CA HARIKRISHNAN.R
Companies Act 2013 is being looked upon as a harsh, draconian legislation which offers a crown of thorns in the form of penalties and a spell in hell in the form of imprisonment for both the officers and auditors of companies alike. Here what is being attempted is to project an ambiguity relating to the Auditors opinion & True and Fair view .
The audit of Indian companies are to be conducted in accordance with the standards of auditing issued by the ICAI. As per the standards an auditor has to form his opinion based on conclusions drawn from examination of audit evidences and he reaches a conclusion that the financial statements are true and fair, he shall make a report under SA 700 and if he can form only a modified opinion he shall make a qualified opinion, adverse opinion or disclaimer as the case may be as per SA 705.
Now have a look at the applicable section of the Companies Act, 2013, section 143(2).
“The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.”
This mean that the auditor shall make a report that the Financial statements give a true and fair view. What if the auditors are of a different opinion?
In this context have a look at the corresponding provision of the 1956 Act, Section 227(2)
“The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view –
(i) in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year ; and
(ii) in the case of the profit and loss account, of the profit or loss for its financial year.”
Have a look at the corresponding provision of the ‘British Companies Act, 2006 also, section 495(3).
“(3) The report must state clearly whether, in the auditor’s opinion, the annual accounts—
(a) give a true and fair view—
(i) in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year,
(ii) in the case of an individual profit and loss account, of the profit or loss of the company for the financial year,”
The 1956 act and the British Act 2006 provides that the auditor shall state whether financial statements are “true and fair” whereas the 2013 Act prescribes that the auditors shall state that the Financial Statements give a true and fair view. Of course it is also stated that the auditor should take into account ‘standards of auditing’ which provides for modified opinion also.
But what is the impact of the omission of the word ‘whether’ in the section?
Consider the following position;
The Companies Act 2013 mandates that an auditor should express only an unmodified opinion only and if has a modified opinion he is not supposed to express it and under such a situation he has to find a way out as prescribed under Para 12 of SA 200, ‘ The overall objective of an Independent auditor and the conduct of an audit in accordance with the SAs’
“In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report is insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, the SAs require that the auditor disclaim an opinion or withdraw from the engagement, where withdrawal is legally permitted.”
Will it be improper to take a view that the legislative intention of the omission of the words “ state whether” is to imply that the auditor shall either express an unmodified opinion or withdraw?
An exact interpretation of the Section 143(2) is very important as its violation may attract penal provisions under Section 147(2) as follows;
“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:”
(Author is a CA from Kottayam (Kerala) and can be reached at hknair999@gmail.com)
Author Bio
Please send me the Luxury Tax Rates for the Assessment Year 2014-15
08-09-2014 Bangalore
My comment on true and fair vire in the auditor’s report:-
I want to comment further since it is more pertinent to comment here.
In case of vast business organisations the RBI or the vast business
organization appoint auditors for each of specified location or
business division. Later all their auditors’ reports are clubbed together
and a single audit report is prepared.
This is wrong. Because, one vast organisation and several auditors
appointed. One to many. …..(A)
This is correct: One big organisation and single auditor.
Now one single auditor should appoint several auditors.
Several auditors should report direct to him.
The position: One to one.
Companies Act 2013 should be amended to enable one single auditor
to appoint his own network to meet the purpose. …… (B)
ICAI should move up to this position to equal to the level and status
big business organisations.
This aspect enhances the professional excellance and vast freedom
in discharging professional duty to the society.
To ICAI, India: Please ensure this taking this as a challenge.
Can you do it? You know well how previous
audit reports were questioned by everyone and everyone doubted credibility of audit reports. Achieve position(B)!
With regards, -Nagaraj T V 9844200688
08-09-2014 Bangalore
Sir,
I want to comment on the issue: “whether true and fair view….”
of the auditor’s report.
Yes Sir, the auditor should compulsorily comment and discharge his
contractual obligation as well as statutory obligation.
If the auditor dissents otherwise, he should comment accordingly.
Every statutory auditor has the following obligations:-
Contractual obligation: To the shareholders who appoint him.
Statutory obligation: To all the tax regulators and the government.
Social obligation: To the credit rating agencies, investors at large, etc.
In case of social obligations, there is no privity of contract with the auditor. But still, auditors comment on ‘fair view’ is pivotal
because everyone depends and relies on auditor’s report for various
and varied purposes.
True and fair view should correctly co-relate the following activities:-
Economic activity as stated in the core objective and incidental
objectives of the company. This is No.1.
Books of account and final accounts should reflect accordingly.
This is No.2. No.1 should ‘truly and fairly’ tally with No.2.
Consider all these reports:-
Directors report, Internal auditor’s report, Cost control and various
management’s control reports.
What matters to each and everyone is: Auditor’s report giving fair
and true view. All other reports are secondary.
See the position:- Auditor’s fair and true view
is based on various other reports.
So the report is ‘based on other reports’.
See this position:- Auditor’s fair and true view after examining
and satisfying himself(or herself)
whether No.1 tallies with No.2 and whether
all the other reports are correctly serving
the corporate purpose, regulators’ purpose
and the purpose of all other users.
Reason:- Every company earns income from business operations,
financial or capital operations and investing operations.
Predominance of business operations is important because
it meets the corporate objectives. Predominance of other activities should be commented and cautioned well.
Conclusion:- Auditor’s true and fair view should reflect
independence in his profession and overcome
dependence based on other reports.
The intention of the statute is to increase the quality of auditors’
report and chartered accountants’ profession.
It is pertinent to note this aspect is physics:-
Performance is a scalar quantity (no direction to the purpose)
True and fair view in audit report is a vector quantity.
Vector is more important than scalar.
Please respond if my views are correct.
With regards, Nagaraj T V 9844200688