Impact of Companies Act 2013 on Audit Fraternity

AN INTRODUCTION

There is tremendous change 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, to further strengthen regulations and expected to enhance auditor independence and audit quality.

The auditing fraternity is facing regulatory heat with the new company law looking to implement mandatory auditor rotation on a retrospective basis.

For the first time ever, India is introducing mandatory auditor rotation — both at an individual auditor level and at the audit firm level. The auditing fraternity had, in recent years, come under a cloud after a spate of accounting scandals, such as Satyam Computer and Reebok India. This prompted the Government to mandate auditor rotation.

 

APPOINTMENT OF FIRST AUDITIOR

The first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.

In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date of registration of the company and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.

 

SUBSEQUENT APPOINTMENT OF AUDITOR

In the case of the company that has constituted an audit committee u/s-177; the audit committee will recommend the auditor to the Board. If the Board is not satisfied with such recommendation and wants to proceed with its own nominee, it shall have to explain the reasons for not accepting the recommendation of the audit committee in the Board’s Report,

As per the draft rules, the audit committee or the Board shall also consider the completed and pending proceedings against the auditor before the Institute of Chartered Accountant of India or the National Financial Reporting Authority or Tribunal or any Court of Law.

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

The company is required to take written consent of the auditor before its appointment, and a certificate from him that the appointment, if made, shall be in accordance with the criteria provided in section 141 and conditions as may be prescribed.

 Company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.

 

ROTATION OF AUDITOR

Listed company or any other company excluding one-person companies and small companies* as defined u/s-2(85), shall not appoint or re-appoint—

(a) An individual as auditor for more than one term of five consecutive years;

And

(b) An audit firm as auditor for more than two terms of five consecutive years.

An individual auditor who has completed his term under (a) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term;

An audit firm which has completed its term under (b) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term.

*‘‘small company’’ means a company, other than a public company,—

(i) Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as   may be prescribed which shall not be more than five crore rupees; or

(ii) Turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

 

RETROSPECTIVE ROTATION

Ø  In case of an auditor (whether an individual or audit firm), the period for which he or it has been holding office as auditor prior to the commencement of the Act shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be.

 

JOINT AUDITOR

Ø  Where a company has appointed two or more persons as joint auditors, the company shall follow the rotation of auditors in such a manner that all of the joint auditors do not complete their term in the same year.

 

For the purpose of rotation of auditors, break in term for a continuous period of 5 years would only be considered as fulfilling the requirement of eligibility.

Further the incoming auditor or audit firm shall not be eligible for appointment if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms or is operating under the same trade mark or brand.

Every company, existing on or before the commencement of this Act, shall comply with the requirements of law within three years from the date of commencement of this Act.

 

ROTATION OF AUDITING PARTNER AND HIS TEAM

Members of a company may resolve to provide that—

(a)  In the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or

(b)  The audit shall be conducted by more than one auditor.

 

DISQUALIFICATIONS OF AUDITOR

The following persons shall not be eligible for appointment as an auditor of a company, namely:—

(a) A body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;

(b) An officer or employee of the company;

(c) A person who is a partner, or who is in the employment, of an officer or employee of the Company

(d) A person who, or his relative or partner—

           (i) Is holding any security of or interest in the company or its subsidiary, or of its holding

              or associate company or a subsidiary of such holding company:

             The relative may hold security or interest in the company of face value not exceeding    

              One lakh rupees; or

          (ii) Is indebted to the company, or its subsidiary, or its holding or associate company or a   

               Subsidiary of such holding company, in excess of one lakh rupees; or

          (iii) Has given a guarantee or provided any security in connection with the indebtedness  

               of any third person to the company, or its subsidiary, or its holding or associate

               Company or a subsidiary of such holding company, in excess of one lakh rupees;

 

(e) A person or a firm who, 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 of such nature as may be prescribed;

(f) A person whose relative is a director or is in the employment of the company as a director or key managerial personnel;

(g) 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;

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

(i) 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.

 

REPORTING OF FRAUDS BY AUDITOR

In case the auditor has sufficient reason and information to believe that an offence involving fraud which is likely to materially affect the company, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government within 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.

 

As per draft rules materiality means:

 

(a)  Frauds that is or are happening frequently; or

(b)  Frauds where the amount involved or likely to be involved is not less than five percent of net profit or two percent of turnover of the company for the preceding financial year.

 

 In all other cases, auditors shall send a report in writing to the audit committee and where the company has not constituted an audit committee, to the Board, and the audit committee or the Board, as the case may be, shall reply to the auditors in writing as to steps taken by the audit committee or the Board in addressing the issues of fraud, including systemic issues.

 

In case the audit committee or the Board, as the case may be, is not taking action or the auditor is not satisfied with the action taken, he may report to the Central Government even if the fraud is not material in nature.

 

The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post followed by an email in confirmation of the same.  The report shall be on the letter-head of the Auditor and be signed by the Auditor with his seal and shall indicate his Membership Number.

 

CONSEQUENCES OF CONTRAVENTION OF PROVISIONS OF ACT ON AUDITOR

If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

In case auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, He shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but may extend to twenty-five lakh rupees.

In case of willful contravention, he shall be liable to—

(i) Refund the remuneration received by him to the company; and

(ii) Pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

In case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in the Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

By- CA Ishan Sharma