CA Amresh Vashisht
The first ray of sunrise of the 1st April 2015 is not as usual to the auditing industry. With the dusk of first financial year under companies act 2013 , we are subject to the uncountable penalties and prosecutions . The Government moved to tightening of the grip on the auditors after satyam scam has taken its final step of implementation. The seven year imprisonment to two chartered Accountants clearly established that there were enough laws to check any abuse by the auditors but the intention of the Government was to make the auditors more responsible and to have more stringent laws to deal their incompetence and abuse. However, In the wake of the scam, the ICAI had initiated disciplinary action against six of its members for “professional misconduct” and termed it as “matter of aberration”. The Companies Act, 2013 is now a reality and REALITY BITES. As usual the auditor’s regulator, The Institute of Chartered Accountants of India has drastically failed to take serious cognizance of provisions in the Bill in spite of 8 Months lengthy pendency at Rajya Sabha. Till today, the regulator has no saying on the provisions of the new act in power and continuously failing to provide any directions to its workmen force to be ready to build necessary professional expertise as well as safeguards in the interest of the profession. In this article, an attempt has been made to scan the provisions relating to AUDITORS facing the most challenging time in dealing with the audits of the company with special reference to penalties, prosecution etc.
The current law regarding Auditing and Auditors will materially change our professional responsibilities .While most of the provisions of the present law are welcome keeping an eye over the pending bill at parliament to ease out many provisions but the provisions relating to audit clearly show the drop in the trust and the faith that the authorities and the common people had in the auditors fraternity. The new law is required to understand fully keeping in mind the intention of the legislation writers and put all professional expertise to deal the company audit. The future working of the auditors shall rewrite the history of auditors in India and they have to work with full caution to safeguards the interest of the profession.
ROTATION OF AUDITOR AS PER SECTION 139 OF THE COMPANIES ACT, 2013
Auditors appointed in an annual general meeting shall hold office from the conclusion of that meeting until the conclusion of the ensuing sixth AGM . This appointment shall be subject to ratification by members at every AGM. As per 2013 Act, the company may remove the auditors before the expiry of the term of appointment. Though it shall require special resolution and prior approval from Central Government .The right to resign as auditor is intact with the auditors subject to a rider as per section 140 of the act. The only good news for the auditors in the new act is the stringent provisions on removal of auditors effectively protecting their tenure as auditors.
It’s a moderate adoption of the Voluntary Corporate Governance Guidelines issued by the Government in December 2009. According to these Guidelines, rotation of audit firm after five years was suggested and it provided for compulsory rotation of audit partner after three years. This entire thought process was aimed towards providing strict norms of corporate governance and enhancing investor confidence. Now In case of listed companies, the term of appointment of an individual auditor/ an audit firm is restricted to a period of five years/ ten years. An auditor/ audit firm should mandatorily rotate at the expiry of the term. However, compulsory rotation of audit partner and appointment of joint auditors have been left to the discretion as may be resolved by the members of the company .There is a transition period of three years, from date of enactment of the 2013 Act, to comply with this requirement .It may be noted that there is no provision in the Bill to appoint auditor for a period shorter than 5 years.
As per section 147(2), If an auditor of a company contravenes provisions of section 139, 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. The company and every officer is separately punishable here.
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.
Further where an auditor has been convicted under section 147 (2), he shall be liable to—
Section 147 (4) authorises 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.
As per section 147 (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.
REMOVAL OF AUDITOR AS PER SECTION 140 of THE 2013 ACT.
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. [Section 140(1)]
Now , the Tribunal may also direct the company to change its auditors provided the tribunal either suo-moto or on an application made to it by Central Government or by any person concerned and if satisfied that the auditor of a company has acted in a fraudulent manner or abetted or colluded in any fraud by the company or in relation to the company/its directors/officers. The individual or firm, against whom such an order is issued by the Tribunal, shall not be eligible to be appointed as auditor of any company for five years in addition to other penal actions. An auditor/ audit firm is eligible for re-appointment after expiry of five years since completion of the previous tenure. However it is clearly required that an audit firm having common partners with another firm which has completed its term is not eligible for re-appointment for a period of five years from the completion of the other firm’s term. The company and every officer is punishable for contravention here.
RESIGNATION OF AUDITOR AS PER SECTION 140(2) OF THE 2013 ACT.
An auditor may resign. However, he has to file a statement in the prescribed form within 30 days with company and ROC and also with the CAG in case of a company where the appointment of the auditor has been made by CAG, giving facts and reasons for the resignation. In this statement the auditor has to give reasons and other facts relevant for his resignation. For failure to comply with this requirement, As per section 140(3) Individual Auditor or firm whatever the case is punishable with a minimum fine of Rs. 50,000/- which may extend up to Rs. 5 lakh.
AUDITORS STRAIGHT WAY FALL UNDER SERIOUS FRAUD INVESTIGATION OFFICE UNDER THE 2013 ACT.
In case Auditor under section 140(5) against whom order passed by Tribunal confirms acting in a fraudulent manner or abetting or colluding in any fraud by, or in relation to the company—Auditor of the Company shall be liable for arrest. Section 140(5) is a defined Offence listed in section 211(6) in respect of which officer of the SFIO shall have arresting powers and the same is categorized as non-bail able. He is liable for action under section 447 and that is in addition to contravention under section 140(5). Here section 447 defines without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
ELIGIBILITY, QUALIFICATION & DISQUALIFICATIONS OF THE AUDITORS AS PER SECTION 141.
A person will not be eligible for appointment as auditor if he, his relative, or his partner holds any security of or interest in or is indebted to the company, its subsidiary, holding or associate company or subsidiary of such holding company. A person or an audit firm will be disqualified for appointment if he/it has direct or indirect business relationships with all types of entities mentioned above. A person whose relative is a director or key managerial person by whatever designation in the company is not eligible for appointment. A person who is auditor in more than 20 companies will also not be eligible for being appointed as the auditor. A person who is convicted by a court of an offence involving fraud is not eligible for the appointment as auditor for 10 years from the date of such conviction.
REPORTING OF FRAUD AS WHISTLE BLOWER AS PER SECTION 143 OF THE 2013 ACT.
Sub-sections 143 (12) to (15) of the Companies Act, 2013 require the auditors-statutory auditors, cost auditors and secretarial auditors to immediately report suspected fraud towards the company to the Central Government. Now he shall also require to report fraud under CARO 2015 which demands” whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated. Further, there is a monetary limit prescribed under the rules for reporting firstto Audit committee with in 45 days and audit committee has to send it to the Central Government within 15 days . The ICAI has already issued Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013 released by Auditing and Assurance Standards Board. As per guidelines the provisions of Section 143(12) do not apply to other professionals who are rendering other services to the company. For example, Section 143(12) does not apply to auditors appointed under other statutes for rendering other services such as tax auditor appointed for audit under Income-tax Act; Sales Tax or VAT legislations. In case of internal auditor under Section 138 , the internal auditors are not specified as persons who are required to report under Section 143(12).
Section 143(12) of the 2013 Act provides that 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 report the matter to the Central Government immediately.|
|♦||within such time and|
|♦||in such manner as may be prescribed.|
Failure to do so attracts heavy monetary penalties. Section 143(15) provides that if any auditor, cost accountant or Company Secretary in practice do not report fraud committed or being committed as above, he shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000 . The matter to draw attention here is that reporting to Central Government of frauds under section 143(12) is no substitute for making suitable qualifications/disclosures in audit report to the members of the company. The reporting of fraud by auditor shall also extend to branch auditor to the extent it relates to the concerned branch.
PROHIBITION ON AUDITORS FOR PERFORMANCE OF OTHER FUNCTIONS AS PER SECTION 144 OF THE COMPANIES ACT, 2013
The act provides stringent norms for independence of the auditors. An audit firm will not be able to provide certain services directly or indirectly to a company where it is appointed as the auditor or to its holding company or subsidiary companies. The prohibited services are as under: –
1. Accounting and book keeping services
2. Internal Audit
3. Management services
4. Design and implementation of any financial systems
5. Actuarial services
6. Rendering of outsourced financial services
7. Investment banking or advisory services
8. Other restricted services may be provided.
It is important to note that the restrictions of undertaking the above mentioned prohibited services apply not only to the firm undertaking the audit but to all other connected entities of the firm namely:
i) All its partners;
i) Its parent, subsidiary or associate entity; and
ii) Any other entity in which the firm or any of its partners has (or can exercise) significant influence or control or whose name, trademark, brand is used by the firm of any of its partners.
As per section 147(2), If an auditor of a company contravenes provisions of section 144, 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.
SIGNING AUDITORS REPORT SECTION 145 OF THE COMPANIES ACT, 2013
The person appointed as an auditor of the company shall sign the auditor’s report or sign or certify any other document of the company in accordance with the provisions of sub-section (2) of section 141, and the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.
As per section 147(2), If an auditor of a company contravenes provisions of 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.
CLASS ACTION SUIT AGAINST THE AUDITORS UNDER THE 2013 ACT.
Class action suits may be filed by shareholders, members & shareholders’ associations, in case they believe that the dealings of a company are detrimental to the interest of the company and its shareholders. In such cases, the shareholders can claim damages against the company, directors, auditors and advisors for their wrongful conduct. Damages can be claim against the auditors in their individual capacities as well as their audit firm and against each partner of the audit firm who was involved in making any improper or misleading statement of specifics in the audit report or who acted in a fraudulent, unlawful or wrongful manner. The members can file application before the Tribunal seeking the order against the auditor to claim damages or compensation or demand any other suitable action from or against the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct along with directors, experts & consultants also.
The order passed by the Tribunal shall be binding on the company, binding on all of its members, binding on depositors, binding on auditors and audit firm. It shall also be binding on expert or consultant or advisor or any other person associated with company. The provisions of class action are not applicable to Banking Company.
NATIONAL FINANCIAL REPORTING AUTHORITY
NFRA shall monitor and enforce compliance with auditing and accounting standards and shall have the power to make orders imposing penalty for professional or other misconduct by the auditors. NFRA is authorised to act as a regulator for members registered under the CA Act. Once NFRA commences investigation, ICAI or any other body cannot initiate or continue proceedings in such matters. NFRA will have the same powers as vested in a civil court under Code of Civil Procedures. NFRA has been also entrusted with wide powers such as to investigate suo moto or on reference made by the Central Government into matters of professional or other misconduct committed by a chartered accountant or a firm of chartered accountants.
For proven misconduct, NFRA will have power to levy penalty amounting to not less than Rs. 1 lakh but which may extend to five times the fees received in a case of an individual and not less than Rs. 10 lakh but which may extend to ten times in case of a firm. NFRA will also have the authority to debar a firm or a member from engaging in practice as a member of ICAI for a minimum period of six months or such higher period not exceeding 10 years as may be decided by NFRA.
In these circumstances and being true auditor, there is so much each one of us has to do to make a difference. We are at a dangerous juncture of corporate auditing exposed to many punishments. We need to defend our principles and values and the rules of accounting and auditing world. If we don’t, it’s certain that our profession will descend into a state of chaos. We must be conscious person as we are elevated to a responsible position to discharges our duty with great responsibility with full care.