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Smartphonelog.comspotdeal--charurajat Companies Bill12 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 ICAIs 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 ICAIs 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 Company for a duration of five years, provided it is validated at every AGM, instead of being reappointed. There is an additional mechanism for listed companies. No individual Auditor can continue for more than five years and an Audit firm can serve a maximum two terms of five consecutive years, again subject to shareholders ratification. No re-appointment is permitted. This could be subjected to the Audit Committees review, taking into account that the track record of the Auditor is unblemished; the value the continuation of an Auditor can bring in the long term to a company is substantial. An Auditor may be removed only by way of a Special Resolution, but subject to Central Governments prior approval. This is yet another assault on shareholder autonomy and again unwarranted for the smaller classes of companies. That the Bill restricts Auditors from providing other services, such as internal audit services, accounting, actuarial, investment banking and other financial and management services is fully justified on grounds of conflict of interest. The Firms engaging in such activities have to be weaned off within a time frame. Disqualifications/ restrictions have been imposed on acquiring of the Companys securities by the Auditor and relatives nothing new in that one. On resignation, the Auditor has to submit a statement within thirty days thereof, providing reasons for the resignation - default to comply can result in a hefty fine. And this filing does not have to be made with theMCA, nor any of its agencies, but with the Office of the Comptroller & Auditor General (CAG), no less. 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. The Bill makes it mandatory for the Auditor to attend the AGM, under the 1956 Act the Auditor was entitled to attend but not bound. The Auditor is expected to be a whistle blower if he comes across any suspect fraud. Though specifically not provided for, this is envisaged under Section 245 of the Bill -the Class Action provision. Apart from NFRA, Section 245 of the Bill entitles Members and / or Depositors, 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. What if the Auditor is prosecuted, but found innocent? The Bill does not address this. The 1956 Act on the other hand till the 2000 amendment removed the provision, under Section 201 thereof required the Company obligation to indemnify Auditors, in respect of any liability or costs incurred in defending such action, in cases of breach of trust, misfeasance etc, in the event of acquittal or discharge. Such protections have to be in place and are critical to ensure that people of integrity and quality are attracted to the profession, are not deterred by the Big Brother is watching you approach. Sadly that is what is likely to happen.

III: Audit and Auditors

Every company shall appoint an individual or a firm
as an auditor at the first annual general meeting, who shall hold office till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

 In case of listed companies and certain other class

of companies as may be prescribed, compulsory rotation of individual auditors in every five years and of audit firm every 10 years has been provided. Members of the Company may resolve to rotate auditing partner and his team at specific interval. 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. Auditor can render additional services as approved by Board or Audit Committee. However, auditor cannot render services directly or indirectly to the company, its holding company, its subsidiary like internal audit, investment advise, management services etc. Limited Liability Partnership is allowed to be appointed as auditor. In addition to accounting standards, auditing standards have also been made mandatory. Certain new disqualifications for the Auditors have been prescribed including indebtedness to holding/ subsidiary companies. 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, 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, documents, records, register or minutes etc may be kept in electronic form also.

Companies having subsidiaries are required to prepare

consolidated financial statement of the company and all the subsidiaries, to be presented at Annual General Meeting. Salient features of the financial statement of its subsidiary shall also be attached. Subsidiary shall for the purpose of this requirement include associate company and joint venture. The requirement of attaching annual report of subsidiaries under section 212 of the Companies Act 1956 has been dispensed with. Concept of Corporate Social Responsibility (CSR) has

been included in the statute and every company having net worth of rupees five hundred crore or more, 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, out of which at least one director shall be an independent director. The committee shall recommend the policy for CSR to the Board. CSR should preferably be spent in local areas where the company operates. 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, in every financial year in pursuance of its CSR Policy and in case of failure to do so, it shall report the necessary reasons for not spending the same in their Boards report. The Bill provides for conduct of internal audit of certain companies.

New Companies Bill auditing the auditors

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

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

Keywords: Companies Bill and auditors

Companies Bill prescribes stringent rule for auditors

The long awaited Companies Bill was finally passed by the Lok Sabhayesterday. 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). The amended legislation, with 470 clauses, limits the number of companies an auditor can serve to 20. It has also brought in more clarity on criminal liability of auditors. Besides, the approved amendments also include annual ratification of appointment of auditors for five years. But industry experts are of the view that though the amendment is welcome, changes should be rolled out in phases or applied to a smaller set of companies first. "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. However, provisions like those on rotation of directors and auditors, whilst again welcome, should first be applied to a small subset of the 8000 listed companies, and based on experience extended further," said Vishesh C Chandiok, National Managing Partner, Grant Thornton India LLP. A recent survey conducted by Grant Thornton said that drastic changes in the role of auditor needs to be applied in phases. According to the survey, a clear majority of businesses across India (90%) believe the need for a more diverse audit market, and 79% believe it would help market confidence if every large public company was audited by two firms rather than one. Further, 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. Mandatory rotation may enhance auditor independence by reducing the average audit tenure. 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, said the survey. 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, a quarterly global business survey of 3,000 businesses of which 100 were from India. The other highlight of the Bill is the extent of subordinated legislation. "There are over 300 places, where the rules need to be prescribed. Such clauses in the Bill would only be effective when the related rules are framed and notified. This should be done after careful evaluation as several clauses are intended to be applied to all the 800,000+ companies or the 8,000+ listed companies," said Chandoik. The roles and responsibilities of directors, independent directors and auditors have also been dealt with

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

Accounts & Audit Under Companies BillPresentation Transcript

1. 28.12.12 Companies Bill, 2013 Audit and Auditors 2. 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 - Agenda

3. 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 CAs Only CAs sh all be authorized to act and sign Intimation of appointment to RoC within 15 days Appointment of auditors

4. A body corporate other than LLP A person - Who is or his relative or partner holds security, or is indebted ,or provide guarantee to the company (including subsidiary/ holding/ associate) - Who has direct/ indirect business relationship with company/ subsidiary/ holding/ associate - Who is convicted of fraud (10 years have not lapsed) - Whose relative is a director or key managerial person - Who is auditor in more than 20 companies - Whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and non-audit services NEW Disqualification

5. Mandated for listed companies (and other companies as may be prescribed) Compulsory rotation of audit is provided for: - 5 years for an individual and - 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. Mandatory Firm Rotation

6. 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..

7. Prohibition on auditor rendering specified non-audit services to the auditee company. Restriction extended to holding company / subsidiary company; 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: - Accounting and book keeping services - Internal audit Non Audit services

8. - Design and implementation of any financial information system - Actuarial services - Investment advisory services - Investment banking services - Rendering of outsourced financial services Management services, and any other service which may be prescribed Non Audit services Contd.

9. Members of the company to decide need for joint audit Joint Audit

10. 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. Auditor shall now also report on the cash flow for the year and such other matter as prescribed in his Report, apart for the balance sheet and Profit & Loss account Mandatory attendance of auditor or auditors authorized representative who is qualified to be appointed as an auditor at the AGM of the company. The Act provides that it is the duty of the auditor to comply with the auditing Standards Power & Duties of an Auditor

11. Whistle Blower: - 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: - Adequate internal financial controls system and operating effectiveness of such controls - Observations or comments on financial transactions or matters having adverse effect on the functioning of the company - Any qualification, reservation or adverse remark relating to maintenance of accounts Additional responsibilities of the Auditor

12. Substantially enhanced, new forms of liability Professional or other misconduct: Empowerment of NFRA Punishment for contravention of the law: - Contravention of specific provisions of the Law knowingly or willfully with the intention to deceive the company/ shareholders/ creditors/tax authorities and - Other contraventions Penalty for fraud Class Action suit Auditors Liability

13. Penalties increased by many folds in almost all cases, imprisonment introduced in several sections Fraud now defined and extreme penalties prescribed in case of conviction (in approximately 18 different situations): - imprisonment - 6 months to 10 years and - fine which not less than the amount involved in the fraud, - may extend to 3 times the amount involved in the fraud - Further, where the fraud in question involves public interest, - imprisonment shall not be less than 3 years Auditors Liability Contd..

14. Institute of Chartered Accountants of India Tribunal power change / debar auditor / audit firm New regulator NFRA (replaces NACAAS) with substantial power - 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. Miscellaneous Punishment for false statement - Penal provisions of clause 447 (fraud) Punishment for false evidence - Imprisonment: Minimum 3 years Maximum 7 years - Fine: Rs. 10 lakhs Defense of default not committed willfully removed in many clauses

16. 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. An auditor may resign. However, 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. Thank you