Dr. Sanjiv Agarwal

The new Companies Act, 2013 has been enacted with Presidential assent on 29 August, 2012. 98 sections out of 470 sections have been notified to be in force w.e.f. 12th September, 2013 and it is expected that once the rules are in place, remaining provisions shall also be enforced by the year end. The draft rules have also been placed in public domain. The new law is going to change the life of auditors as well as auditee. While the new role of auditors make them more responsible and accountable, the auditee’s financial statements shall have to be more explicit, self explanatory, transparent and fair.

There is going to be enhanced accountability on the part of companies by way of disclosures in statements and board reports. Not only this, they have to be socially responsible by spending atleast two percent of their average not profits towards corporate social responsibilities.

In erstwhile law, auditor-auditee nexus was a hindrance in independence of auditors and consequent quality of audit as auditors used to audit the companies not for years but decades together. To overcome this hitch, new law provides for rotation of auditors after a specific time frame to ensure independence of auditors and strengthen diligence in their role and work. Now no listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint an individual as Auditor for more than 1 term of 5 consecutive years and an audit firm as auditor for more than 2 terms of 5 consecutive years.

 The auditor has to make a report to the members that accounts, financial statements or other documents required to be laid in general meeting, give a true and fair view of the state of the company’s affairs, about the company having adequate internal financial control systems in place and other specified matters. The report shall state reasons for negative and qualified remarks. The auditor in his report shall also report on cash flow statement for the year and other matters as may be prescribed.

An Auditor, Company Secretary in practice, or Cost Accountant in practice shall immediately report to the Central Government, if they have reason to believe, in pursuance of their duties, that an offence involving fraud is being committed against the company.

Not only this, the qualifications, adverse comments or observations on financial matters in auditor’s report having adverse effect on company’s functioning, shall have to be read at the general meeting before the members present thereat. It has also been mandatory for the auditor or his representative, who is qualified to be auditor, to attend all the general meetings of the company. Chairman of the audit committee is also required to attend the general meeting.

Auditor will be required to inquire “whether the transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company”. Auditor has to verify the cases where securities are sold at a price less than their cost of acquisition and if he finds that such sale is bona fide and the price realised is considered to be reasonable, having regard to the circumstances of each case, no further reporting is required.

Auditor must ensure in respect of shares allotted in cash by the company that cash has actually been received in respect of such allotment by the company.  He should verify and report the cases where cash was not received and that the position, as stated in books of accounts and balance sheet, is correct, regular and not misleading.

If any auditor, cost accountant or company secretary in practice, do not comply with the provisions of sub-Section (12), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

The auditor is prohibited from providing certain specified non-audit services to the audit client or its holding or any subsidiary companies. An auditor cannot provide the 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 and any other kind of services as may be prescribed.

These provisions will certainly bring in greater transparency and accountability in financial statements in audit function, thereby providing authentic information to the shareholders and investors.

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0 responses to “Tougher Norms for Auditors & Auditees in Companies Act, 2013”

  1. ca.dev kumar kothari says:

    Once work of audit is undertaken it must be done sincerely, delegently and honestly irrespective of the amount of fees and chances of losing audit.
    Planning audit and allocating working hours according to the amount of fees is not a proper approach.
    For better audit, quality of articled clerks/ trainees ( for sincerety, honesty, and urge to learn) must be improved. Now-a-days there is lot of change – students are not as interested in gaining practical experience as they should be and as articled clerks had 25-30 years ago. The reason is simple- it was tough to pass examination so learning work and gaining maximum practical experience during training period was considered very important – this was almost sure if one tried but passing examination was very uncertain. Now passing examination is easy (thanks to CA made easy coaching and prevelant dummu articles) so urge to gain practical experience is generally very poor amongst new trainees.
    For any defect or deficiency in audit the teams of auditor and auditee both must be responsible. Only the auditor signing report cannot and should not be held responsible becasue he has to rely on both teams – of auditor and auditee.

  2. Jayant L Aasher says:

    I dont understand why this generalisation just because there was negligence on part of some in the past. Why people forget that auditors are only watchdogs and not bloodhounds. They do keep all necessary evidence of work done. And inserting heavy penalties like Rs one lakh to Rs twenty five lakhs is absolutely silly and will only create unnecessary scare in the minds of practioners. What has been the percentage of some negligent people out of the total ? Why a similar action is not taken against politicians? Instead even the Supreme Court decisions are reversed by Acts to favour them.

    It is really funny and surprising to read the contents of the new audit report model – as if no one knows what the auditor and the management are supposed to do . Further it also tells what an audit is – as if no business people know what an audit is.

    Funny, irritating and unwanted.

  3. lahiri says:

    The enactment should be followed in true letters and spirits

  4. Rahul Nadkarni says:

    Given the current development w.r.t. governance issues with India Inc. these strict norms should be welcomed. Can you imagine now these days after auditing the auditor declares not to rely his audit report as the case now with NSEL. They just absolve themselves the moment any scam crops up. In the new companies bill these provisions have been enacted b’coz the standard/quality of audit or the expectations from the auditors get diluted day by day. It is felt that auditing should not be left alone to the auditors. They should be remaining alert as well as accountable. ICAI and its various so called disciplinary committees failed time and again to check such erring members and their misdeeds. How many of them have been stripped of their membership or banned from practice. Only declaring to provide helping hand in investigation does not prevent such recurrence. When ICAI lobby to get more attestation or exclusive audit work with Govt citing their incomparable audit expertise/better training/understanding of subject matter, they should remain answerable if any untoward thing happens due to their laxity. ICAI president can question the relevancy of other statutory audits but cannot justify the relevant of statutory financial audit. These norms are the result of all these incidents like Satyam/GTB/NSEL. Instead of hailing there is a deliberate attempt already started in various forums to scuttle these norms. They should welcome in constitution of the proposed NFRA in the new companies. On the other in media, parliament and other forum voicing their concerns.

  5. CA R. ROY says:

    Dear sir Unless and untill there is a separate financial regulatory authority these nexus between Auditor- Auditee will go on. In India there must be an independent Watch dog to check and watch audit mechanism to prevent financial fraud.

  6. Prabhakaran says:

    Proactive measures to further uplift the esteemed profession and to facilitate positive growth of Industry

  7. Vimal says:

    Very interesting article having crux in it..

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