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Provisions relating to Accounts and Audit
- 1. AUDITOR & ACCOUNTS UNDER COMPANIES ACT 2013 MVSK RUTHVIK
- 2. Topics of Discussion • Introduction on CA-2013 • Accounts • Important Definitions &Their Interpretations • New aspects • Auditors • Key Changes & NewAdditions • Areas which still require clarity • What CA is required to do know??? • Conclusion
- 3. Introduction • Companies Act 2013 (CA-2013) has bought a lot of revolutionary changes relating to appointment, disqualification, many other new terms of auditor. • Penalties are something which got a special status and makes a auditor go bankrupt. • The 3’S behind CA 2013 to come into enforcement • Satyam Computers • Saradha Scam • Sahara Scam
- 4. Comparative Analysis COMPANIES ACT 1956 • 656 Sections • 13 Parts • 15 Schedules COMPANIES ACT 2013 • 470 Sections • 29 Chapters • 07 Schedules
- 5. New Concepts in CA 2013 1. One Person Company 2. Women Directors 3. Corporate Social Responsibility 4. RegisteredValuers 5. Rotation of Auditors 6. Class Action 7. Dormant Company 8. FastTrack Mergers 9. Serious Fraud Investigation Officer (SFIO)
- 6. Provisions relating to Accounts Section No Provision Section 128 Books of accounts Section 129 Financial Statements Section 130 Re-opening of Books of accounts Section 131 Voluntary Revision of Financial Statement or Board’s Report Section 132 NFRA-National Financial ReportingAuthority Section 134 Financial Statements & Board’s Report Section 135 Corporate Social Responsibility
- 7. KEY DEFINITIONS There have a some key changes relating to the definitions:- 1. Free Reserves & NetWorth 2. Financial Statements 3. FinancialYear 4. Subsidiary company 5. Associate company
- 8. Section 128-Books of Accounts • Every Company shall Prepare and keep at is registered office, books of accounts and financial statements on accrual basis for every financial year which give a true and fair view of the state of affairs of the company. • Books of accounts along with relevant vouchers shall be kept for a period of at least 8 years from immediately preceding the financial year.
- 9. Section 130-Reopening of Books of accounts • Reopening of books of accounts and recast financial statements, if application is made to CG, IT Authorities, SEBI and other statutory regulatory body if any, and an order is made by court of competent jurisdiction or tribunal to that effect that- • Earlier accounts were prepared in a fraudulent manner • Affairs of the company were mismanaged during the relevant previous period • This revision is required to disclose in Board’s report of the financial year in which the revision is made and such a revision shall not be made or filed more than once in a financial year.
- 10. Section 132-National Financial Reporting Authority (NFRA) • The Central Government has introduced a new regulatory authority named as National Financial Reporting Authority (NFRA). • The Authority Shall make recommendations to central Government on Accounting and auditing policies monitor and enforce the compliance with accounting and auditing standards and oversee the quality of the services provided by the professionals. • It has right to investigate or by reference made by the CG for bodies corporate or persons, into the matters of professional misconduct committed by members or firm of Chartered Accountants, registered under the Chartered Accountants Act,1949
- 11. Section 135 Corporate Social Responsibility(CSR) The Companies Act mandates the CSR guidelines for the following companies:- 1. Having Net worth of INR 500 crores or more (or) 2. Turnover of INR 1000 crores or more (or) 3. Net profit of INR 5 crores or more. • Such a company shall constitute a CSR Committee of Board Comprising of 3 or more directors ,1 of whom shall be an Independent Director, the committee shall formulate a policy for the activities specified in ScheduleVII of the CompaniesAct 2013. • 2% of the average net profits of immediately preceding 3 years shall have t be spent, and if not spent, an explanation with reasons thereof shall be required to be given in the director’s report.
- 13. Chapter-X Audit & Auditors ranging from section 139 to 148 has into act from 1st April 2014. Companies Act, 2013 Section Description Section 139 Appointment of Auditors Section 140 Removal, Resignation of auditor and giving of special notice. Section 141 Eligibility, qualifications and disqualifications of auditors. Section 142 Remuneration of auditors. Section 143 Powers and duties of auditors and auditing standards. Section 144 Auditor not to render certain services. Section 145 Auditors to sign audit reports, etc. Section 146 Auditors to attend general meeting. Section 147 Punishment for contravention. Section 148 Central Government to specify audit of items of cost in respect of certain companies. (Cost Audit)
- 14. Key Changes • A firm/LLP can partner with non-CA’s and still be appointed as auditor. • Section 144 specifies services which auditor shouldn’t provide. • Acts of relative included in dis-qualification of auditor. • Business relationship with a company is bought within the ambit of disqualification of an auditor (whether direct or indirect) • Mandatory Compliance of Standards onAuditing • Fraud Reporting – Section 143(12)
- 15. Section 139: Appointment of Auditor • Every Company has to appoint the auditor for period of 5 yrs i.e. till end of 6th AGM • Company will intimate the auditor about his appointment & Now it is duty of the company to File form ADT-1 relating to auditor appointment. • In every Annual General Meeting, the appointment of Statutory Auditors should be ratified. If ratification of appointment is not made by the members in the Annual General meeting, the Board shall appoint another individual/Firm as Auditors as per procedures laid down under the Act.
- 16. Procedure of appointment if Companies have audit committee • Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee • It is Duty of Audit Committee to go through the process of selection of Auditors and then recommend to the Board which in turn recommends to the Members for consideration in the AGM. • If the Board disagrees the recommendation of the Audit committee, it shall refer back again to the said Committee citing reason for disagreement and recommending reconsideration.
- 17. Rotation of Auditors • New Concept Where many Chartered Accountants are in favour & against too. But Law has to be followed….. • Rotation of Auditors is Mandatory only for • listed companies • unlisted companies having paid up share capital of Rs. 10 crores or more • all private limited companies having paid up share capital of Rs. 20 crores or more • all other companies (excluding OPC & small companies) having paid up share capital below threshold limit but having public borrowing financial institutions, banks or public deposits of Rs. 50 crores or more.
- 18. • An individual is eligible to be appointed as auditor only for one term of 5 consecutive years while a firm can be appointed as auditor of the same company for two terms of 5 consecutive years i.e 10 years. COOLING PEROID:- • An individual or audit firm as the case may be who/which has completed the above mentioned terms shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term. • Companies incorporated prior to 1st April 2014 have been given 3 years of moratorium period to ensure compliance with the act.
- 19. Section 140: Removal & Resignation • Auditor can be removed by passing a Special resolution after obtaining prior approval of Central Govt. Application to CG in within 30 days of passing board resolution. • Removal of auditor before 5 years would be considered as removal from his office ,so strict formalities have to followed to protect the interest of auditor. • In case an Auditor resigned within his period of 5 years, he has to file (ADT-3) with ROC within 30 days of removal stating the reasons why resigned else he would punishable with a fine of not less than Rs. 50,000 upto Rs. 5,00,000.
- 20. Section 141:Eligibility of Auditor • Only a Practising Chartered accountant Can be appointed as Auditor for a company. • It seems Firm/LLP can contain partner’s who are Non- CA’s. The introduction of LLP as an auditor and ability of a firm/LLP to operate with partners who are not Chartered Accountants is a welcome change and in line with international practices
- 21. Disqualification • Body corporate other than LLP • A person who is a partner or who is in the employment of an officer or employee of the company • A person who, or his relative or partner • Holds a security exceeding Rs. 1,00,000 (Face value) • Indebtness to company exceeding Rs.5,00,000 • Given guarantee in connection with the indebtness of any 3rd party to company/subisdary/associate in excess of Rs.1,00,000 • A person or a firm who, whether directly or indirectly, has business relationship with the company/associates/subsidaries • Having a relative as director/KMP in such companies
- 22. Ceiling Limit • a person who is in full time employment elsewhere or a partner of a firm holding appointment as its auditor as on that date of appointment shall not be auditor of more than 20 Companies ( Includes Public + Private). • However, the MCA Notification on 5th June 2015 brought a huge relief to many CA Firms that auditor ceiling limit excludes one person companies, dormant companies, small companies and Private limited companies who paid up share capital is less than 100 crores.
- 23. Section 142: Remuneration • The BOD may fix the remuneration for first auditor. Subsequently the remuneration shall be fixed in AGM. • Section 142 requires the Company to quantify the remuneration in the General Meeting. • But as per the new act, the remuneration in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.
- 24. Section 143:Powers & Duties of Auditor 1. Right to access of books of accounts, documents, vouchers relating to the company at all times. 2. Report to the company on the accounts examined by him that are required to be laid before the company in general meeting 3. Auditor should report on matters relating to compliance with the accounting & Auditing standards, disqualification relating to the director, reporting the efficiency of the internal financial controls. 4. In case of branch audit, opening the report from such branch auditor if such branch is out of India 5. Reporting of the fraud committed by the employees to audit committee beyond certain limit and beyond such limit to the central govt. Such limit is yet to be notified by the central government.
- 25. Section 144: Other Services by Auditor • New concept introduced in Companies act 2013 stating services which the auditor are not entitled to provide. Auditor can provide such other services as approved by BOD. Services which an auditor cannot provide:- 1. Accounting and Book keeping services 2. Internal audit 3. Design and implementation of any financial information system 4. Actuarial services 5. Investment advisory services & Investment banking services 6. Rendering of outsourced financial services 7. Management services any other kind of services as may be prescribed
- 26. Section 145-Auditor to Sign report • The person appointed as an auditor of the company shall have to sign the audit report or certify any document in accordance with the section 141 of the act. • The qualifications, observations or comment on functioning of the company in the auditor’s report shall be read before the general meeting Section 146-Auditor to attend AGM All the notices and communications related to AGM shall be forwarded to the auditor. The auditor shall attend AGM either himself or through representative and have the right to be heard at the meeting.
- 27. Section 147-Punishment for Contravention Company- Punishable with fine (Rs. 25,000 to Rs. 5,00,000). Officer in charge- Punishable with imprisonment maximum for 1 year or with fine (Rs.10,000 to Rs. 1,00,000). Auditor- Punishable with fine (Rs. 25,000 to Rs. 5,00,000). 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 (Rs. 1,00,000 to Rs. 25,00,000).
- 28. Conclusion The companies’ act 2013 has bought a few drastic changes which require the attention of the auditors so as to ensure compliance with them. The some key definitions needs to be relooked before we advise the client and we should keep ourselves updated on daily basis as the notifications and circulars been released by MCA on various aspects which bring a lot amount of clarity.
Editor's Notes
- #2: Gone are the days where an auditor used to react and report post the fraud happens and qualify his report. Now, An auditor is ‘watch dog’ not a ‘blood hound’. Like a dog should bark and chase when something found wrong. Same like that duty of auditor is to verification and detection, but he must go deep if suspicion arises.
- #4: It is not that Penalties imposed in CA 2013 are something new, but the way they are imposed is something which auditor, officer in charge have to be careful about.
- #5: Now there is something Called Companies act 2015(amended) which came in 25th May 2015 after receiving the president assent. Rules for 18 Chapters have been notified till date.( as per ICAI Website).
- #8: Sec 2(43) says free reserves are those which are available for distrubiton to Sharholders but excludes unrealized, notional gains & Revaluation assets. It is important to understand the difference between Unrealized & Notional gains.Example- stock market MtmPL & bank int. Networth of company means agg value of paidup share capital + reserves created out of profit + Sec prem-acc losses-misc exp-deff exp. However it doesn’t include revaluation of assets, w/back of depn. FYR mandatory now only 31st march. So 2 yrs time given. However, not app for Foreign co & their subsidiaries who rewwuire consolidation outside india Subsidiary co is defined now in terms of 51% of Share capital ( ESC+Convertible PSC) instead of saying 51% of Voting power. Associate co means other co has significant influence which means atleast 20% of total SC orr business decisions. Financial Statements include BS.,PL,CFS (newly added),stat of equity.CFS not app for OPC,Small company
- #9: For Branches outside india, we assume they are maintaining the books but the summarized retunrs have to be sent here to registered office place.
- #10: No provision earlier in CA 1956. But practical it is thought to defend by because BOD cannot openly accept fraud has been done where a lot of questions will come. Also to get permission from CG,IT,SEBI is not so easy.
- #11: NFRA has to be told that it would come into force since long hasn’t still yet come. As per one of members Seminar, I would that there is a lot of pressure that this will be not enacted as the ICAI will loose it commend & every Person will have a right to Point fingers at a CA.
- #14: Let me try to cover major sections which cover the significant changes.
- #15: Compliance in relating to Appointment, resignation of auditor have been tightened. Limits for disqualification in case of holding of security, indebtness to a company or providing guarantee to a company have increased.
- #16: first Auditors of a company are to be appointed always by the BOD within 30 days of registration of company. Failing to do so members will hold a EGM and then appoint within 90 days who holds office till end of 1st AGM. In every Annual General Meeting, the appointment of Statutory Auditors should be ratified. If ratification of appointment is not made by the members in the Annual General meeting, the Board shall appoint another individual/Firm as Auditors as per procedures laid down under the Act. Auditor should give his elgibility certificate to the company. Earlier auditor used to intimate roc about his appointment through 23B.Casual vacncy filled by BOD. But due to resignation such vacncy shoud be approved by members in AGM.
- #18: The existing companies shall comply with the requirement of rotation of auditors within 3 years from the date of enforcement of the act. The members of the company may resolve, in the audit firm appointed the partner and his team shall be rotated at intervals. The audit may be conducted by more than one auditor.
- #19: To Avoid Ambuigty it is considered that earlier term of 5 yrs /10 yrs served by CA Individual or CA Firm shud be taken in consideration for the purpose of counting the period served. Refe Rule 6(3)(i).
- #20: Special notice shall be required for a resolution at an AGM appointing as auditor a person other than a retiring auditor, except where the retiring auditor has completed a consecutive tenure of 5 or10 years. Any application to CG by any other person if satisfied that auditor has directly or indirectly has acted fraudulently it may order, direct the company to change the auditor. If the final order is passed, the auditor shall not be appointed as auditor of any company for a period of 5 years.
- #21: This will also result in multi-disciplinary firms providing vide range of services.
- #22: In CA 1956, the amt of holding security,indebtnes was Rs1000 which has been now been increased. a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction. If after getting appointed as the auditor, the auditor incurs any of the above disqualifications then he shall vacate the office and such vacation shall be deemed as casual vacancy.
- #24: The Board has to finalize the remuneration payable to the Auditor in consultation with him and pass the resolution in the Board subject to the approval of the shareholders in the Annual General Meeting. Earlier under the Companies Act, 1956, The Company had the privilege to appoint Auditors in the AGMs on a remuneration that could be decided by the Board at a later date With the Board’s consent on the Appointment as well as on the remuneration, the intended resolution to be passed could be mentioned in the AGM NOTICE itself.
- #26: Here, the Act has provided a transition period 1 year which means an auditor who has already been performing any non-audit services shall comply with this section till 31.03.2015. This section will significantly damage the ability of an audit-firm/individual to provide most non-audit services. The requirements appear to be quite onerous and indeed would appear to prohibit an audit firm from providing a wide range of services, even when those are non-material.
- #28: If the auditor is convicted, he is liable to compensate for damages.CG shall ensure the prompt payment of damages through a statutory body. The liability of partners in audit firm shall be joint and several.