How can an Auditor report a disqualification of a director in the Audit Report?

Short Summary

How Do you know a director is disqualified?

Section 164(2) provide conditions for the disqualification of the director.

• A director can be disqualified under Section 164 of the Companies Act, 2013 for the following reasons:
• The Director is of unsound mind and stands so declared by a competent court.
• The Director is an undischarged insolvent.
• The Director has applied to be adjudicated as an insolvent and his application is pending.
• The Director has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence. Also, any person who has been convicted of any offense and sentenced to imprisonment for a period of seven years or more, will not be eligible to be appointed as a director in any company.
• An order disqualifying the Director for appointment as a director has been passed by a court or Tribunal and the order are in force.
• The Director has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call.
• The Director has been convicted of the offense dealing with related party transactions under section 188 at any time during the last preceding five years.
• A company in which the Director is a part of the Board has not filed financial statements or annual returns for any continuous period of three financial years.
• The company has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay the interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more.

As mentioned in point 8, a person can be disqualified from being a Director, if the company on which the person is a Director has not filed MCA annual return for a continuous period of three years. Under Section 164 of the Companies Act, a person disqualified from being a Director will not be eligible for being appointed as Director in any company for a period of 5 years.

Questions: What is the responsibility for auditor in respect of reporting of disqualification of Director in Audit Report?

Legal Provision

As per Section 143(3)(g) the auditor's report shall also state, whether any director is disqualified from being appointed as a director under sub-section (2) of Section 164.

Step I: How auditor shall check whether a Director is disqualified or not?

There are following ways to check the same:

1. Obtain DIR-8 from the directors of the Company every year before the audit.

DIR-8: DIR-8 is a declaration by directors that they are not disqualified to continue as director of the company or not disqualified to appoint as director.

2. Check the status of directorship of Director on MCA website and then check whether all the companies in which such person is director completed their annual filing with ROC or not.

Step II

On the basis of a declaration from directors in DIR-8 and analysis the MCA website. The Auditor shall conclude whether the director is disqualified or not. If all the directors are non- disqualified auditor can report the same simply in audit report.

Step III: if any director is disqualified then how to report the same in Audit Report?

As per the requirement of Section 143(3)(g), the auditor shall specifically mention in its audit report about disqualification of Director.

The Auditor shall mention followings in its auditor report:

• Name of Disqualified Director;
• Date of Disqualification;
• Reason of disqualification of Director;

Conclusion

One can opine that it shall be the duty of the statutory auditor of the appointing company as well as disqualifying company, as required under Section 143(3)(g) to report to the members of the company whether any director is disqualified from being appointed as director and to furnish a certificate each year as to whether on the basis of his examination of the books and records of the company, any director of the company is disqualified for appointment as a director or not.