FAQs on Signing of Financial Statements Post COVID-19

COVID-19 is likely to materially impact the financial position and statutory Compliances of many Corporates in India. It is therefore important for directors, whether executive, non-executive or independent directors and the management of each company to consider whether there are additional circumstances to assess before they signing on financial statements and report by the Board of Directors (“Board") for the financial year (FY) 2020-21, especially considering the impact that COVID-19 may have. The financials of a company play an important role in showing the state of affairs of the company and are relied upon by the stakeholders. Especially companies which have investments from private equity funds / strategic investors or have financing arrangements from lenders / financial institutions need to pay attention while drawing up financials for FY 2020-21 due to COVID-19.

COVID-19 has been an irresistible force and its Second Wave has caused many companies to ascertain the following:-

(a) their stand on defaults on contractual obligations,
(b) whether they are in compliance with applicable laws,
(c) whether internal financial controls are adequate, and
(d) similar arrangements / requirements.

Due to lockdown and consequent slowdown in the businesses across each and every sectors, various companies may also be facing risks of ceasing to be going concern.

Some companies have already faced defaults on financial and other related covenants and may not find support from their shareholders. In these tough times, a tighter check is expected of the directors and the management to present and depict the true picture of the state of affairs of the company which are reflected in the financials of the company in a true and fair view.

Non-compliance of statutory norms in relation to financials of a company may trigger following consequences, depending on facts and circumstances of each case:-

Penalties and fine may be imposed on the company and officers for any breach of statutory requirements;

The company, directors and the management may face the consequences under the investment agreements, joint venture agreements, loan agreements, shareholders agreement or articles of association or similar arrangements where such statutory non-compliances is seen as a default;

Defaults under such documents / arrangements may lead to termination of contracts, exercise of rights by counter parties on occurrence of an event of default, indemnity claims, initiation of oppression / mismanagement actions, class actions by shareholders, etc.

To reduce the impact of COVID-19, the Government is providing certain temporary relaxations / exemptions / modifications vis-à-vis statutory compliances, Various matters which could not be transacted through video conferencing (VC) or other audio-visual means (OVAM) have been allowed to be transacted through VC/OVAM. Inability of independent directors to hold one compulsory meeting for FY 2020-21 or failure to meet the residential status of directors for FY 2020-21, will not be seen as a default.

Spending / contribution for combating COVID-19 related activities has been qualified as eligible expenses as per CSR Rules Under Companies Act 2013 has allowed holding of extraordinary general meetings (EGMs), through VC or OVAM till 31/12/2021, provided the process and steps mentioned in the circulars are followed.

Under the relevant provisions of the Disaster Management Act, 2005 and Epidemic Diseases Act, 1897, the Government are also issuing orders on other fronts, for example, all employers, be it in industry or in the shops and commercial establishments, are directed to make payment of wages of their workers, at their work places, on the due date, without any deduction, for the period their establishment are under closure during the lockdown.

India Companies has just seen the closure of FY 2019-20, and thus, any regulatory change / business environment change due to COVID-19 may have radical impacts on the financials of a company. Directors and management need to be careful of while giving a green signal to the financials under the Companies Act, 2013 (“Act") and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR").

In the series of following FAQs, we have considered the critical issues around financials of a company under the Act and LODR vis-à-vis COVID-19 and have provided certain check points that the directors and the management need to adopt:-

1. What are financial statements and why are they important?

The Act defines financial statement in relation to a company, to include:

• a balance sheet as at the end of the financial year;
• a profit and loss account for the financial year;
• cash flow statement for the financial year;
• a statement of changes in equity, if applicable; and
• any explanatory note annexed to, or forming part of the aforementioned.

Financial statements are required to give a true and fair view of the state of affairs of the company, comply with the accounting standards and shall be in the form or forms as may be provided for different class or classes of companies under the Act.

For conglomerates, the Act provides that where a company has one or more subsidiaries or associate companies, it shall, in addition to its financial statements, prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards.

The financial statements are required to be approved by the Board before they are signed on behalf of the Board by the chairperson of the company where he is authorized by the Board or by two directors out of which one shall be managing director, if any, and the chief executive officer (CEO), the chief financial officer (CFO) and the company secretary (CS) of the company, wherever they are appointed.

Signing off of financial statements drawn up in accordance with the Act, is crucial for every company, because if a company contravenes the requirements in relation to financial statements (Section 129), then the concerned directors / officers of the company become liable to fine / imprisonment / both.

2. What is Board's report and why is Board's report important?

In addition to financial statements, another litmus test for a company is preparation of Board's report. Board's report is also circulated to shareholders along-side the financial statements.

In light of various situations that may have arisen due to COVID-19 and the impact that it may have, following factors should be carefully ascertained by the Board to draw up the report:-

• Directors' Responsibility Statement;
• The state of the company's affairs;
• Material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;
• A statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;
• The details of significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company's operations in future;
• The details in respect of adequacy of internal financial controls with reference to the financial statements.

The Board's report and any annexures thereto are required to be signed by its chairperson of the company if he is authorized by the Board and where he is not so authorized, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.

If a company contravenes the requirements in relation to Board's report (Section 134), then the concerned directors / officers of the company become liable to fine / imprisonment / both.

3. What are critical declarations in Directors' Responsibility Statement with respect to financial statements?

While the prescriptive matters which should be contained in the Directors' Responsibility Statement is provided in Section 134(5), however, in light of COVID-19, following factors should be carefully ascertained by the Board before providing a declaration thereto:-

The directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;

The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

The directors had prepared the annual accounts on a going concern basis;

The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively; and

The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

4. What are the general duties of directors with respect to financial statements?

The Act has provided for general duties which directors are obligated to fulfil. Section 166 of the Act specifically deals with general duties of a director of a company, whether or not such director, is an independent director.

Therefore, while fulfilling their obligations with respect to financial statements and Board's report as required under other provisions of the Act especially due to COVID-19, it is essential that each director shall act in accordance with the articles of the company; act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. For example, a director may find it difficult to ascertain if he has fulfilled his duty in cases where the company has laid off employees due to financial impact of COVID-19, whereas the duty requires him to act in the best interests of not just the company, the shareholders, the community but also its employees.

5. Do independent directors have additional duties with respect to financial statements?

The Act provides that the company and independent directors shall abide by the provisions of Schedule IV of the Act. Schedule IV deals with the code for independent directors and provides comprehensive set of roles and responsibilities of independent directors.

While each and every role mentioned therein is important, following are certain crucial ones with respect to financial statements and Board's report especially in the times of COVID-19 and the impact that it may have, which require that the independent director shall:

• assist the company in implementing the best corporate governance practices;
• help in bringing an independent judgment to bear on the Board's deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
• satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
• safeguard the interests of all stakeholders, particularly the minority shareholders;
• balance the conflicting interest of the stakeholders;
• moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder's interest;
• seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
• where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
• keep themselves well informed about the company and the external environment in which it operates.

In addition to the aforementioned, LODR also requires the independent directors to, inter alia review the performance of non-independent directors and the board of directors as a whole and assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties.

6. What are the additional compliances for listed companies under LODR with respect to financial statements?

LODR also provides for certain additional compliances in relation to financial statements, important ones being:-

The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor;

CEO and CFO of the listed company is required to furnish compliance certificate to the Board, certifying inter alia that they have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief, :-

(1) These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

(2) These statements together present a true and fair view of the listed entity's affairs and are in compliance with existing accounting standards, applicable laws and regulations;

The audit committee is obligated to oversee the listed entity's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible;

Additionally, the audit committee is also required to review, with the management, the annual financial statements and auditor\'s report thereon before submission to the Board for approval, with particular reference to inter alia: (a) matters required to be included in the director's responsibility statement to be included in the Board's report in terms of Section 134(3) of the Act; (b) compliance with listing and other legal requirements relating to financial statements.

7. During This Worst Phase of CORONA VIRUS PERIOD (Covid 19) Can a Company Sign the Financial Statement Digitally?

As per Section 134 of Companies Act 2013 It is specifically Mentioned that the Financial Statements of a Company should be Signed by the :-

1. Chairperson of the Company duly authorized by the Board of Directors; OR
2. By the Two Directors out of which One shall be Managing Director; &
3. By the CEO/CFO of the Company;
4. Company Secretary of the Company in such case of duly Appointment

In Case of One Person Company ONLY BY ONE DIRECTOR for the Submission to the Auditor.

A DSC is used to authenticate the Document. DSC can be used for signing the documents in PDF Files on Several Government Portals such as MCA, GST, INCOME TAX etc. It also gives the authenticity and assurance of Data which is freezed and locked on portals after uploadation electronically.

There is nowhere mentioned that the Financial Statements should be signed digitally or physically.

Therefore as per Section 134 of Companies Act 2013 and DSC as per Information Technology Act 2000;The Financial Statements of a Company can be Signed Digitally or Physically as the Case May be.

Financial Statements can be signed through Digitally also, even Companies can get their Financial statements digitally from the directors/CFO/CEO/Statutory Auditors.

Conclusion

Various statutory requirements with respect to financials as mentioned above may require the Board and the management to pay closer look at the language of the statutory requirements and the interpretation therein. While the impact of COVID-19 is an ongoing process, however, the fluid nature of impact may be difficult to be reflected in the financials of the company. Directors definitely would not want to default on their statutory obligations, and at the same time, the company will need to be kept afloat as a going concern. These may require the company and the management to take certain tough calls, however, it is advisable that professional advice is sought at each contentious step.

To sum up, following are certain cautions / takeaways vis-à-vis financial statements and Board's report for FY 2020-21 due to COVID-19:

• adhere to the specific requirements under the relevant provisions of the Act, including section 129, 134 and 166;
• directors, independent directors and the management should engage and deliberate on the disclosures and state of affairs of the company;
• review company's liquidity position;
• engage with stakeholders, including private equity funds / strategic investors / lenders / financial institutions, employees, vendors, suppliers;
• assess the requirements under the articles of association of the company;
• consider possible impacts, whether direct or indirect on the company's business, and identify measures which might potentially help the management to mitigate such impacts;
• analyze the nature of relaxations introduced by the Government and various authorities due to COVID-19;
• in case of group companies, treat every such companies' financial position should be treated separately;
• keep an eye on any regulatory change or judicial precedents vis-à-vis COVID-19 impacting the financials and representations / declarations therein.