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.