There was no provision in Companies’ Act 1956 in respect to restrictions for providing certain services by the statutory auditors. The newly inserted section 144 of the Companies Act 2013 is the new provision that comes with the list of services that statutory auditors are restricted to render to their clients.
As per this section, the auditor shall provide only such services to the company that is approved by the board of director of the company or the audit committee. It should not be misunderstood that the services approved by the BOD shall override the provisions of this act. It should be clear that the services are to be approved by the BOD or audit committee keeping in mind the provisions of this act.
There are certain services that the statutory auditor cannot render to their clients either directly or indirectly (i.e., the company or its holding company or subsidiary company).
Again the section defines the word directly or indirectly like this:
The term directly or indirectly shall include the services rendered by the auditor, here two cases may arise:
(i) In case the auditor is an individual:
Rendering of services either by himself or through his relative or any other person connected or associated with him through any other entity, whatsoever, in which such individual has significant influence or control or whose name or trademark or brand is used by such individual.
(ii) In case the auditor being the firm:
The services rendered by itself or through any other of its partners or its parent, subsidiary or associate entity or through any other entity, whatever may be the case where the firm or any partner of the firm has significant influence or control or whose name or trademark or brand is used by the firm or any of its partners.
The list of restricted services are:
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed.
Not only this but also the newly inserted section 144 talks about the time allowed to leave the restricted services by the auditors which goes like this:
An auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this act, shall comply with the provisions of this section before the closure of first financial year after the date of such commencement.
However, this section is not yet notified by the Ministry of Corporate Affairs.
In many cases (ie, general practice) it has been practically noticed that auditors approved as the Statutory Auditors of the company are assigned the task of maintaining accounts and any or all of the services which are similar or same in nature as restricted now. Consequently, there could not be true and fair presentation as a result of which the report generated may be misleading. These might be the possible reasons for inserting this section:
- The section and details were produced for the academic knowledge only at this stage to make up mind by the Auditors and Corporate.for future activities.
- To reduce the fraud and enhance the confidence of users of financial statements.
- To ensure independency of statutory auditors.
In case of non compliance of section 144 please refer section 147 (yet to be notified, which provides that:
Section 147. (1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees 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 ten thousand rupees but which may extend to one lakh rupees, or with both.
(2) 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:
Provided that if an 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 which may extend to twenty-five lakh rupees.
(3) Where an auditor has been convicted under sub-section (2), 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.
(4) The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) and such body, authority or officer shall after payment of damages to such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification.
(5) Where, 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 this 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.
Seeking greater transparency and corporate responsibility and making auditors more-independent.
The above article is contributed by Niraj Thapa (ICAI Reg. No. FRO0004147), a CA Final student doing articleship in a Delhi based CA Firm. Any queries and suggestions are most welcome; you may write him at firstname.lastname@example.org