It is inevitable that 'dynamic environment demands constant changes'. One of such change had been made in the Companies Act notifying the Companies Act, 2013 on 30.08.2013. Although, the Companies Act, 2013 was notified on 30th August 2013, but Section 1 (3) of Companies Act 2013 (hereinafter referred to as 2013 Act) empowered Central government to notify the Sections and bring out the provisions in tranches, at their discretion. And until the Sections are notified, the provisions of Companies Act 1956 were directed to be followed. The 2013 Act contains 470 Sections along with VII schedules. Although the 2013 Act contains less number of Sections, but the rules attached to these Sections makes it comparatively lengthier as compared to the Companies Act 1956. As of now 183 Sections have been notified which majorly includes provisions related to Incorporation, meetings, books of accounts, Buy back, share capital, auditors etc.
In the present article we deal with the provisions of the 2013 dealing with the Auditors of the Company. The auditors of a company play a vital role towards the stakeholders of such company. The Auditors are required to audit the books of accounts of the company and report to the shareholders regarding the affairs of the Company which are carried out by the directors of the Company in the fiduciary capacity.
The provision related to auditors in the 2013 Act contains drastic changes as compared to the 1956 act. The important one is defining the role of Auditors, which is in parlance with the Sarbanes Oxley Act 2002, commonly known as SOX and defining the tenure for an auditor to Audit the books of the company.
APPOINTMENT OF AUDITORS
Section 139 (6) of 2013 Act provides for appointment of First Auditor i.e. Board shall appoint such auditor within 30 days of registration of company. If no auditor is appointed then, the members through an EoGM shall appoint an auditor within 90 days. In case of subsequent auditor, the Audit committee shall recommend the board for appointment of auditor, and the board shall recommend (if recommendation approved by the board) in the Annual General Meeting. In case the board disapproves such auditor, the reason along with proposal for recommendation must be referred back to the committee. If the committee does not wish to reconsider its decision, the Board shall record its reasons and place it before the committee and send its own recommendation for consideration in the AGM for the appointment.
However, in case of first auditor of Government Company, Section 139(7) requires Comptroller and Auditor General of India to appoint an auditor within 60 days. If the CAG does not appoint the auditor, then Board shall appoint the auditor within next 30 days. If board does not appoint, the members shall have the authority to appoint the auditor within next 60 days in Extra-ordinary General Meeting. In case of subsequent auditor in a Government company, Section 139 (5) mandates, Comptroller and Auditor General of India to appoint an auditor within 180 days from the commencement of the financial year.
The Audit committee or the Board (incase no such Audit committee is formed), is required to consider the experience, qualification, or any professional misconduct by the auditor or the firm of auditor in case of his appointment. The appointment of such auditor will be from conclusion of that meeting till the conclusion of sixth annual general meeting, subject to ratification by passing Ordinary resolution in every general meeting till the 6th AGM.
Section 139 (10) by taking into consideration of the company unable to appoint the auditor due to any reason, provides that the existing auditor shall continue to be the auditor of company.
The provisions dealing with the Auditors as enumerated under the 2013 Act are dealt herein below:
SECTION 139 (2) READ WITH RULE 5 DEALS WITH THE CONDITION FOR APPOINTMENT AS FOLLOWS:-
No (i) listed companies, (ii) unlisted public company having paid-up-capital of Rs 10 crore or more, (iii) all private limited company having paid-up-capital of Rs 20 crore or more, (iv) all companies having public borrowings or public deposits Rs 50 crores or more, shall appoint or reappoint;
- any individual auditors for more than 1 term of 5 consecutive years and
- Auditors firm for more than 2 terms of 5 consecutive years each.
Note: - Proviso 3 provides that existing companies has to comply with above provisions within 3 years from date of commencement.
The existing tenure of the auditor or auditors firm shall be taken into consideration for calculating the remaining tenure of the auditor/ auditors firm. In case of existing companies, the individual auditor who has been auditing the accounts of the company since past three years or more can be appointed for further auditor ship for not more than 3 years. It means, if the auditor was auditing the company since past 2 years or more, he can be appointed for further maximum 3 years only. In case auditor has been appointed for period less than 3 years, then he can further be appointed for only the remaining period as defined above. However, in case of auditor's firm which has been auditing the accounts of the company since past seven years or more can be appointed as an auditor for further period not exceeding 3 years. In case auditor's firm has been appointed for period less than 7 years, then they can further be appointed for only the remaining period as defined above. It means, if the auditor's firm was auditing the company since past 7 years or more, they can be appointed for further maximum period of 3 years only.
The law also requires that the incoming and outgoing auditor shall not be under same network of audit firms. Same Network includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.
SECTION 141 READ WITH RULE 10- DISQUALIFICATION OF AUDITOR
The following shall not be appointed as auditor;
- A body Corporate other than LLP
- An officer or employee of company
- A person who is a partner or who is in employment, of an office or employee of company.
- The person, his relative or partner is holding shares of the company of face value worth more than Rs 1 Lakh.
- The auditor, his relative, his partner is indebted to company, its holding or subsidiary or associate company or subsidiary of holding company for Rs 5 lakh or more.
- The auditor, his relative, his partner has given guarantee or provided security in connection with indebtedness of third person to company or its holding or subsidiary or associate company or subsidiary of holding company for Rs 1 lakh or more.
- If the person or the firm has business relationship (not including professional services and transaction at arm lengths prices) with the company or its holding or subsidiary or associate company or subsidiary of holding company.
- A person whose relative is a director or is in employment of company as director or KMP.
SECTION 143 READ WITH RULE 13- REPORTING OF FRAUDS
The auditor, secretarial auditor, or cost auditor shall report to C.G within 60 days of any fraud to his knowledge in the company.
- The report should be in form of a statement as specified in Form ADT-4.
- The auditor, secretarial auditor, cost auditor, before reporting to the C.G shall forward his report to audit committee or Board within 45 days of his knowledge and seek their response on the same.
- Such response, both positive and negative, has to be reported to C.G within 15 days of the report sent to the committee or the board.
SECTION 144- AUDITOR NOT TO RENDER CERTAIN ACTIVITIES
An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:—
(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:
Provided that an auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement.
SECTION 148- COST AUDITOR
- Central Government can issue order for cost audit of such class of companies as may be prescribed.
- If audit committee exists, the committee shall recommend to the board for appointment of cost accountant in practice along with the remuneration of such auditor and shall be ratified by shareholders. In any other case, board shall appoint a cost auditor who shall be ratified by shareholders subsequently.
- The cost auditor shall submit his report to the Board, and the board shall within 30 days report to C.G.
SECTION 147 PROVIDES FOR PUNISHMENT FOR CONTRAVENTION
Company- Not less than Rs. 25,000 but which may extend to Rs. 5,00,000 and Officers in Default- Imprisonment of up to one year or fine, of not less than Rs. 10,000 which may extend to Rs 1,00,000 or both.
Since, the 2013 Act per se has been inculcated to strengthen the Corporate Governance norms, the role of auditor in laying the foundation of Corporate Governance is essential. As the penalties for not complying with these provisions have been made harsh for the Companies as well as officers in Default, the Auditors will also face grave consequences if the auditor is involved in the window dressing of the accounts of the company. The 2013 Act provisions pave a keen focus on the accountability of the Auditors who have the responsibility towards the stakeholders being playing the role of the examiner of the affairs of the Company. In today's era when the affairs of the Company are transparent in a way that there are many decisions of the board as well as shareholders which can be seen online/are available in public domain i.e. on the portal of the Ministry of Corporate Affairs, the accountability of the Auditors of the Company lays a vital role.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.