Editorial
The Companies Bill has finally seen the light of day. By
virtue of the fact that it was introduced in the Lok Sabha, whose term will
shortly come to an end, it is likely to lapse, and would have to be reintroduced
in the new Lok Sabha. This Companies Bill has been debated and discussed for the
past five years, and therefore there were high expectations that it would
address the various shortcomings of the present Companies Act.
The Companies Bill does contain some wholesome provisions
relating to accounts. Consolidated accounts will now be required by all
companies having subsidiaries. The format of the final accounts will be
prescribed by rules.
The National Advisory Committee on Accounting Standards will
also now advise the Central Government on the formulation of auditing standards,
with the standards issued by the Institute being applicable until auditing
standards are laid down by the Central Government after consultation with the
National Advisory Committee on Accounting and Auditing Standards. Effectively,
the powers of the Institute are being whittled down so far as they relate to
prescribing auditing standards for audit of companies.
Auditors are to be expressly prohibited from providing
certain services to an audit client, such as accounting, internal audit, design
and implementation of financial information systems, actuarial services,
investment banking services, outsourced financial services, investment advisory
services, etc., most of which are in any case prohibited today under the Code of
Conduct. Management services is however also one of the prohibited services.
The disqualification relating to indebtedness of the auditor
is being broadened, with even the minuscule limit of Rs.1,000 being sought to be
done away with. Therefore, any indebtedness (even of Re.1) would attract
disqualification. However, so far as shareholding limit is concerned, a
percentage beyond which shareholding is not permissible would be prescribed,
instead of an absolute prohibition. Further, this prohibition would apply not
only to holding of the securities of the company itself, but also to holding of
securities of its holding company, its subsidiary, its fellow subsidiary or its
associate company.
Unfortunately, the format of the audit report has been made
more complicated instead of being simplified, with mandatory reporting on
certain additional items. Further, a couple of the items seem to indicate a lack
of understanding of the subject — for instance, whether the financial statements
comply with the accounting standards
and the auditing standards.
Obviously the financial statements cannot comply with the auditing standards —
only the audit process and the auditor’s report can comply with such standards.
Also, one of the points to be reported is the observations or comments of the
auditors which have an adverse effect on the functioning of the company. It is
obvious that the observations or comments of the auditors cannot have an adverse
effect on the functioning of the company, but may amount to an adverse comment
on the functioning of the company. A residual point “such other matters as may
be prescribed” leaves the door open for complicating the audit report further.
The most unfortunate part of the provisions relating to audit
is the punishment that can be meted out to an auditor of a company for
contravention of any of the provisions of S. 126 to S. 129 (powers and duties of
auditors and auditing standards, prohibition on rendering certain services and
auditor to sign audit reports, attend general meeting). The punishment
prescribed is a fine of between Rs.25,000 to Rs.5,00,000. For knowing or willful
contravention, the punishment is imprisonment up to one year or fine between
Rs.1,00,000 and Rs.25,00,000 or both.
The provisions unfortunately do not draw a distinction
between major and minor contraventions. For instance, with so many auditing
standards, it is possible that one small aspect of an auditing standard may not
have been complied with by the auditor. Or the auditor may have been prevented
by circumstances from attending the Annual General Meeting, though he may have
had every intention of doing so. There could have been valid reasons for not
following a particular auditing standard. To penalise an auditor under such
circumstances seems rather unfair, particularly given the fact that promoters of
companies are rarely penalised for gross violations by companies under their
control. One wonders whether it is a classic case of a situation where just
because the real culprit cannot be found or punished, the nearest person found
available is caught and punished for the misdeeds of the other !
One hopes that these provisions are rationalised before they
are enacted. I am sure that the Institute and the BCAS would also take up all
these and other issues with the Government.
Gautam Nayak
