Analysis of Provisions on Statutory/Cost/Secretarial Audits & Auditors

THE COMPANIES ACT 2013

(Chapter X- Sections 139 to 148 & 204)

About the Act

The long-awaited new Companies Bill 2012 has at last seen the light of the day as The Companies Act 2013 (Act No.18 of 2013) with its publication in the Gazette of India Extraordinary on 30th August 2013 when the new Act replaced the 57-year old Companies Act, 1956. Of the total 470 Sections in the new Act, 98 have been brought into force on 8th September 2013. About 400 draft Rules and draft Forms there under  have since been hosted on the MCA’s website. The final Rules and Forms are expected to be notified soon.

The overall objective of the Act is summed up as “to modernize corporate structure through enlightened regulation consistent with international practices and provide autonomy of operation (self-regulation) with scope for innovation”  

This article sets out the provisions of the new law relating to Audit (including the new  Secretarial Audit) and Auditors together with the relevant rules and proceeds to analyse them so as to bring into focus their salient and hidden features with a view to spreading awareness thereof among all concerned, especially the corporate professionals – both in service and in public practice- and the general legal fraternity at large.

CHAPTER X - AUDIT AND AUDITORS

Highlights

1. Unlike annual appointment under the 1956 Act, Auditor(s) will henceforth be appointed for a period/term of 5 consecutive years subject to ratification of such appointment at each following AGM during the said five-year term. Limited Liability Partnership (LLP) may now be appointed as auditors.  

2. Mandatory rotation of the office of Auditor (s in the case of listed companies and other class of  companies prescribed): In such cases, an individual auditor may now hold office as auditor for a maximum period of five years ( one term) and a firm may hold such office for a maximum of 2 consecutive terms of 5 years each ( total 10 years); however ,such out-going/retiring auditor(s) will be eligible for reappointment in the same company after a break/gap of 5 years from such retirement. 

3. In the case of a firm of auditors, the company has power to seek rotation of  the Partner in charge of audit and his team  during the period of office of the firm( 10 years)

4. In the case of Government companies and companies owned or controlled, directly or indirectly, by the Governments, CAG will appoint the auditor(s). ‘Indirect control’ includes  control by public financial institutions like LIC, IDFC, IRBI, GIC, RCTFC, TFCI, PFCI, NHB, REC, IRFC, Various State FCs, NABARD etc which are in turn owned/controlled by Government(s) (notified by Central Government)

5. NCLT may, suo motu or on an application made to it, order removal of an auditor (in office) before the expiry of his term on grounds of his/its fraudulent action etc.

6. Casual vacancy in the office of an auditor now includes, in addition to resignation and death, any disqualification suffered/attracted by the auditor such as employment in the company, holding any security interest in, or indebtedness to, or business relationship with, the company or holding office as auditor in more than the permitted maximum of 20 companies or conviction for fraud, rendering prohibited services to the company etc. 

7. The auditor is now mandated (a) to seek from the company the information needed by him for his audit ( as against information merely obtained by him, earlier) and (b)to state in his report  whether the company has adequate internal financial controls system in place, and the operating effectiveness of such controls. (Sec. 143)

8. The auditor(s) has/have been mandated to comply with the (prescribed) ‘auditing’ standards (in addition to only accounting standards earlier) and to report promptly if and when he believes that an offence has been committed against the company by officers and employees of the company. (Sec. 143)

9. The auditor’s qualifications, adverse observations or comments on financial transactions shall be read before the company in general meeting

10. Unless specifically exempted by the company, the auditor (or his authorised representative who shall be qualified to be an auditor) shall attend every general meeting. (Sec.146)

11. Contravention  of  Sections 139 to 146 by the company attracts punishment of the company by way fine between Rs.25,000 and Rs. 5,00,000  and  punishment of  officer of the company in default by way of  imprisonment for a term up to one year or with fine between Rs.10,000 and Rs. 100,000, or with both.

12. For contravention of Sections 139, 143,144 and 145, the statutory auditor ( also Cost auditor and Secretarial auditor) shall be punishable with fine of between Rs.25,000 and Rs.5,00,000; if committed knowingly and willfully with intention to deceive the company or its shareholders or creditors or tax authorities, the punishment will be imprisonment up to one year and fine between Rs.100,000 and Rs. 25,00,000 apart from the liability to refund the remuneration received as auditor from the company and payment of damages. (Sec.147)

13. If one of the partners of the statutory audit firm (also of the cost audit firm and of Secretarial audit firm) has been proved to have acted fraudulently or abetted or colluded in a fraud by the company or in relation to the company or its directors or officers, the liability for such act shall be of the partner concerned individually and of all the partners of the firm, jointly and severally.

14. Cost auditor of a company shall now comply with the Cost Auditing Standards issued by the ICWAI.

15. Secretarial Audit:  Listed companies, Rs10 cr puc companies, Rs.25 cr outstanding loan/Rs.25 cr deposits companies  shall annex with their Board’s report, a Secretarial audit report in the prescribed form. The provisions of Sec.143 (relating to statutory audit and the auditor) read with Sec.147 shall mutatis mutandis apply the Company Secretary in practice conducting the Secretarial audit.

16. Statutory recognition accorded to Audit committee of the Board to strengthen corporate Governance and taking the corporate professional management to a higher plane by recognizing the Chief Financial Officer (CFO. Company Secretary and Who-time Director as Key Managerial Personnel of the company.

17. Class Action Suits (by members or depositors seeking any damages or compensation or other suitable action from or against an audit firm) have been introduced on the lines existing abroad;  the liability will now be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner

Detailed analysis

10 Sections (139 to 148) forming Chapter X of the Companies Act 2013, Regulation 89 of Table F (Schedule I), Schedule II (Depreciation) and Schedule III (Balance Sheet & Profit & Loss Account)) deal with the law and practice of statutory Audit & Auditors of Companies. It is proposed to examine and analyse these provisions, in detail, as under:-     

1.0 Appointments of Auditors (Sec.139)

Subject to the provisions of Chapter X of the Act (Sections 139 to 148), every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every (other/successive) sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed.  For purposes of Chapter X (Sections 139 to 148) “Appointment” includes reappointment, “auditor” includes a ‘firm’ which includes a limited liability partnership (LLP).

Draft Rule 10: Manner and procedure of selection of auditors : For the purpose of sub-section (1) of section 139,

(a) In the case of a company that has constituted an Audit Committee under section 177, the audit committee and in other case; the Board shall take into consideration, the qualifications and experience of the person proposed to be considered for appointment as auditor and whether these are commensurate with the size and requirements of the company.

The audit committee or the Board, as the case may be, shall also consider the completed and pending proceedings against the auditor before the Institute of Chartered Accountants of India or the National Financial Reporting Authority or Tribunal or any Court of law.

(b) Subject to the provisions of sub-rule (1) above, where a company has constituted an audit committee, the audit committee shall recommend the name of an individual or a firm as auditor to the Board. In other cases, the Board shall consider and recommend an individual or a firm as auditor to members in the annual general meeting for appointment.

(c) If the Board is satisfied with the recommendation of the audit committee, it shall consider and recommend the appointment of an individual or a firm as auditor to the members in the annual general meeting.

(d) If the board is not satisfied with the recommendation of the audit committee, it may send back the recommendation to the audit committee for reconsideration with their reasons.

(e) If the Audit Committee, after considering the reasons given by the Board, does not agree to reconsider its recommendation, the Board shall submit to the members its own recommendation for consideration of members and appointment of one of them as Auditors and shall explain the reasons for not accepting the recommendation of the audit committee in the Board’s report.

(f) The members at the annual general meeting shall appoint auditor of the company who shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting, counting the current meeting as the first, which shall be subject to the ratification by members at every annual general meeting.

1.3 The company shall also comply with the following:-

a. It shall place the matter relating to such appointment/reappointment for ratification by members at the succeeding (i.e .second, third, fourth and fifth etc) annual general meetings. 

b. Before such appointment is made, the company shall obtain a written consent of the (proposed) auditor to such appointment, and a certificate from him/it that the appointment, if made, shall be in accordance with the following conditions (vide Rule 10.2), namely  (1) he or it is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and Rules and Regulations made therein. (2) the proposed appointment is within the term allowed under the Act. (3) the proposed appointment is within the limit laid down in the Act.

c. The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141 (eligibility, qualifications and disqualifications).

d. The company shall inform the auditor concerned of his/ its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.

1.4  The  provisions in the above paras 1.1 to 1.3 are not applicable for appointment of first auditor and auditor of Government company due to the non obstante (notwithstanding) clause in sub-sections (5), (6) and (7) of Sec.139.

2.0 No listed company or a company belonging to such class or classes of companies (all companies excluding (vide Rule 10.3) OPC and small companies, that is to say companies other than public companies paid-up share capital of which does not exceed  fifty lakh rupees or such higher  amount  as may be prescribed which shall not be more than five crore rupees, or turnover of which as per is last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees. However, small company does not include (i) a holding company or a subsidiary company) (ii) a company with charitable objects registered under Sec.8 and (iii) a company or body corporate governed by any special Act) shall appoint or re-appoint (a) an individual as auditor for more than one term of five consecutive years; and (b) an audit firm as auditor for more than two terms of five consecutive years.

1. However, (i) an individual auditor / audit firm who/which has completed his/its term of 5 years or ten years as the case may be, shall be eligible for re-appointment as auditor in the same company after a gap of five years from the completion of his/its  term; Further, as on the date of appointment, no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years. Furthermore, every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, shall comply with the requirements of this sub-section within three years from the date of commencement of this Act.

2. The Central Government has , by Rule 10.4, prescribed the manner in which the companies shall rotate their auditors on the expiry of their term,  as follows:-

(a) The audit committee of a company, constituted under Section 177 of the Act shall recommend to the Board, the name of individual auditor or the audit firm who may be rotated in the place of the present incumbent on the expiry of his or their term.

(b) Where a company has constituted an audit committee, the Board shall consider the recommendation of the audit committee, and in other cases, the Board shall itself consider the matter of rotation of auditors. Thereafter, it shall propose to the members for consideration in general meeting, the names of outgoing and incoming auditor or audit firm.

(c) The members at the annual general meeting shall consider the proposal for rotation at the meeting and appoint the auditor or audit firm in the manner specified in Rule 10.1

(d) For the purpose of the rotation of auditors (i) In case of an auditor (whether an individual or audit firm), the period for which he or it has been holding office as auditor prior to the commencement of the Act shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be. (ii) The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms or is operating under the same trade mark or brand.

Explanation– For the purpose of rotation of auditors, break in term for a continuous period of 5 years would only be considered as fulfilling the requirement of eligibility.

(e) Where a company has appointed two or more persons as joint auditors, the company shall follow the rotation of auditors in such a manner that all of the joint auditors do not complete their term in the same year.

1.3. Nothing contained in 1.3 and 1.3.1 shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.

1.4 Subject to the provisions of this Act, members of a company may resolve to provide that (a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or b) that the audit shall be conducted by more than one auditor. (Sec.139 (3))

1.5 Notwithstanding anything contained in pares 1.1 and 1.2, in the case of a Government

Company or any other company owned or controlled, directly or indirectly, by the Central

Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor-General of India (CAG) shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.

1.6 Notwithstanding anything contained in paras 1.1 and 1.2, the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors

Within thirty days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.

1.7 Notwithstanding anything contained in sub-section (1) or sub-section (5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India (CAG) within sixty days from the date of registration of the company and in case the CAG  does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next thirty days; and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the members of the company who shall appoint such auditor within the (next) sixty days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.

1.8 Any casual vacancy in the office of an auditor shall (i) in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the CAG, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting; (ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the CAG , be filled by the CAG within thirty days.  However, in case the CAG does not fill the vacancy within the said period, the Board shall fill the vacancy within next thirty days.

1.9 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.

Note:  If the company has not yet constituted the Audit Committee s required by Sec.177, it should form such a committee first and take its recommendations. This is because of the language “ is required to constitute” instead of “ has constituted”. If the latter expression had been used, the company is not compelled to constitute the committee; the recommendations may be made by the Board directly.

1.10. Subject to the provisions of sub-section (1) and the rules made there under, a retiring auditor may be re-appointed at an annual general meeting, if (a) he is not disqualified for re-appointment; (b) he has not given the company a notice in writing of his unwillingness to be Re-appointed; and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he (retiring auditor) shall not be re-appointed.

1.11 Where at any annual general meeting, no auditor is appointed or re-appointed, the Existing auditor shall continue to be the auditor of the company.

1.12 Punishment for contravention of the provisions of Sec.139, the Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

1.13. When an auditor is convicted as above-stated, such auditor shall also be liable (a) to refund the remuneration received by him to the company and (b) to pay damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his report. The Central Government will be notifying a statutory body or authority or an officer of the Central Government for ensuring prompt payment of such damages to the company, statutory body etc (Sec.147)   

1.14   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.

Notes:

a. The meaning and implication of the word ‘ratification’ needs to be clarified by MCA. In law, ratification refers to regularization (by way of confirmation) of an irregular or incorrect or incompetent original action.  How this word ‘ratification’ can be used for a valid resolution passed at an AGM is not clear. An apt expression may be ‘reconfirmation’ (of the continuation of appointment already made). It is also not clear as to whether failure to ratify would amount to removal of the existing auditor.

b. The maximum number of company-audits that may be held by an individual auditor (20 under Sec.224 of the 1956 Act) will now be prescribed by the Central Government in the Rules. Such maximum number will now include private companies as the present Section 139 ( unlike Sec.224 of the 1956 Act) does not exclude Private company. 

c. It is not clear how the word ‘certificate’ is justified in the context of the second proviso to sub-section (1) of Sec. 139 when the contents of the document pertain to some uncertain event of the future, namely .conditions that may be prescribed’. The document may perhaps be called a ‘Letter of undertaking’ or simply a ‘letter of consent’ or an ‘agreement’. ‘Certificate’ is always of a past event or permanent feature (like character, conduct etc) that exists even at the time of issue of issue of the certificate.

d. The words ‘for a period of five years’ are not only superfluous but may aid  an absurd interpretation that the company may appoint such a firm (having a common partner) for a period of  less than five years.

e. Existing listed companies and other companies to be prescribed have a three-year period available to them to comply with sub-section (2) of Sec. 139.

f. The expression ‘Rotation’ should apply to the period of office held by an auditor and not to the auditor himself/itself. Hence, sub-section (3)  (a) of Sec. 139 should be restated as follows “ in the audit firm appointed by it, the period of office  of the  auditing partner and his/her team shall be rotated at such intervals…etc”

g. Following (e) above, the words “rotate the auditors” in sub-section (4) would need to be changed as “rotate the period of office of their auditors”. Rotation applies to a function (eg. Rotating the audit) or action (eg. like retirement by rotation) and not to a person or office.

h. Note that in the case of “a company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments”, the CAG shall appoint the auditor. In other words, such company will be a Government Company for purposes of audit. Indirect control would include direct ownership or control of companies by institutions which are, in turn, directly owned or controlled by State and/or Central Government. This provision was covered by Section 224A of the 1956 Act that required the passing of a special resolution for appointment of auditor. In its original avatar, such companies were required to be audited in the same way as a Government company.

i. The expression ‘casual vacancy’ has not been defined in the Act barring reference to ‘deemed casual vacancy’ in sub-section (4) of Sec. 141.. The expression generally denotes vacancies of a temporary nature caused by acts like resignation, death, vacancy due to disqualification etc but not retirement by expiry of tem or omission/failure to appoint an auditor.

j. The individual auditor or firm holds his/its office from the time of conclusion of the meeting at which he/it is appointed till the time of conclusion of the (successive) sixth meeting. Hence the holding of office has nothing to do with a particular financial statement or making of a report on the accounts examined by it/him or on the financial statement. His duty and power to examine accounts thus continues uninterrupted till the conclusion of the sixth annual general meeting including any valid extensions and adjournments thereof. 

k. A class of companies is distinguished by a special feature, yardstick, parameter, rank, level, grade etc like Turnover, control, size, accommodation, merit etc. (eg. Holding company.  Deemed public companies, Government Company, listed company etc).

l. Sec. 139 (3) empowers a company to resolve to provide (a) the rotation of audit among the partners in a firm or (b) that the audit shall be conducted by more than one auditor (joint-audits).

m. ‘Control’ in relation to a company refers to exercise of decision-making power or possession of a controlling interest through voting rights ( holding more than half in nominal value of the subsidiary’s  total share capital) or constitution of the board of directors (without holding any equity) etc.( eg. Holding company, Government Company etc). Such control may be exercised directly or indirectly (like company a controlling B and B controlling C, as in a chain or A & B together controlling C). The degree of control generally stars from fifty-one percent of the equity or control of the composition of the whole or majority of the directors).

n. ‘Total voting power’ means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes. (Sec.2)

o. ‘Special resolution’ is one which complies with the following: (a) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution (b) the notice required under the Act has been duly given and (c) the votes cast in favour of the resolution, whether on a show of hands, or electronically or on a poll, as the case may be, by members who, being entitled so to do, vote in person or by proxy or by postal ballot, are required to be not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.” (Sec. 2)

p. In the case of a firm of auditors including LLP the liability for fraudulent action or abetting or collusion in any fraud, by a partner would be that of both the partner concerned and of the firm. In the case of LLP such joint and several liability may be limited to those partners in LLP who are chartered accountants.( Sec. 140 )

q. Special Notice ( required for a resolution to appoint a person other than the retiring auditor etc) means a notice of the intention to move a resolution ( to be set out in the notice of a general meeting) is given to the company by such number of members holding not less than one percent of total voting power or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up and the company shall give its members notice of the resolution in such manner as may be prescribed.(Sec.115)

r. If the Tribunal (NCLT) passes a final order against any auditor ( which expression includes a firm of which he is a partner) all the partners including the guilty partner and the firm cannot be appointed as auditors of any company for a period of five years from the date of passing the order by the Tribunal. This is without prejudice to the liability of the auditor and the firm for penal action under Section 447 (Punishment for fraud).

2.0 Removal, resignation of auditor and giving of special notice (Sec. 140)

2.1 The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government, under Rule 10.5 through an application to the Central Government , with requisite fee, in Form No. 10.1 within 30 days from the date on which the special resolution was passed in general meeting.

in that behalf in the prescribed manner: Before taking any  such action, the auditor concerned shall be given a reasonable opportunity of being heard.

2.2 The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed Form 10.2 with the company and the Registrar, and in case of  Government companies and other companies owned/controlled by Government(s) referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

2.3 If the auditor does not comply with para 2.2, he or it shall be punishable with fine of between fifty thousand rupees (minimum) and five lakh rupees (maximum).

2.4  (i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a Consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139. (ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor (iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,

(a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and (b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company, and if a copy of the representation is not sent as aforesaid because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting: However,  if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar: Further, if the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting.

2.5 Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors. However, when an application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place.

2.5.1 Further, an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447 (re: punishment for fraud). In the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.

2.6 Punishment for contravention of the provisions of Sec.140, the Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

2.7 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.

Notes:

a. As per the second proviso to sub-section (5) of Sec.140 an auditor is disqualified to be appointed as auditor of any company for a period of  5 years when the Tribunal convicts him for his fraudulent action. However, under Sec.141 (3) (h)  a person (Chartered Accountant) convicted by a court for an offence involving fraud  is  disqualified for  appointment as an auditor for a period of 10 years. The anomaly needs to be clarified by MCA.

b. Tribunal’s powers to order to (a) suspend an existing auditor  (b) to order change of auditor  and (c) to impose a 5-year ban on functioning as auditor in any company will be exercised only when the auditor is guilty of  fraud committed by him or for abetting or colluding in a fraud by or in relation to the company. Right-thinking auditors who function dutifully, honestly and professionally should have no problem whatsoever with these onerous provisions.

c. In the case of a firm of auditors including LLP the liability for fraudulent action or abetting or collusion in any fraud, by a partner would be that of both the partner concerned and of the firm. In the case of LLP such joint and several liabilities may be limited to those partners in LLP who are chartered accountants.

d. Special Notice ( required for a resolution to appoint a person other than the retiring auditor etc) means a notice of the intention to move a resolution ( to be set out in the notice of a general meeting) is given to the company by such number of members holding not less than one percent of total voting power or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up and the company shall give its members notice of the resolution in such manner as may be prescribed.(Sec.115)

e. If the Tribunal (NCLT) passes a final order against any auditor ( which expression includes a firm of which he is a partner) all the partners including the guilty partner and the firm cannot be appointed as auditors of any company for a period of five years from the date of passing the order by the Tribunal. This is without prejudice to the liability of the auditor and the firm for penal action under Section 447 (Punishment for fraud).

3.0 Eligibility, qualifications and disqualifications of auditors (Sec. 141)

3.1 A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant ( holding certificate of practice under the CA Act, vide Sec.2). However, a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.

3.2 Where a firm including a LLP is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.

3.3 The following persons shall not be eligible for appointment as an auditor of a company, namely (a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) A person who, or his relative or partner, (i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company: however, the relative may hold security or interest in the company of Face value not exceeding one thousand rupees or such sum as may be prescribed (may hold securities of face value or interest in the company not exceeding rupees one lakh vide Rule 10.7)  (ii)  a person who, or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed ( indebtedness in excess of rupees one lakh  renders him ineligible for appointment, vide Rule 10.7); or (iii) a person who, or his relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not be eligible for appointment ;  (e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company ( the term “business relationship” shall construe any transaction entered into for a commercial purpose except those which are in the nature of professional services as permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act and the rules and the regulations made under such Act.); (f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel; (g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies; (h) 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; (i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services  as provided in section 144.

3.4 Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

3.5 Punishment for contravention of the provisions of Sec.141, the Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

Notes:

a. ‘body corporate’ or ‘corporation’ includes a company incorporated outside India, but does not include (a) a co-operative society  and (b) a body corporate ( not being a company) exempted by the Central Government. (Sec.2) The scope of ‘body corporate’ is wider than that of a ‘company’ under the Act. It includes corporations incorporated formed under any special law of India or abroad such as public financial institutions formed under special acts of Parliament (eg LIC, UTI, IDFC, etc) an incorporated company is a body corporate but a body corporate may or may not be an incorporated company. Under Income Tax Act, a company is an association whether incorporated or not, whether Indian or Foreign. Again, the members of an incorporated body need not necessarily be individuals; they could be companies or other incorporated bodies having an existence as a legal entity distinct from its members and having perpetual succession and a common seal..The Supreme Court has held in re: Board of Trustees, Ayurvedic and Unani Tibia College, Delhi, AIR 1962, SC 458 that a society formed under the Societies Registration Act is not a company despite the society being a legal person capable of holding property and becoming the member of a company.  A ‘corporation sole’ is a body corporate since it has not been accepted under the present definition of ‘body corporate’ (unlike in the 1956 Act where it was specifically excluded). This may be clarified by MCA.     

Under Sec.141 (3) (h)  a person (Chartered Accountant)  convicted by a Court for an offence involving fraud  is  disqualified for  appointment as an auditor for a period of 10 years.  However, as per the second proviso to sub-section (5) of Sec.140 an auditor is disqualified to be appointed as auditor of any company only for a period of  5 years when the Tribunal convicts him  for his fraudulent action.  The anomaly needs to be clarified by MCA

‘Relative’ with reference to any person, means anyone who is related to another, if (a) they are members of a HUF or (b) they are husband and wife or (c) other relatives as may be prescribed by the Central Government.

In the case of a firm of auditors including LLP the liability for fraudulent action or abetting or collusion in any fraud, by a partner would be that of both the partner concerned and of the firm. In the case of LLP such joint and several liability may be limited to those partners in LLP who are chartered accountants.( Sec. 140 )

Special Notice ( required for a resolution to appoint a person other than the retiring auditor etc) means a notice of the intention to move a resolution ( to be set out in the notice of a general meeting) is given to the company by such number of members holding not less than one percent of total voting power or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up and the company shall give its members notice of the resolution in such manner as may be prescribed.(Sec.115)

If the Tribunal (NCLT) passes a final order against any auditor ( which expression includes a firm of which he is a partner) all the partners including the guilty partner and the firm cannot be appointed as auditors of any company for a period of five years from the date of passing the order by the Tribunal. This is without prejudice to the liability of the auditor and the firm for penal action under Section 447 (Punishment for fraud).

4.0 Remuneration of auditors (Sec. 142)

4.1 The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein: Provided that the Board may fix remuneration of the first auditor appointed by it.

4.2 The remuneration under sub-section (1) shall, 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.

4.3 Punishment for contravention of the provisions of Sec.142, the Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

Notes:

a. ’Remuneration’ means any money or its equivalent given or passed to any person for services rendered by him and includes the  perquisites as defined under the Income-tax Act 1961 (Sec.2 (78). The language corresponds with that of Sec. 28 (iv) of IT Act except for omission of the words “any benefit” and “whether convertible into money or not”. “Perquisite" is defined elaborately under Sec. 17 (2) of the Income-Tax Act 196. Briefly stated, ‘perquisites’ includes the values of  (a) rent-free accommodation provided  by the employer  (b) any concession in the matter of rent (c)  any benefit or amenity granted or provided free of cost or at concessional rate (d)  any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee; and (e) any sum payable by the employer, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund to effect an assurance on the life of the assessee or to effect a contract for an annuity

b. Schedule III requires payments to the auditor to be detailed as payments made to him (a) as auditor (b) for taxation matters (c) for Company law matters (d) for management services (e) for other services and (f) as reimbursement of expenses.

c. In the case of a firm of auditors including LLP the liability for fraudulent action or abetting or collusion in any fraud, by a partner would be that of both the partner concerned and of the firm. In the case of LLP such joint and several liability may be limited to those partners in LLP who are chartered accountants.( Sec. 140 )

d. Special Notice ( required for a resolution to appoint a person other than the retiring auditor etc) means a notice of the intention to move a resolution ( to be set out in the notice of a general meeting) is given to the company by such number of members holding not less than one percent of total voting power or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up and the company shall give its members notice of the resolution in such manner as may be prescribed.(Sec.115)

e. If the Tribunal (NCLT) passes a final order against any auditor ( which expression includes a firm of which he is a partner) all the partners including the guilty partner and the firm cannot be appointed as auditors of any company for a period of five years from the date of passing the order by the Tribunal. This is without prejudice to the liability of the auditor and the firm for penal action under Section 447 (Punishment for fraud).

5.0 Powers and duties of auditors and auditing standards (Sec.143)

 5.1 Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members; (b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company; (c) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading: However, the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

5.2 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 (a)  the provisions of this Act (b) the accounting and auditing standards  (c)  matters which are required to be included in the audit report under the provisions of this Act or any rules made there under or under any order made under sub-section (11) and (d) to the best of his information and knowledge state whether 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.

5.3 The auditor’s report shall also state (a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him; (c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report; (d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; (e) whether, in his opinion, the financial statements comply with the accounting standards; (f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; (g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164 (Disqualifications for appointment as director);(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;  (i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; (j)  their views and comments on the following matters: (a) Whether the company has disclosed the effect, if any, of pending litigations on its financial position in its financial statement; (b) Whether, as per Rule 10.8, the company has made provision for foreseeable losses, if any, on long term contracts including derivative contracts;  (c) Whether there has been delay in depositing money into the Investor Education and Protection Fund by the company such other matters as may be prescribed. (4) Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons thereof.

5.5 In the case of a Government company, the  CAG shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the CAG  which, among other things, include the directions, if any, issued by the  CAG , the action taken thereon and its impact on the accounts and financial statement of the company.

5.6 The CAG shall within sixty days from the date of receipt of the audit report under sub-section (5) have a right to, (a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the CAG  may direct; and (b) comment upon or supplement such audit report: However, any comments given by the CAG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of section 136 (Right of member to copies of audited financial statement) and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.

5.7 Without prejudice to the provisions of Chapter X (Sections 139 to 148), the CAG may, in case of any company covered under sub-section (5) or sub-section (7) of section 139 (Government companies etc) if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the CAG (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.

5.8 Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company’s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be as contained in sub-sections (1) to (4) of section 143.The branch auditor shall submit his report to the company’s auditor*. The provisions of sub- section (12) of section 143 read with rule 10.10 hereunder regarding reporting of fraud by auditor shall also extend to such branch auditor to the extent it relates to the concerned branch. However, the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary. (*Rule 10.9)

5.9 Every auditor shall comply with the auditing standards.

5.10 The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA): However, until any auditing standards are notified, any standard or standards of auditing specified by the ICAI  shall be deemed to be the auditing standards.

5.11 The Central Government may, in consultation with the NFRA, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.

5.12  Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence

Involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as  prescribed by Rule 10.10 as follows:”

(1) In case the auditor has sufficient reason and information to believe that an offence involving fraud which is likely to materially affect the company, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than thirty days of his knowledge or information, with a copy to the audit committee or in case the company has not constituted an audit committee, to the Board.”Materiality” here shall mean: (a) fraud(s) that is or are happening frequently; or (b) fraud(s) where the amount involved or likely to be involved is not less than five percent of net profit or two percent of turnover of the company for the preceding financial year.

(3) In all other cases, auditors shall send a report in writing to the audit committee and where the company has not constituted an audit committee, to the Board, and the audit committee or the Board, as the case may be, shall reply to the auditors in writing as to steps taken by the audit committee or the Board in addressing the issues of fraud, including systemic issues.

(4) In case the audit committee or the Board, as the case may be, is not taking action or the auditor is not satisfied with the action taken, he may report to the Central Government even if the fraud is not material in nature.

(5) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post followed by an email in confirmation of the same.

(6) The report shall be on the letter-head of the Auditor and be signed by the Auditor with his seal and shall indicate his Membership Number.

(7) The report shall be in the form of a statement as given in Form No. 10.3

5.13 No duty to which an auditor of a company may be subject to ( such as confidentiality) shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if the reporting has been done in good faith.

5.14  The provisions of this section shall mutatis mutandis apply to (a) the cost accountant in practice conducting cost audit under section 148 (cost audit) ; or (b) the company secretary in practice conducting secretarial audit under section 204 (Secretarial audit).

5.15 If any auditor, cost accountant or company secretary in practice does not comply with the provisions of sub-section (12) of Section 143 (reporting on fraud to Central Government) , he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

5.16 Punishment for contravention of the provisions of Sec.143: The Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

5.17 When an auditor is convicted as above-stated, such auditor shall also be liable (a) to refund the remuneration received by him to the company and (b) to pay damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his report. The Central Government will be notifying a statutory body or authority or an officer of the Central Government for ensuring prompt payment of such damages to the company, statutory body etc (Sec.147)   

5.18 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.

Notes:-

Re: Qualification, reservation or adverse remark of auditor: Refer to ‘Statement on Qualifications in Auditor’s report’ issued by the Institute of Chartered Accounts of India.

Test Audit: This is more of a propriety audit conducted by the staff of CAG (through local AG’s office) in respect of a Government Company’s accounts and audited financial statement. The comments of the CAG are sent to members and placed at the AGM in the same way as the Statutory Audit Report. The test audit commences after completion of the statutory audit and the financial statements have been initialed by the statutory auditor for informal submission to the Board along with a draft report of the statutory auditor. These documents form the basis for commencement of the test audit by the CAG.

Auditing Standards have been made statutory now. Earlier, they were enforced by ICAI on its members who were engaged in statutory audit. The Central Government will be prescribing the Auditing Standards in consultation with NFRA who in turn will be receiving the (draft) Standards  from ICAI and vetting the same before forwarding to the CG, for their consideration and  notification under Sec.143 (10) of the Act. Every auditor shall comply with such notified Auditing Standards. In the performance of audit function in companies, the auditors will henceforth be subject to direct tri-partite control, namely the professional jurisdiction of ICAI (as members) and legal/administrative jurisdiction of the Central Government and NCLT/NCALT (as Auditors).

Statutory Auditors have now been charged with a  legal duty (apart from any professional duty to ICAI) to report to the Central Government on any offence noticed by them, during their audit,  involving material fraud ( past or present) committed against the company by the company’s officers or employees. This new provision in the Act ( applicable to audit of all companies) overrides the immunity so far claimed by the Auditors of companies under the century-old British ruling in re: Kingston Cotton Mill Co where the judge said that ‘an auditor is only a watch-dog but not a blood-hound’( meaning that the auditor’s duty is only verification and not detection of any fraud). The watch-dog is now statutorily mandated to bark and chase like a blood hound, where necessary. While sniffing around, the watch-dog (like the police dog) is now expected to smell a rat or hit upon anything that is going wrong in the company (or that had gone wrong earlier) and expose it to the audit committee and the Central Government. Sub-section (13) holds a safety umbrella to him by saying “No duty to which an auditor of a company may be subject to (meaning the professional duty of client- confidentiality) shall be regarded as having been contravened by reason of his reporting such (suspicious) matter to the Central Government, if he has done so  in good faith. Failure to report such an offence, when noticed/suspected during the course of audit, will entail a fine of anything between one lakh rupees and twenty-five lakh rupees. The new duty is indeed very onerous! The duty to report such offence is equally applicable to the Cost auditor and the Company Secretary in practice ; they also attract the same fine as the statutory auditor, for failure to report (sub-sec.14) Section 143 read with Sec.447 may be said to mark the end of a long era of protection afforded by the judgment in Kingston Cotton Mills. If the outgoing auditor has failed to report a fraud in his time and the incoming auditor has reported about a fraud with its roots in the past, it adds a new dimension in the cordial relations that now exist within the auditing community. A new chapter in the history of the audit profession has begun

As per Sec. 447,  “Fraud, in relation to affairs of a company or any body-corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to receive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss”;  “Wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled; “Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled. As per ICAI Statement “Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal.

 Yet another (general) definition of ‘Fraud  (Term of the Day in the Net) runs thus:  Act or course of deception, an intentional concealment, omission, or perversion of truth, to (1) gain unlawful or unfair advantage, (2) induce another to part with some valuable item or surrender a legal right, or (3) inflict injury in some manner. Willful fraud is a criminal offence which calls for severe penalties, and its prosecution and punishment (like that of a murder) is not bound by the statute of limitations. However incompetence or negligence in managing a business or even a reckless waste of firm's assets (by speculating on the stock market, for example) does not normally constitute a fraud. In such cases, the aggrieved party (creditors or stockholders or shareholders) must prove that at some point they were intentionally deceived on a material fact. Public interest is concept that signifies general social welfare or regard to social good or the common good of those with reference to whom it is used. The expression represents an overall or all-controlling consideration. It reflects a standard of goodness for judging private acts and conduct in the social context. It should be contra-distinguished clearly from self-interest or special privileges of any individual or class or group of individuals. It may also mean the general or larger interest of a community or nation as a whole. ‘Common good’ means “the greatest possible good for the greatest possible number of individuals (meaning all human beings). It represents a quality which is convertible, or reducible, to the sum total of all the private interests of the individual members of a society and interchangeable with them. The common good, then, is the sum total of the conditions of social life which enable people the more easily and straightforwardly to do so.

Promoting the common good (sometimes referred to as "public wealth") is the goal of democracy (in the spheres of politics and socio-economics. Any progressive and democratic government should be committed to the common good and put the public’s interest above the privileges of the few and  uphold the basic decency and dignity of all  by taking greater steps to help the poor and disadvantaged sections of society.

Fraud usually involves acts designed to conceal it such as collusion, forgery, deliberate failure to record transactions or intentional misrepresentations being made to the auditor…..The auditor should, therefore,  so plan his audit that he has a reasonable expectation of  detecting material misstatements  in the financial information resulting from fraud and error.

The auditor’s responsibilities may not be limited now to consideration of risks of material misstatement of the financial statements, but may also include a broader responsibility to consider risks of fraud. The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the SAs. Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees.

The auditor may, at times, be required to by legislation or regulation to make a specific assertion in respect of frauds on/by the entity in his report. For example, Clause (xxi) of Paragraph 4 of the Companies (Auditor’s Report) Order, 2003 requires the auditor to specifically report “whether any fraud on or by the entity has been noticed or reported during the year; if yes, the nature and amount involved is to be indicated”. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional. The auditor is concerned with fraud that causes a material misstatement in the financial statements.

The audit cannot be relied upon to ensure the discovery of all frauds or errors but where the auditor has any indication that some fraud or error may have occurred which could result in material misstatement, the auditor should extend his procedures to confirm or dispel his suspicions”…..The term ‘fraud’ refers to intentional misrepresentations of financial information by one or more individuals among management, employees or third parties. Fraud may involve (a) manipulation, falsification or alteration of records or documents such as ante-dating (b) misappropriation of assets (c) suppression or omission of the effects of transactions from records or documents (d) recording of transactions without substance such as recording consignment-transfer as sale and (e) misapplication of accounting policies.

The degree of assurance of detecting errors would normally be higher than that of detecting fraud, since fraud is usually accompanied by acts specifically designed to conceal its existence. Due to inherent limitations of audit there is a possibility that material misstatements of the financial information resulting from fraud     and, to a lesser extent, error may not be detected. The question as to whether the auditor has adhered to the basic principles governing an audit is determined by the adequacy of the procedures undertaken in the circumstances and the suitability of the auditor’s report based on the results of these procedures”……”The auditor may be unable to obtain audit evidence either to confirm or dispel a suspicion of fraud…..The auditor should communicate his findings to management on a timely basis if fraud or significant error is found to exist….Where a significant fraud has occurred the auditor should consider the necessity for a disclosure of the fraud in the financial statements and if disclosure is not made, the necessity for a suitable disclosure in his report. Some factors unique to an EDP environment which relate to the conditions and events like integrity or competence of management, unusual pressures within an entity, unusual transactions, problems in obtaining sufficient appropriate audit evidence include (a) inability to extract information from computer files due to lack of or non-current documentation of record contents or programs (b) large numbers of program changes that are not documented, approved and tested and (c) inadequate overall balancing of computer transactions and data bases to the financial accounts. 

As regards the need to ensure that the reporting to CG is done in good faith, it would be necessary to examine how the audit function has been carried out. For this, it is necessary to examine the extent of compliance by the auditor of the guidance notes and statements in general issued by the ICAI and, in particular, with regard to the subject of Fraud and Error. Statement No1 on Standard Auditing Practice (SAP 1)  or SAP 240 (Revised) issued by ICAI  (dealing with the responsibilities of auditor  relating to fraud in audit of financial statements) that permit the auditor to disclose to third party any information acquired by him in the course of his audit work  if there is a legal or professional duty to disclose. He is also not deemed to be guilty of professional misconduct if the disclosure is due to a legal requirement.

Sec. 447 which deals with punishment for fraud states that the punishment consists of imprisonment for a term between six months and ten years and also fine of an amount not less than the amount involved in the fraud, which extends up to three times such amount. Where, however, the fraud involves public interest, the term of imprisonment shall not be less than three years.

“Officer “has been defined by Sec.2 to ‘include any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or anyone or more of the directors is or are accustomed to act (Sec.2) Director includes MD (both by definition of MD and of KMP) and Whole-time director (vide definitions of Officer who is in default and KMP). Key Managerial personnel (KMP), vide Sec.2, means the Chief Executive Officer or the Managing Director or the Manager, the Company Secretary (of the company), the whole-time director, the Chief Financial Officer and such other officer as may be prescribed by the Central Government.

The expression ‘ person in accordance with whose directions or instructions the Board or any one or more of the directors is or are accustomed to act” would appear to include advisors and other ‘deemed’ officers. It includes also others who wield control over companies indirectly (sometimes concealing their identities) or directly by occupying position of responsibility as regards any particular duty imposed by the Act. Whether or not a person comes within the purview of ‘officer’ of the company would depend upon the circumstances of each particular case and the relevant provisions of the Act. For purposes of criminal liability, the auditor has been held to be an officer in re: R vs Shacter (1960) 30 Com Cases 317 (Bom). A director includes a past director for certain purposes like filing statement of affairs. An officer is a person who has the power to direct other person(s) while the function of a mere employee is only to obey.  

The Central Government, under sub-section (11) is empowered to issue a general or special order to direct the statutory auditors, in respect of such class or description of companies as may be specified in the order, to include a statement in their audit report on such matters as may be specified therein. This sub-section (11) thus authorizes the CG to issue an order on the lines of the erstwhile Companies (Auditor’s Report) Order issued under Sec.227 of the 1956 Act. ‘Class of companies’ may be determined based on a common/similar yardstick/interest/parameter like Capital ( Large, Medium etc) or Turnover ( size, nature etc), Total value of Assets, Rights, Control (Government, Private etc), Listing, Location (Indian, Foreign etc), Type of business (Textile, Steel, Cement etc)

In the case of a firm of auditors including LLP the liability for fraudulent action or abetting or collusion in any fraud, by a partner would be that of both the partner concerned and of the firm. In the case of LLP such joint and several liability may be limited to those partners in LLP who are chartered accountants.( Sec. 140 )

Special Notice ( required for a resolution to appoint a person other than the retiring auditor etc) means a notice of the intention to move a resolution ( to be set out in the notice of a general meeting) is given to the company by such number of members holding not less than one percent of total voting power or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up and the company shall give its members notice of the resolution in such manner as may be prescribed.(Sec.115)

If the Tribunal (NCLT) passes a final order against any auditor ( which expression includes a firm of which he is a partner) all the partners including the guilty partner and the firm cannot be appointed as auditors of any company for a period of five years from the date of passing the order by the Tribunal. This is without prejudice to the liability of the auditor and the firm for penal action under Section 447 (Punishment for fraud).

6.0 Auditor not to render certain services. (Sec.144)

6.1 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, (of the company concerned ) 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:

6.1.1 However, 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. The term “directly or indirectly” mentioned here includes the rendering of services by the auditor, (i) in case of auditor being an individual, either himself or through his relative or

any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual; (ii) in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.

6.2 Punishment for contravention of the provisions of Sec.144, the Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

6.2.1 When an auditor is convicted as above-stated, such auditor shall also be liable (a) to refund the remuneration received by him to the company and (b) to pay damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his report. The Central Government will be notifying a statutory body or authority or an officer of the Central Government for ensuring prompt payment of such damages to the company, statutory body etc (Sec.147) 

6.2.2   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.

Notes:

The services listed in para 6.1 and those to be prescribed further by the Central Government have been declared as non-audit services, that is to say services prohibited to be rendered  by the company’s statutory auditor. As to who should render those services to a company is not clear. Some of those non-audit services fall also under the purview of regulatory bodies other than ICAI like SEBI, RBI, and IRDA etc. Since a company is now permitted to maintain its books of account electronically, even IT professionals may render the services of book-keeping and accountancy services (duly complying with the provisions of Section 128 of the Act like maintaining accounts on accrual basis and according to double-entry system of accounting). They may also prepare the financial statements complying with the accounting standards.  Such IT professionals or others who maintain the company’s accounts and prepare the financial statements will fall under the expression “any other person of a company charged by the Board with the duty of complying with the provisions of Sec.128 (dealing with Books of account etc to be kept by a company)

Internal audit in respect of a class of companies to be prescribed by the Central Government and in other companies may be performed by a CA or Cost Accountant or other professional as may be decided by the Board. Ideally, internal audit function requires a team of professionals of different disciplines including law (including company law), accountancy, internal audit, Costing, Insurance, Engineering ( including environmental engineering), Management etc.  Actuarial services also may require to be rendered by duly qualified (certified) professionals in that field with the help of other professionals in the fields of law, accountancy etc.

Design and implementation of any financial information system may also be undertaken by a team of professionals of various disciplines (including IT, and Industrial Engineers) who have the expertise and abilities.

Investment advisory and investment banking services may also be rendered by an individual or a team of experts from different disciplines; these services are also regulated by SEBI, IRDA etc.

Management Consultancy Services of a CA ( as per ICAI) include (a) Designing budgetary and control system (b) Determining measures of the effective utilization of capital, Installing cost accounting system (c) Assisting the management in the efficient use of working capital as an aid to improve productivity (d) Advising management on principles of organization and methods for effective delegation and planning of work (e)  Rendering advice on international taxation matters (f) Advising on foreign collaborations, joint ventures, double taxation agreements etc (g) Reviewing procedures and equipment for operational control.(h) Rendering secretarial services and advice on Corporate Law matters,  (i) Advising management on amalgamations, reconstructions, takeovers and expansion schemes,(j) Assist in the preparation of feasibility studies of new project and expansion schemes (k) Advise on the system analysis and design, including selection of hard work and development of software and feasibility of incorporating computer applications for accounting and commercial activities, (l) Assist in finding solutions for specific business problems such as product mix decisions, pricing decisions, making representation to Government on various matters etc. (m) Appraisal of personnel policies and practices. (n) Assist in the selection of executive personnel in the areas of production, marketing, accounts, data processing, personnel, general administration etc. (o) Acting as advisor or consultant to an issue, including such matters as drafting of prospectus and memorandum containing salient features of prospectus, (p) preparation of publicity budget etc (q) Acting investment counselor in respect of securities, ® Acting as registrar to an issue and for transfer of shares/other securities.

Emerging services for CAs, as per ICAI, include the myriad opportunities in Electronic Commerce (consumer to business, business to business, internet service providers and other services), Risk assessment ( identification of business risk and evaluating  whether the entity has an appropriate system in place to effectively manage that risk.) , Performance measurement ( balanced scorecard, that reveals the  entity's ability to attain its goals and objectives ) Systems quality i.e., information development, information system design, information systems management and control and system evaluation) Intellectual capital  measurement ( to provide the requisite assurance), Continuous assurance ( eg. quarterly reporting). Expression(s) such as “parent, subsidiary or associate entity of a firm” and “significant influence or control” “trade mark” in Explanation (ii) for Sec.144 would need to be clarified by MCA.

‘Relative’ with reference to any person (individual), means anyone who is related to another as (i) members of a HUF or (ii) husband and wife or (c) other relationships to be prescribed by the Central Government.  Under the 1956 Act, the following 22 relationships were covered: Father, Mother (including step-mother) Son (including step-son) Son’s wife , Daughter (including step-daughter), Father’s father, Father’s mother, Mother’s father, Son’s son, Son’s son’s wife, Son’s daughter, Son’s daughter’s husband , Daughter’s husband, Daughter’s son, Daughter’s son’s wife,  Daughter’s daughter, Daughter’s daughter’s husband, Brother (including step brother) Brother’s wife, Sister (including step-sister) and Sister’s husband. All or some of these relationships are likely to be notified.

 The expression "control" includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; (Sec.2)’ This definition is the same as in SEBI’s Takeover Regulations. ‘Significant influence’ means control of at least 20 per cent. of total share capital of a company or of business decisions under an agreement.(Sec.2)

If the Tribunal (NCLT) passes a final order against any auditor ( which expression includes a firm of which he is a partner) all the partners including the guilty partner and the firm cannot be appointed as auditors of any company for a period of five years from the date of passing the order by the Tribunal. This is without prejudice to the liability of the auditor and the firm for penal action under Section 447 (Punishment for fraud).

7.0 Auditor to sign audit reports, etc. (Sec. 145)

7.1 The person appointed as an auditor of the company shall sign the auditor’s report

Or sign or certify any other document of the company in accordance with the provisions of sub-section (2) of section 141- namely, that, in the case of an LLP, only the partners who are chartered accountants are authorised to sign on behalf of the firm. The qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company (evidently, at or during the meeting)

7.2 Punishment for contravention of the provisions of Sec.145, the Company attracts fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both. The auditor shall be punishable with fine of between Rs.25, 000 and Rs.500, 000. However, for willful default ( with intention to deceive the company or its shareholders or creditors or tax authorities), the auditor  will be liable to a higher punishment by way of imprisonment for a term up to one year and with fine between Rs.100,000 and Rs.25,00,000.(Sec. 147)

7.2.1 When an auditor is convicted as above-stated, such auditor shall also be liable (a) to refund the remuneration received by him to the company and (b) to pay damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his report. The Central Government will be notifying a statutory body or authority or an officer of the Central Government for ensuring prompt payment of such damages to the company, statutory body etc (Sec.147)

Notes:

Since the auditor or his authorised representative is now mandated to be present at the general meetings (includes AGM) vide Sec. 146, it is only befitting that the auditor or the auditor’s representative reads the qualifications, observations etc in the auditor’ report and gives the clarifications that may be required by the meeting.

When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with those charged with governance the circumstances that led to the expected modification and the proposed wording of the modification.

When an auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement; or that

The auditor is unable to obtain sufficient appropriate audit evidence to-

Conclude that the financial statements as a whole are not free from material misstatement, he decides upon a suitable modification to his opinion (or report) on the said financial statement. SA 705 issued by ICAI dealing with ‘modifications to the opinion in the Independent auditor’s report’ lists three types of Modified Opinions, namely (a) a qualified opinion, an adverse opinion, and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon: (a) the nature of the matter giving rise to the modification, that is, (i) whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and (ii) the auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements.

The auditor shall express:

a qualified opinion when: (a) the misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or (b)  the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

Adverse opinion/remark when the misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Disclaimer of Opinion when (a)  the possible effects on the financial statements of un-detected misstatements, if any, could be both material and pervasive and (b) it is not possible to form an opinion on the financial

Statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.

a. When the auditor modifies his/its opinion on the financial statements, the auditor shall, in addition to the specific elements required by the SA 700 (Revised), include a paragraph in the auditor’s report that provides a description of the matter giving rise to the modification. The auditor shall place this paragraph immediately before the opinion paragraph in the auditor’s report and use the heading “Basis for Qualified Opinion”, “Basis for Adverse Opinion”, or “Basis for Disclaimer of Opinion”, as appropriate.

b. Other Considerations (reporting circumstances) that would not contradict the auditor’s adverse opinion or disclaimer of opinion are (a) The expression of an unmodified opinion on financial statements prepared under a given financial reporting framework and, within the same report, the expression of an adverse opinion on the same financial statements under a different financial reporting framework9. And (b) The expression of a disclaimer of opinion regarding the results of operations, and cash flows, where relevant, and an unmodified opinion regarding the financial position.

8.0 Auditor(s) to attend general meeting. (Sec. 146)

8.1 All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend the meeting either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and such auditor/authorised representative shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

8.2 Punishment for contravention of the provisions of Sec.146 involves the Company attracting a fine between Rs.25000 and Rs.500, 000 and every officer in default with imprisonment for a term up to one year or with fine between Rs.10, 000 and Rs.100, 000 or with both.(Sec. 147)

Notes:

a. Since the auditor or his authorised representative is now mandated to be present at the general meetings (includes AGM), it is only befitting that the auditor or the auditor’s representative reads the qualifications, observations etc in the auditor’ report and gives the clarifications that may be required by the meeting.

b. The new requirement of the auditor having to compulsorily attend a general meeting is in keeping with the general thrust in the Act to usher in good corporate governance.

The shareholders are entitled to interact with the Auditor personally on his qualifications, adverse observations etc.

9.0 Central Government to specify audit of items of cost in respect of certain companies (Sec. 148)

9.1 Notwithstanding anything contained in this Chapter, the Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies: However, the Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act.

9.2 If the Central Government is of the opinion, that it is necessary to do so, it may, by

Order, direct that the audit of cost records of class of companies, which are covered under

para 9.1  and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order.

9.3  The audit under para 9.2  shall be conducted by a Cost Accountant in practice who shall be appointed by the Board on such remuneration as may be determined by the members.  In the case of companies which are required to constitute an audit committee, the audit committee shall take into consideration the qualifications and experience of the person appointed by the Board as cost auditor and recommend to the Board a suitable remuneration to be paid to the cost auditor; and the remuneration recommended by the Audit Committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders.  In the case of those companies which are not required to constitute an audit committee, the Board shall consider and approve the remuneration of the Cost Auditor which shall be ratified by shareholders subsequently. However, no person appointed under section 139 as a (statutory/Financial) auditor of the company shall be appointed for conducting the audit of cost records: Further,the auditor conducting the cost audit shall comply with the cost auditing standards, that is to say, such standards as are issued by the Institute of Cost Accountants of India (ICWAI), with the approval of the Central Government.

9.4 An audit conducted under this section shall be in addition to the (statutory/Financial) audit conducted under section 143.

9.5 The qualifications, disqualifications, rights, duties and obligations applicable to (statutory/Financial) auditors under Chapter X of the Act shall, so far as may be applicable, apply to a cost auditor appointed as above and it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the company. However, the report on the audit of cost records shall be submitted by the cost accountant in practice to the Board of Directors of the company.

9.6 A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared in pursuance of a direction under sub-section (2) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.

9.7 If, after considering the cost audit report referred to under this section and the information and explanation furnished by the company under sub-section (6), the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that Government.

9.8 If any default is made in complying with the provisions of this section, (a) the company and every officer of the company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147; (b) the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147.

10.0 Secretarial audit of listed and other prescribed companies (Sec. 204)

10.1 Every listed company and a company belonging to other class of companies.

As may be prescribed shall annex with its Board’s report made in terms of sub-section (3) of Section 134, a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed.

10.2 It shall be the duty of the company to give all assistance and facilities to the Company secretary in practice, for auditing the secretarial and related records of the Company.

10.3 The Board of Directors, in their report made in terms of sub-section (3) of Section 134, shall explain in full any qualification or observation or other remarks made by the company secretary in practice in his report under sub-section (1).

10.4 If a company or any officer of the company or the company secretary in practice,

Contravenes the provisions of this section, the company, every officer of the company or the Company secretary in practice, who is in default, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

10.5 Notwithstanding anything contained in Section 143, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed (Sec. 143 (12))

10.5 The provisions of Section 143 (Powers and duties of Auditors and Auditing Standards) shall mutatis mutandis apply to the company secretary in practice conducting secretarial audit under section 204. (Sec.143 (14)

10.6  If any Secretary in practice does not comply with the provisions of sub-section (12) of Sec.143, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.(Sec.143 (15) )

Notes:

a. The selection, appointment, period of office and remuneration of the Secretarial Auditor are evidently matters for a company’s Board (or its committee) to decide, unlike the case of a statutory auditor who is selected, appointed and remunerated by the company in annual general meeting based on the recommendations of the Board which in turn is assisted in the task by the Audit Committee. Also, the appointment would appear to be only that of an individual and not of a firm of Company Secretaries since ‘auditor’ includes a firm of auditors only for purposes of Chapter X (vide Explanation II to Section 140).

b. The form of Secretarial audit report will be prescribed by the Central Government.(S.204)

c. The Secretarial Auditor will have the same powers, duties and responsibilities of a (statutory/external) auditor set out in Section 143 of the Act (Sec.204)

Published by the Company Cases – January 2014 issue of Company Law Institute of Chennai