Background
The corporate jurisprudence in India enshrines statutory auditors who audit the accounts of a company as representatives of the shareholders who appoint them at every Annual General meeting {AGM} to look after the interests of the shareholders/members.
In a significant case of Deputy Secretary v S N Dasgupta, AIR, 1956, Cal 414, it was held by the court that the auditor’s duty is to examine the affairs of the company on behalf of the shareholders at the end of a year and report to them what he has found.
The Report of the Auditors is an important document through which shareholders and public at large are informed about the accounts and financial statements of the company, which have been examined by Statutory Auditors.
While examining, the Auditors are to take into account, among others, the accounting and auditing standards. They have to report that to the best of their information and knowledge such accounting & financial documents give a true and fair view of the state of the company’s affairs as at the end of the financial year, its profit & loss account and cash flow for the year, and, also report on other prescribed matters. The law has been quite elaborately laid down, and, inter alia, section 143 of the Companies Act 2013 and The Companies {Audit & Auditors} Rules are applicable.
It is an obvious statutory inference that at the AGM where the audited accounts are placed and approved by the shareholders, the Statutory Auditors’ Report should be given utmost importance for discussion consideration and adoption.
Earlier Position
The erstwhile Companies Act 1956 in section 230 had provided as follows: -
“230. Reading and Inspection of Auditor's Report.
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.”
From the above it is clear that due importance had been given to the Auditors’ Report, even earlier, by statutorily requiring that it would be read at the general meeting.
This was applicable irrespective of whether it was qualified or not.
Moreover, due to specific law, it could not be taken as read by the shareholders although it had already been circulated to them along with the notice of the meeting, audited accounts and director’s report.
In addition, right was given to any member to inspect the same.
It is pertinent to note that auditors’ report need not be read out by the auditors themselves. In the case of Re, Allen, Craig Co. {London} Ltd {1943} All ER Rep 301 it was held that the duty of the auditors was complete when they sent their report to the company.
In fact the company secretary, when present, or any director or any other officer looking after accounts, usually read the Report more as a routine. Perhaps in actual practice, few lines at the beginning and few lines at the end of the Report were only read. Even the shareholders rarely bothered.
New Position
With the coming into force of new Companies Act 2013 the position of reading of the Auditor’s Report at the AGM has undergone substantial change.
A. Section 145 of the Companies Act 2013 provides as follows: -
“145. Auditor to sign Audit Reports, etc.
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, and 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.”
B. Secretarial Standards {SS-2} of The Institute of Company Secretaries of India {ICSI} with regard to General Meetings, effective from 1st July 2015, has been laid down in line with the above section 145.
“13. Reading of Reports
13.1 The qualifications, observations or comments or other remarks on the financial transactions or matters which have any adverse effect on the functioning of the company, if any, mentioned in the Auditor’s Report shall be read at the Annual General Meeting and attention of the Members present shall be drawn to the explanations / comments given by the Board of Directors in their report”.
Analysis regarding reading Auditor’s Report
As can be seen from the above provisions that the present law with regards to signing and reading of the Auditor’s Report at the Annual General Meeting, is as follows: -
{1} The Auditor of the company shall sign the Auditor’s report or sign or certify any other document of the company. {Earlier law was in section 229 of erstwhile Companies Act 1956}.
{2} There have to be qualifications, observations or comments on financial transactions or matters of the company, mentioned in the Auditor’s Report.
{3} such qualifications etc. have to have adverse effect, of any nature, on the functioning of the company. [Pertinently this could be a matter of difference of opinion].
{4} Where the aforesaid conditions {2} & {3} are met, the Auditor’s Report shall be read before the company in a general meeting.
{5} These provisions apply to any general meeting, whether AGM or extraordinary general meeting, although SS-2 only stipulates AGM. [This may need to be considered by ICSI]
{6} As per SS-2, the attention of the members present at the said meeting has to be drawn to the explanations / comments given by the Board of Directors of the company in their report in response to qualifications etc.
{7} It appears, full Auditors’ report need not be read. Only the qualifications etc. are to be read, generally to be done by Company Secretary/ CFO or in their absence, director, etc. Although there appears to be no prohibition, Auditors as a practice do not read their report.
Similarly explanations/ comments need not be read only attention of the members is to be drawn of the relevant pages of the Directors’ Report. However, it will be good governance practice to read such explanations/comments also.
{8} If there are no qualifications etc. in the Auditors’ Report, which have any adverse effect, there is no requirement to read the Auditor’s Report and that can be taken as read by the shareholders. This is a significant departure from the earlier law.
{9} Similar to the earlier position, the Auditors’ Report shall be open to inspection by any member of the company.
CONCLUSION
It is a welcome amendment in the new Companies Act 2013 that clean Auditor’s Report need not be read at the AGM. Only when there is a qualified Report, stating adverse effect that it shall need to be read together with the response of the Board to bring to the specific notice of the shareholders. Hopefully this will bring out more meaningful response to the Report and its consequences at the level of the shareholders.
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