Companies Act 2013: Provisions relating to an Auditor
Overview to the Companies Act, 2013:
The new Companies Act (hereinafter referred as COMPANIES ACT 2013) is replacing old Companies Act, 1956.The Companies Act 2013 makes comprehensive provisions to govern all listed and unlisted companies in the country. The CA2013 is partially made effective w.e.f. 12th September, 2013, by way of implementing 98 Sections and repealing the relevant sections corresponded with Companies Act 1956.
Seeking greater transparency and corporate responsibility, the Companies Act, 2013 has changed the role of auditors in companies.
First of all, there is a need to understand section 139 that deals with the Appointment of Auditors
Appointment of Auditor:
In case of Govt. Company:
Auditor will be appointed by the C&AG within 180 days from the commencement of the Financial Year, who shall hold office till the conclusion of the AGM.
In case of other than Govt. Company:
- Every other company shall at the first AGM appoint an individual or a firm as an Auditor who shall hold office from the conclusion of that AGM till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth meeting.
- Even if the auditor is appointed for 5 years, then also members of the Company should ratify such appointment at every AGM. The manner and procedure of the appointment of the Auditor is prescribed by CG.
- Before the appointment of the auditor the written consent of the auditor to such appointment and certificate showing compliance of Section 141 and other conditions as prescribed, should be obtained.
- Notice of Appointment of Auditor should be filled with the Registrar within 15 days of the meeting in which the auditor is appointed.
- Where at an AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the Company.
In case of resignation by auditor:
Casual Vacancy to be filled by BOD within 30 days but the same should be approved by the members in a general meeting (EGM) to be convened within 3 months of the recommendation of the Board. He shall hold office till the conclusion of next AGM.
Mandatory rotation of Auditors:
The New Companies Act [Section 139(2)] read with the draft rules provide for the mandatory rotation of auditors. Individual auditors will be compulsorily rotated every 5 years and the audit firm will be rotated every 10 years in all companies except one-person companies and small companies.
This step was inserted to ensure that auditors do not increase their familiarity and reduce their independence by continuing to audit a company for an unlimited period of time.
“After taking the command, the Companies’ Act 2013 has emerged with certain new challenges for the auditors and these are imposed on them by changing the role and responsibilities of an auditor and incorporated certain provision which deals with the restrictions in their work. So, let us discuss these new role and responsibilities imposed on an auditor which has become challenges for them.”
Auditor’s Liabilities/ Responsibilities under Companies Act, 2013:
- SA 620 “Using the work of an Auditor’s Expert” discusses the auditor’s responsibility in relation to an expert and the procedures the auditors should consider in using the work of an expert as audit evidence. During the audit, the auditor may seek to obtain, in conjunction with the client or independently, the audit evidence in the form of reports, valuation, statements, and opinions of an expert.
- Before relying on advocate’s opinion the auditor should verify that the statement given by an expert is prima facie dependable.
- SA 620 makes it incumbent on the part of an auditor to resolve the inconsistency by discussion with the management and expert.
- In case, the expert’s statement does not support the related representation in financial information the inconsistency in the legal opinions could have been detected by the auditor if he had gone through the same.
Auditor’s Liability in case of Unlawful Acts or Default by Clients:
The auditor’s basic responsibility is to report that whether in his opinion the accounts show a true and fair view and in discharging his responsibility he has to see as how the particular situations affect his position.
The Institute of Chartered Accountants of India has considered the role of a chartered accountant in relation to taxation frauds by the assesses and has made the following major recommendations:
- A professional accountant should keep in mind the provisions of section 126 of the Evidence Act whereby a barrister, an attorney or vakil is barred from disclosing any information made to him the course of and for the purpose of his employment.
- If the fraud relates to the past years when the CA did not represent the client, the client should be advised to make a disclosure. The accountant should also be careful that the past disclosure should not affect the current tax matters.
- In case of fraud relating to the accounts examined by the accountant himself, he should advise the client to make a complete disclosure. In case, client refuses tom do so, the accountant should inform him that he is entitled to dissociate himself from the case and he would make a report to the authorities that the accounts prepared and examined by him are unreliable on account of certain information obtained later.
- In case of suppression in current accounts the clients should be asked to make a full disclosure. If he refuses to do so, the accountant should make a complete reservation in his report and should not associate himself with the return.
Auditor’s Liability to Third Parties in relation to Issue of Prospectus:
Under section 35 of the Companies Act, 2013
(1)Where the person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus is misleading and he has sustained any loss or damage as a consequence thereof, the company and every person who:-
- Is a director the company at the time of issue of the prospectus;
- Has authorized himself to be named and is named in the prospectus as a director of the company or as agreed to become as a director either immediately or after an interval of time;
- Is a promoter of a company;
- Is an expert referred in sub section 5 of the section 26,
shall without prejudice to any punishment to which any person may be liable under the section 36, be liable to pay the compensation to every person who has sustained such loss or damage.
(2) No person shall be liable under sub section (1), if he proves
- That having consented to become a director of the company, he withdrew his consent before the issue of prospectus, and that it was issued without his authority or consent.
- That the prospectus was issued without his consent and that on becoming aware of this issue he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
(3) Now withstanding anything contained in this section, where it is proved that prospectus has been issued with intent to defraud the applicants for the securities of a company or any other fraudulent purposes, every person referred to in the subsection (1) shall be personally responsible, without any limitation or liability, for all or any of the losses.
What does the section 144 of companies act 2013 talks about?
There was no provision in Companies’ Act 1956 in respect to restrictions for providing certain services by the statutory auditors. The newly inserted section 144 of the Companies Act 2013 is the new provision that comes with the list of services that statutory auditors are restricted to render to their clients.
As per this section, the auditor shall provide only such services to the company that is approved by the board of director of the company or the audit committee. It should not be misunderstood that the services approved by the BOD shall override the provisions of this act. It should be clear that the services are to be approved by the BOD or audit committee keeping in mind the provisions of this act.
There are certain services that the statutory auditor cannot render to their clients either directly or indirectly (i.e., the company or its holding company or subsidiary company):
(i) In case the auditor is an individual:
Rendering of services either by himself or through his relative or any other person connected or associated with him through any other entity, whatsoever, in which such individual has significant influence or control or whose name or trademark or brand is used by such individual.
(ii) In case the auditor being the firm:
The services rendered by itself or through any other of its partners or its parent, subsidiary or associate entity or through any other entity, whatever may be the case where the firm or any partner of the firm has significant influence or control or whose name or trademark or brand is used by the firm or any of its partners.
The list of restricted services is:
- 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.
In case of non-compliance of section 144, section 147 takes the command which states that, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both.
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.
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