (i) subsidiaries; (ii) associates; (iii) joint ventures or (iv) controlled
special purpose entities with whom investments have been made and the nature and extent
of the investment so made in each such body corporate (showing separately investments
which are partly paid)

In regard to investments in the capital of partnership firms, the names the firms (with the
names of all their partners, total capital and the shares of each partner) is also required to
be disclosed. Further to the above, the following disclosures are also called for:-

(a)   Aggregate amount of quoted investments and the market value thereof.
(b)   Aggregate value of unquoted investments.
(c)   Aggregate provision made for diminution in value of investments.
Penal provisions for default / non-compliance

4. Relating to penal provisions, the section 450 of the Companies Act 2013 states that – if a
company or any officer of a company or any other person contravenes any of the provisions
of this Act or the rules made thereunder, or any condition, limitation or restriction direction
or exemption in relation to any matter has been accorded, given or granted and for which no
penalty or punishment is provided elsewhere in the Act, the company an every officer of the
company who is in default or such other person shall be liable to a penalty of ten thousand
rupees and in case of continuing contravention with further penalty of one thousand rupees
for each day after the first during which the contravention continues, subject to a maximum
of two lac rupees in case of a company and fifty thousand rupees in case of an officer who is
in default or any other person.

Consequences of any default

5. To understand the consequences of any default while in complying with the provisions
relating filing of annual return and annual financial statements, let us go through the
decided case law by the Registrar of Companies of Patna & Official Liquidator on 17 th
February 2023.

The relevant case law on this matter

6. We shall go through the adjudication order dated 17th February 2023 passed by the
Registrar of Companies of Patna & Official Liquidator bearing No.ROC/ PAT/ SCN/ 143/38519
/26634 passed by the Registrar of Companies-cum-Official Liquidator of Patna, in the matter
of adjudication of penalty for violation of section 143 of the companies Act 2013 in the
matter of M/s. Angel Gems and Jewellery Private Limited

Details of the company

7. M/s. Angel Gems and Jewellery Private Limited is a company registered under the
Companies Act 1956 with effect from 22nd November 2011. This company is having its
registered office at Hanuman Chowk, Gangajala Saharsa - Saharsa in the state of Bihar and
the company falls under the jurisdiction of the Registrar of Companies of Bihar and the
Registrar of Company is situated at Patna. The company currently have two on its board. The
company is in the jewellery and gems business.

Auditors of the company

8. As per the details of the filing by the company available at the Ministry of Corporate
Affairs portal, the company had the statutory auditors as under:-

Auditors of Angel Gems and Jewellery Private Limited

Sr. no Financial year ending on Name of the auditor

1 31st June 2015

Samir Kumar Paloi
2 31st June 2016

Facts about the Case

9. The following are the relevant details / events relating to this particular case.

The Registrar of Companies, during his scrutiny of the documents submitted by the company
via MCA portal observed the following for the financial years 2014-15 and 2015-16 as under.

(i)   The company had shown an amount of Rs. 1,11,00,000 and Rs 2,99,75,000 under
the heading non-current investments for the year 2014-15 and 2015-16 respectively.
(ii)   The company had failed to disclose the details of the name of the body corporate
indicating separately whether such body corporates were (i) subsidiaries; (ii)
associates; (iii) joint ventures or (iv) controlled special purpose entities with whom
the investments were made.
(iii)   The company had also not disclosed the nature and the extent of investment so
made in such body corporate (showing separately investments which are partly
paid).
(iv)   The company had also failed to disclose the basis of valuation of such investment as
required under the provisions of schedule III of the Companies Act 2013.
With the above observations, the Registrar of Companies came to a conclusion that the
financial statement had affected the true and fair view of the state of affairs of the company
leading to a contravention of the provisions of section 129 read with schedule III of the
Companies Act 2013.

Further to the above, the Registrar of Companies had also observed from the Auditor's
report submitted by the company that the auditors had failed to comment on the above
aspects in their audit report for the aforesaid two financial years.

Action taken by the regulator

10. The Registrar of Companies, based on the verification of the records at the Ministry of
Corporate Affair Portal issued show cause notice on 4th January 2023 for default under
section 143 of the Companies Act 2013 asking the auditor to show cause as to why action
cannot be taken against the auditor for not making the comments in their audit report on the
non-disclosure from the part of the company.

Response from the auditors

11. In response to the adjudication notice, the Registrar of Companies had received a reply
on 17th January 2023 from the auditors stating that the auditor was unable to trace the
original copy of the financial statement of the company.

Conclusion reached by the Registrar of Companies / Adjudicating officer

12. The Registrar of Companies found the reply received from the auditor was
unsatisfactory. Based on the facts and his observation from the documents verified by him he
came to a conclusion that the auditor had contravened the provisions of section 143 of the
Companies Act 2013 and therefore the auditor was liable for penalty under section 450 of
the Companies Act 2013 for the financial years 2014-15 and 2015-16.

Therefore, the Registrar of Companies/ Adjudicating Officer decided to pass the adjudication
order on this matter for the default committed by the auditor.

As regards to imposing lesser penalty

13. The Registrar of Companies after considering the following levied the penalty as
applicable to a small company.

S. Considerations by the Registrar of Companies

no
1 As per clause 85 of section 2 of the Companies Act 2013, small company means a
company whose paid up capital and turnover shall not exceed rupees four crore and
rupees forty crore respectively.
2 As per Ministry of Corporate Affairs portal, the paid up capital of the company i.e. M/s.
Angel Gems and Jewellery Private Limited was having the following as per the financial
statements submitted by the company for the years 2014-15 and 2015-116
(i)   Rs 9,64,000, as paid up capital and
(ii)   the turnover of the company for the last three years were was
(a)   Rs 15,374 for the financial year 2014-15
(b)   Rs. 43.70,230 for the financial year 2015-16

3 Therefore, the benefits of small company was extended to this auditing firm while
adjudicating penalty.

The order passed by the Registrar of Companies / Adjudicating Officer

14. The Registrar of Companies / Adjudicating Officer, having considered the facts and
circumstances of the case and after taking into account the provisions of Rule 11 of
Companies (Adjudication of Penalties) Rules 2014 (as amended) imposed a penalty of Rs
10,000 (ten thousand) on the chartered accountant as per table below for violation of section
143 of the Companies Act 2013 for the financial years 2014-2015 and 2015-16.

Nature of default Violation Company No of days Penalty as Penalty

of section default per 450 of imposed as
the Act per 446B of
the Act
Rs Rs Rs
Non reporting of Section Chartered Financial 10,000 5,000
violations/ 143 Accountant year 2014-15
compliance made by and 2015-16
10,000 5,000
company in audit
report
Total Penalty 10,000

(a)   The order directed that the partners of the audit firm shall have to make the
payment of penalty by way of e-payment (available on Ministry website
www.mca.gov.in) under "pay miscellaneous fees" category in MCA fee and payment
services within 90 (ninety) days of this order. The challans / SRN generated after
payment of penalty through online mode shall have to be forwarded to the office of
Registrar of Companies.
(b)   The order stated that an appeal against this order may be filed in writing with the
Regional Director, Eastern Region, Ministry of Corporate Affairs, Kolkata within a
period of sixty days from the date of receipt of this order, in form ADJ setting forth
the grounds of appeal and shall be accompanied by the certified copy of this order.
(Section 454(5) and 454(6) of the companies Act, 2013 read with the
companies(Adjudicating of Penalties) Rules, 2014)
(c)   The order also spelled out that if the noticee does not pay the penalty amount
imposed herein within a period of ninety days from the date of the receipt of the
copy of the order, he shall be punishable with imprisonment which may extend to six
months or with fine which shall not be less than twenty five thousand rupees which
may extend to one lakh rupees or with both.
(d)   The order drawn the attention to section 458(8) of the Companies Act, 2013,
regarding the consequences of non-payment of penalty within the prescribed time
limit, in the event of noncompliance of this order which provides that in case of
default in payment of penalty, prosecution will be filed under section 454 (8) (ii) of
the companies Act, 2013 at the cost of the notice, without any further notice.
Despatch of the order

15. The order was sent by the Registrar of Companies in terms of the provisions of sub-rule
(9) of Rule 3 of Companies (Adjudication of Penalties) Rules 2014 as amended by Companies
(Adjudication of Penalties) Amendments Rules 2019 to the chartered accountant and also to
the Regional Director, Eastern Region, Ministry of Corporate Affairs at Kolkata.

Complete order for reading

16. The readers may like to read the complete adjudication order bearing No. bearing
No.ROC/PAT/SCN/143/38519 /26634 passed by the Registrar of Companies-cum-Official
Liquidator of Patna dated 17th February 2023, in the matter of adjudication of penalty for
violation of section 143 of the companies Act 2013 in the matter of M/s. Angel Gems and
Jewellery Private Limited and the relevant website is https:// www.mca.gov.in/ content/ mca/
global/en/data-and-reports/ rd-roc-info /roc-adjudication-orders.html (titled as order for
penalty for violation of section 143 of the Companies Act with respect to Angel Gems and
Jewellery Private Limited – Anupam Sarkar under Patna ROC posted on 17 th February 2023)

Conclusion

17. Accurate and proper compilation of financial information of a company coupled with the
transparent disclosure, in a manner that is standardized and understood by all the
stakeholders, is central to the credibility of the corporates and soundness of investment
decisions by the investors. The preparation of financial information and its audit, therefore,
regulated by the Ministry of Corporate Affairs through the Companies Act 2013 which
provides stringent penalties for any default / non-compliance.
The company is required to ensure the compliance as per the provisions of the Companies
Act 2013 read with the relevant Accounting Standards that are applicable to a company and
the financials to be as per the format specified by Schedule III and also need to disclose the
required details as per the Schedule III requirement so that the financials gives a true and
fair view.

On the part of the statutory auditors, it's their duty to carry out the audit and see that the
company has complied with all the requirements that are needed and then provide an
opinion in the audit report that the financials are reflecting the true and fair view. Any non-
compliance / non-disclosure / default made by the company which is affecting the true and
fair view, is required to be commented by the auditors in their audit report and they should
issue a qualified audit report. If auditors fails to make the comment then they are liable for
penalty as we have seen in this case,

Therefore the audit firm need to take all the precautions to ensure that their audit report is
issued after the thorough checking of the adherence of the provisions, disclosure
requirements as per the Schedule III requirement and also confirming with the Accounting
Standards.

Reference:-

1.   Companies Act 2013

2.   Companies (Adjudication of Penalties) Rules 2014
3.   Companies (Adjudication of Penalties) Amendment Rules 2019
4.   Adjudication order bearing No.ROC/PAT/SCN/143/38519 /26634 passed by the
Registrar of Companies-cum-Official Liquidator of Patna dated 17th February 2023,
in the matter of adjudication of penalty for violation of section 143 of the companies
Act 2013 in the matter of M/s. Angel Gems and Jewellery Private Limited
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