Auditor Responsibility under Companies Act 2013

BY: CS R.S.BHATIA

INTRODUCTION COMPARISON- COMPANIES ACT, 2013 & COMPANIES ACT, 1956

APPOINTMENT/RE-APPOINTMENT OF AUDITORS ROTATION OF AUDITORS RESIGNATION/REMOVAL DISQUALIFICATIONS POWERS AND DUTIES OF AUDITORS.

CONTENTS

AUDITOR NOT TO RENDER CERTAIN SERVICES AUDITOR’S LIABILITY IN CASE OF UNLAWFUL ACTS.

AUDITOR’s LIABILITY TO THIRD PARTIES IN RELATION TO CONTENTS OF PROSPECTUS

DUTIES AND RESPONSIBILITIES OF AN AUDITOR IN CASE OF MATERIAL MISSTATEMENT

PUNISHMENT FOR CONTRAVENTION PENALTIES ON AUDITOR

CONTENTS

There are tremendous Changes in new Provisions under the Companies

Act, 2013 with respect to Auditors as compared to the old Companies Act,

1956. The new Act intents to improve Corporate Governance and to further

strengthen regulations. The Onus and responsibilities of Auditors becomes

cumbersome. Lot of responsibilities imposed under the Act & Rules.

CAUTION

 Perusal of the provisions with respect to Auditors, clearly reveals that,

Auditor should not listen to management advice during the

finalization of accounts and it should be purely independent finalization

and Financial statement should reflect true and fair view of the business

Otherwise auditor will be held responsible.

INTRODUCTION

Section NameSection No. as per New Companies

Act,2013 

Section No. as per Old

Companies Act, 1956

Appointment of Auditor 139 224

Removal, resignation of Auditor and giving of special notice

 140 225

Eligibility, Qualifications & Disqualifications of Auditors

141 226

Remuneration of Auditor 142 224

Powers and Duties of Auditor and AS 143 227, 228

Auditors not to render certain services. 144 New insertion

Auditor to sign Audit report 145 229,230

Auditor to attend General Meeting 146 231

Punishment for contravention 147 232, 233

Central Govt. to specify audit of items of cost in respect of certain Companies.

148 233B

Chapter X of the Companies Act, 2013 (Section 139 to 148) deal with Audit and Auditors SECTION 139:-

FIRST AUDITOR: First Auditor to be appointed in a Board Meeting within 30 days of registration of the Company else within 90 days in an EGM.

Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. AUDITOR ALREADY APPOINTED BY THE BOARD CAN BE APPOINTED BY THE SHAREHOLDERS AT THE FIRST AGM

*The company shall place the matter relating to such appointment for ratification by members at every annual general meeting.

APPOINTMENT/RE-APPOINTMENT OF AUDITORS

Written consent along with a certificate is required to be given by the proposed

appointee. Certificate shall also indicate whether the auditor satisfies the

criteria provided in S. 141 & Rule 4 of (Audit & Auditors) Rules, 2014.

No audit firm having a common partners or partners whose tenure has expired

immediately preceding financial year shall be appointed as auditor of the same

company for a period of five years. It means though auditor is appointed

at AGM but he can conduct the audit for a particular financial year.

The Company has to inform the auditor  and  file form ADT-1 for appointment

with the Registrar within fifteen days of the meeting in which the auditor is

appointed.

  

CONT….

Listed company or a company belonging to such class or classes of companies as may be prescribed in S.139(2) & Rule 5 of Companies (Audit & Auditors) Rules, 2014 shall not appoint or re-appoint—

an individual as auditor for more than one term of 5 consecutive Years ; and an audit firm as auditor for more than two terms of five consecutive years.Provided that: an individual auditor who has completed his term shall not be eligible for

reappointment in the same company for next five years . Similarly, an audit firms which completed its terms shall not be eligible for

reappointment in the same company for five years 3 years transition period will be given to comply this requirement. However,

according to the rules,  period of   5 years will be calculated from retrospective effect

 

CONT…

TERM OF APPOINTMENT: Sec 139(2) & Rule 5

For the purposes of S.139, the classes of companies shall mean the following classes of companies excluding one person companies and small companies :-a) **All unlisted public companies having paid up capital of Rs. 10

crore.b) All private limited companies having paid up share capital of Rs. 20

crore.c) All companies having paid up share capital of below threshold limit

mentioned in (a) & (b) above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more.

CONT…

Class or Classes of Companies (Rule 5)

A retiring auditor may be re- appointed at an AGM, if: [Sec 139(9)]

He is not disqualified for re-appointment,

He has not given the company a notice in writing of his unwillingness to be

re-appointed,

A special resolution has not been passed at that meeting appointing some

other auditor or providing expressly that he shall not be appointed. 

Where at an AGM, no auditor is appointed or re-appointed, the

existing auditor shall continue to be the auditor of the Company.

In case of Death: Casual Vacancy to be filled by BOD within 30 days. He

shall hold office till the conclusion of next AGM.

CONT…

Other Provisions regarding re-appointment of Auditor:

In case of Resignation: Casual Vacancy to be considered by BOD within 30

days and the same should be approved by the members in a general meeting to

be convened within 3 months of the recommendation of the Board. He shall hold

office till the conclusion of next AGM.

Where a company is required to constitute an Audit Committee u/s 177 all

appointments including the filing of casual vacancy shall be made after taking

into account the recommendations of such committee.(Sec 139(10).

A company which does not have audit committee, the Board shall take into

consideration the qualifications and experience of the individual or the firm

proposed to be considered for appointment as auditor and whether experience

are commensurate with the size and requirements of the company.

CONT….

Compulsory rotation of auditors by listed companies and classes of companies as prescribed :

a) Audit firm including LLP – not more than 2 terms of 5 consecutive years

b) Individual auditor – not more than 1 term of 5 consecutive years

c) During the cooling period ( of 5 years) even any audit firm having one or more common partners with the audit firm being rotated is not eligible to be appointed auditor of the same company.

Mandatory rotation of Auditors:

The auditor can be removed before the expiry of his term by passing a special

resolution, provided previous approval of the Central Government in Form ADT-2 is

obtained. So be compliant and have all backups.(Rule 7)

The auditor who has resigned from the company shall file within a period of 30 days

from the date of resignation, a statement in the Form ADT – 3 with the company

and the Registrar. In the case of non-compliance, the auditor shall be punishable with

fine which shall not be less than Rs.50,000 to Rs.5,00,000. (Rule 8)

Appointing as auditor a person other than a retiring auditor or specifically providing

that retiring auditor shall not be reappointed.

Special notice as per section 115 shall be required for a resolution at an annual

general meeting. Auditor has a right to give representation.

RESIGNATION/REMOVAL OF AUDITORS (SEC 140)

Ensure before giving consent and certificate that: You are not a Body corporate other than LLP You are not an Officer or employee of the Company You are not a partner of a person who is in the employment, of the

company. Neither you or your relative or partner— is holding any security  or indebtedness or guarantee or provided

any security in connection with the  indebtedness of any third person to the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company exceeding Rs.1 Lakh 

DISQUALIFICATIONS (Sec 141)

Neither you or your firm, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary  of such holding company or associate company. 

Your relative is a director or is in the employment of the company as a director or key managerial personnel;

a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;

a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;

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.

CONT….

a) Ensure compliance of all auditing standards

b) Consolidation of accounts Exercise your right to access to the records of all its subsidiaries if required.

c) Ensure you have sought the desired information. Keep all backups preferably certified copies.

d) The auditor’s report shall state any qualifications, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.

e) The auditor’s report to state whether company has adequate internal financial controls systems in place and operating effectiveness of such controls.

POWERS & DUTIES OF AUDITORS

f) If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Govt immediately but not later than thirty days of his knowledge or information, with a copy to the audit committee or in case the company has not constituted an audit committee, to the Board.

g) If the auditor does not report the fraud committed or being committed, he shall be punishable with fine which shall be less than Rs. 1 lakhs but may extend to Rs. 25 lakhs

CONT…

The section provides that an auditor appointed under this Act shall not directly or indirectly provide any of the following “other services” to auditee-company or its holding company or subsidiary company: Accounting and book keeping services Internal audit Design and implementation of any financial information system Actuarial services Investment advisory services Investment banking services Rendering of outsourced financial services Management services Any other services as may be prescribed

AUDITOR NOT TO RENDER CERTAIN SERVICES (SEC 144)

ADDITION

AL

PROVISIO

N

It is not clear whether the restriction will apply to rendering of non-

audit services by the auditor to its network firms wherever located

to the auditee’s holding company or subsidiary located outside India.

Further, the Act does not define the terms such as investment

advisory services and management services which are subject

to varying interpretation.

CONT…

The auditor’s basic responsibility is to report that whether in his opinion the accounts show a true and fair view and in discharging his responsibility he has to see as how the particular situations affect his position.

The general thinking with regards to unlawful acts or default by the clients appears to be that the auditor should not “aid or abet” but he is not under any legal obligation to disclose the offence.

The INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA has considered the role of a chartered accountant in relation to taxation frauds by the assessee and has made the following major recommendations:

A professional accountant should keep in mind the provisions of section 126 of the EVIDENCE ACT whereby a barrister, an attorney or vakil is barred from disclosing any information made to him the course of and for the purpose of his employment.

AUDITOR’S LIABILITY IN CASE OF UNLAWFUL ACTS

DISCLOSURESo If the fraud relates to the past years when the CA did not represent the client,

the client should be advised to make a disclosure. The accountant should also be careful that the past disclosure should not affect the current tax matters.

o In case of fraud relating to the accounts examined by the accountant himself, he should advise the client to make a complete disclosure. In case, client refuses to do so, the accountant should inform him that he is entitled to dissociate himself from the case and he would make a report to the authorities that the accounts prepared and examined by him are unreliable on account of certain information obtained later.

o In case of suppression in current accounts the clients should be asked to make a full disclosure. If he refuses to do so, the accountant should make a complete reservation in his report and should not associate himself with the return.

CONT….

The question of liability of an auditor for unlawful acts or frauds by the clients should be the considered in the light of broad parameters given above. However, it appears that if an auditor was aware of any unlawful act have been committed by the client in respects of accounts audited by him and the unlawfulness was not rectified by proper disclosure, the auditor owes a duty to make the suitable report. if he does not, he may be held liable.

CONT…

Under Section 35 of THE COMPANIES ACT, 2013

Where the person has subscribed for securities of a company acting on any

statement included, or the inclusion or omission of any matter, in the

prospectus is misleading and he has sustained any loss or damage as a

consequence thereof, the company and every person who-

Is a director --------;

Has authorized himself to be named and is named in the prospectus as a

director of the company ---------------------;

Is a promoter -------------------;

AUDITOR’s LIABILITY TO THIRD PARTIES IN RELATION TO CONTENTS OF PROSPECTUS:

Is an expert referred in sub section 5 of the section 26, (AUDITOR is Covered) shall without prejudice to any punishment to which any person may be liable under the section 36, be liable to pay the compensation to every person who has sustained such loss or damage.

Not withstanding anything contained in this section, where it is proved that prospectus has been issued with intent to defraud the applicants for the securities of a company or any other fraudulent purposes, every person, (including auditor) referred to in the subsection (1) shall be personally responsible, without any limitation or liability, for all or any of the losses.

.

CONT….

Misstatement in financial information can arise from fraud or error. The term

FRAUD refers to the ‘INTENTIONAL ACT’ by one or more individuals amongst the management, those charged with governance.

The auditor is concerned with fraudulent acts that cause a material misstatement in the financial statements.

Fraud involving one or more members of management those charged with governance is referred to as MANAGEMENT FRAUD. The primary responsibility for the prevention and detection of fraud rests with those charged with governance and management of the entity.

 Further, an audit conducted in accordance with the standards on auditing generally accepted in India, is designed to provide reasonable assurance that financial statements taken as a whole are free from material misstatement whether caused by fraud or error.

DUTIES AND RESPONSIBILITIES OF AN AUDITOR IN CASE OF MATERIAL MISSTATEMENT:

The fact that an audit is carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of error and fraud.

An auditor does not guarantee that all material misstatement will be detected because of such factors, as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature.

Certain levels of management may be in a position to override control procedures designed to prevent similar frauds by other employees. Auditor’s opinion on the financial statements is based on the concept of obtaining reasonable assurance hence in an audit the auditor does not guarantee that material misstatements will be detected.

CONT…

If any of the provisions of S.139 to S.146 is contravened, the company shall be punishable with fine which shall not be less than Rs.25000 but which may extend to Rs.5 lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs.10000 but which may extend to Rs.1 lakhs or with both.

If the contravention by the auditor is willful or with intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a terms which may extend to 1 year and with fine not less than Rs. l lakhs to Rs. 25 lakhs

The auditor who has been convicted shall refund the remuneration and pay for damages to company or the statutory bodies.

PUNISHMENT FOR CONTRAVENTION

Class action suit against the Auditors U/s  245 To protect investor interest, Section 245 of Companies Act

2013 has introduced the concept of class action suits, through which shareholders, depositors can initiate legal action against the company and auditors in the event of fraudulent activity. A class of shareholders or deposit holders  can now claim damages or compensation or demand other suitable action against the auditor, including the audit firm, by filing an application with the NCLT.

OTHER PENALTIES ON AUDITOR

Prosecution by NFRA (National Financial Reporting Authority)  U/s 132

NFRA may investigate either suomoto or on a reference made to it by the Central Government on matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949 chartered accountants. If professional or other misconduct is proved, NFRA has the power to make order for 

(A) imposing penalty of— (I) not less than one lakh rupees, but which may extend to five times

of the fees received, in case of individuals; and

CONT…

 (II) not less than ten lakh rupees, but which may extend to ten

times of the fee  received, in case of firms; (B) debarring the member or the firm from engaging himself or

itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

CONT…

THANK YOU