Auditor’s Role & Responsibilities under Companies Act, 2013

The new Companies Act (hereinafter referred as COMPANIES ACT 2013) is replacing old Companies Act, 1956 (hereinafter referred as CA1956).

The CA 2013 makes comprehensive provisions to govern all listed and unlisted companies in the country. The CA 2013 is partially made effective w.e.f. 12th September, 2013, by way of implementing 98 Sections and repealing the relevant sections corresponded with CA 1956.

Seeking greater transparency and corporate responsibility, the Companies Act, 2013 (“New Companies Act”) has changed the role of auditors in companies.

 Firstly, there is a need to understand section 139 that deals with theAppointment 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.

Some other Provisions regarding re-appointment of Auditor:

A retiring auditor may be re- appointed at an AGM, if:

  • He is not disqualified for re-appointment,
  • He has not given the company a notice in writing of his unwillingness to be re-appointed,
  • A special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be 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 convenedwithin 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 five years and the audit firm will be rotated every ten 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.

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 top 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 general thinking with regards to unlawful acts or default by the clients appears to be that the auditor should not “aid or abet” but he is not under any legal obligation to disclose the offence.

The INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA has considered the role of a chartered accountant in relation to taxation frauds by the assessee 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.
  • The question of liability of an auditor for unlawful acts or frauds by the clients should be the considered in the light of broad parameters given above. However, it appears that if an auditor was aware of any unlawful act have been committed by the client in respects of accounts audited by him and the unlawfulness was not rectified by proper disclosure, the auditor owes a duty to make the suitable report.i9f he does not, he may be held liable.

AUDITOR’s LIABILITY TO THIRD PARTIES IN RELATION TO ISSUE OF PROSPECTUS:

Under section 35 of THE COMPANISE 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.

DUTIES AND RESPONSIBILITIES OF AN AUDITOR IN CASEOF MATERIAL MISSTATEMENT:

  • Misstatement in financial information can arise from fraud or error. The term FRAUD refers to the ‘INTENTIONAL ACT’ by one or more individuals amongst the management, those charged with governance.
  • The auditor is concerned with fraudulent acts that cause a material misstatement in the financial statements.
  • Fraud involving one or more members of management those charged with governance is referred to as MANAGEMENT FRAUD. The primary responsibility for the prevention and detection of fraud rests with those charged with governance and management of the entity.
  • Further, an audit conducted in accordance with the standards on auditing generally accepted in India, is designed to provide reasonable assurance that financial statements taken as a whole are free from material misstatement whether caused by fraud or error.
  • An auditor does not guarantee that all material misstatement will be detected because of such factors, as the use of judgment, the use of testing, the inherent limitations of internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature.
  • Certain levels of management may be in a position to override control procedures designed to prevent similar frauds by other employees. Auditor’s opinion on the financial statements is based on the concept of obtaining reasonable assurance hence in an audit the auditor does not guarantee that material misstatements will be detected.

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:

(a) Accounting and book keeping services;

(b) Internal audit;

(c) Design and implementation of any financial information system;

(d) Actuarial services;

(e) Investment advisory services;

(f) Investment banking services;

(g) Rendering of outsourced financial services;

(h) Management services; and

(i) 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.

Conclusion: Seeking greater transparency and corporate responsibility and making auditors more-independent, the changes brought out in the form of THE COMPANIES ACT, 2103 will prove more, efficient and effective.

 

 

 

 

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