COMPANIES BIL, 2011 Provisions relating to Accounts and Audit

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The Companies Bill, 2009, was introduced in the Lok Sabha on 3rd August, 2009. It was referred to the Standing Committee of Finance which submitted its report on 31st August, 2010. After consideration of the recommendations of the Standing Committee and suggestions of various chambers of commerce, professional bodies and others, the Government has made changes in the original bill and now introduced a revised Companies Bill, 2011, in the Lok Sabha on 14th December, 2011. This Bill will replace the 55-year-old Companies Act, 1956 (existing Act). The new Bill proposes to introduce far-reaching changes which will have impact on the registration of companies, management and administration of companies, shareholder’s rights, director’s responsibilities, maintenance of accounts and audit of companies and other provisions relating to mergers, acquisitions, winding up of companies, etc. The new Bill is divided into 29 Chapters and contains 470 sections and 7 Schedules. The new Bill is likely to be considered and adopted in the Budget session of the Parliament in March, 2012 and may come into force on the date to be notified by the Government. In this article, some important provisions in the new Bill relating to Accounts and Audit are discussed.

2. Accounts of companies

Sections 128 to 138 deal with accounts to be maintained by all companies. It is provided in section 128 that every company shall maintain books of accounts on mercantile system of accounting. These provisions are on the same lines as provisions in section 209 of the existing Act. At present, a company can adopt any accounting year for maintaining its accounts. It is now provided that all companies will have to follow uniform accounting year ending 31st March of every year. The existing companies which are following different accounting years will have to comply with the new provisions within a period of two years from the date when the Companies Act, 2011, comes into force. Exemption from this provision can be claimed by obtaining permission of the National Company Law Tribunal (Tribunal) in respect of foreign subsidiary companies which are required, by the laws of the foreign countries, to adopt different accounting year.

3. Financial statements

3.1 Section 129 provides that every company has to prepare financial statements for each accounting year and place them before the Annual General Meeting of the company. The term financial statements has been defined to include Balance Sheet, Profit and Loss A/c. or Income & Expenditure A/c., Cash Flow statement, A statement of changes in equity and notes to accounts. These financial statements have to comply with Accounting Standards prescribed by the Government as provided in section 133. If the company has one or more subsidiary companies, associate companies or joint ventures, the financial statements of these companies and joint ventures will have to be consolidated and these consolidated financial statements will also be required to be placed before the General Meeting. Further, such a company is also required to attach with the financial statements a statement of salient features of the subsidiaries including associates and joint ventures in the prescribed manner. The Government has power to notify any class of companies to which these provisions will not apply.

3.2 Every company will have to prepare financial statements every year in the Form given in Schedule III. This Schedule gives forms of Balance Sheet, Statement of Profit and Loss and General Instructions for preparation of Consolidated Financial Statements. This Form of Balance Sheet and Statement of Profit and Loss is similar to present Schedule VI as revised from 1-4-2011. The above financial statements have to be approved by the Board of Directors. The procedure for adoption of these statements is similar to section 215 of the existing Act.

4. Reopening of accounts

4.1 This is a new provision. At present, there is no provision to reopen the accounts of the company. Section 130 now provides that if any Court or Tribunal passes an order that accounts for any accounting year have been prepared in a fraudulent manner or the affairs of the company were mismanaged and there is a doubt about reliability of financial statements, the accounts of that year shall be reopened. Before passing such order the Court/Tribunal shall invite comments from the Government and the Income-tax Department. If the financial statements are revised by the company as per the above order, such statements shall be final.

4.2 Section 131 provides that it is also possible for the Board of Directors to revise the financial statements or the report of Board for any of the three previous financial years if they find that these statements and/or report are not in accordance with the requirements of sections 129 to 134. For this purpose, the Board will have to take the approval of the Tribunal. Before giving such approval the Tribunal has to give notice to the Government and the Income-tax Department and invite their comments. Such revision of accounts can be made only once in a financial year. The Board will have to give detailed reasons for such revision of financial statements in its report to the members. Copies of the revised financial statements or Board Report will have to be sent to the members of the company and the Registrar of Companies. The revised financial statements will have to be approved by the members in General Meeting.

4.3 The Government is authorised to make Rules about the form in which application is to be made to the Tribunal for this purpose. These rules will also provide about the role of the company’s Auditors about their report on the accounts audited by them. The Directors have also to take such steps as may be provided in these rules.

5. Accounting and auditing standards

5.1 At present, the accounting standards to be followed by companies are formulated by the Institute of Chartered Accountants of India (ICAI). The Government has appointed a National Advisory Committee on Accounting Standards. This Committee examines these standards and makes recommendations to the Government. Thereafter, the Government notifies the accounting standards to be adopted by companies in the preparation of financial statements. So far as auditing standards are concerned, they are issued by ICAI and auditors have to follow these standards for conducting the audit of companies.

5.2 New sections 132, 133 and 143 give very wide powers to the Government to notify the accounting and auditing standards and to take action against the auditors who do not comply with these requirements. These provisions are as under.

(i) Section 132 provides that the Government will appoint a National Financial Reporting Authority (NFRA) for formulation of accounting and auditing standards and for enforcement of these standards. The NFRA will have a chairman and 15 members who will be appointed by the Government. For this purpose, the Government will notify the detailed rules and procedure.

(ii) The Government will notify the accounting standards as recommended by ICAI in consultation with NFRA u/s.133.

(iii) Similarly, the Government will notify the Auditing Standards as recommended by ICAI in consultation with NFRA u/s.143. This will mean that the present authority of ICAI to formulate auditing standards will now be taken over by the Government.

(iv) NFRA has been given powers to monitor and enforce compliance with the accounting and auditing standards, oversee the quality of professional services of auditors and suggest measures to make improvement in such services.

    v) NFRA can investigate about the professional or other misconduct of Chartered Accountants, Cost Accountants and Company Secretaries in practice while rendering professional services to any company and take disciplinary action against the members or firms rendering such services. Once NFRA starts disciplinary proceedings against any member or firm, the respective Institutes cannot take any action against such member or firm. This particular provision will mean that the powers of the three Institutes of Chartered Accountants, Cost Accountants and Companies Secretaries to take disciplinary action against their members in such matters will be transferred to this NFRA appointed by the Government.

    vi) NFRA has been given powers of a civil court for conducting this investigation. For the purpose of deciding whether there is professional or other misconduct on the part of the member or firm, it is provided that the items listed in section 22 of the Act governing the three Institutes will apply.

    vii) If a member or a firm is found guilty of professional or other misconduct, the NFRA has power to

    a) impose a minimum penalty of Rs. one lac on the Individual member and a minimum penalty of Rs.10 lacs on the firm, and

    b) debar the member or the firm from professional practice for a minimum period of six months or for such higher period up to 10 years.

    viii) Any member or firm aggrieved by the above order of the NFRA can file appeal before the Appellate Authority constituted u/s.22A the
Acts governing the three Institutes.

    ix) The detailed provisions are made in section 132 for day-to-day administration of the NFRA, its accounts, audit, etc.

    6. Report of the Board of Directors

Section 134 provides that the Board of Directors of a company shall adopt the financial statements for each financial year and get the auditors report on the accounts. The Board has to prepare its report to the members every year and submit to the members at the Annual General Meeting along with the financial statements and audit report. The report of the Board should contain the information as required under the existing Act as well as some additional items as under.

    i) Statement of declaration given by Independent Directors u/s.149(6).

    ii) In the case of a listed company or any other company as specified by the Rules as provided in section 178(1), the company’s policy on director’s appointment and remuneration, criteria for determining qualifications, positive attributes, independence of directors, etc.

    iii) Particulars of loans, guarantees or investments in subsidiaries as provided in section 186.

    iv) Particulars of contracts or arrangements with related parties as stated in section 188.

    v) A statement indicating development and implementation of risk management policy for the company which in the opinion of the Board may threaten the existence of the company.

    vi) Details about policy developed and implementation of corporate social responsibility policy.

    vii) In the case of listed and other specified companies a statement indicating formal annual evaluation made by the Board about its performance and of its committees and Independent Directors.

    viii) Such other matters as provided in the Rules notified by the Government.

6.2 The Board has to send the financial state-ments with Audit Report, Directors report, etc. to each member before the Annual General Meeting. The Meeting should be held within six months of close of financial year i.e., before 30th September every year. These provisions are more or less on the same lines as existing provisions. These statements and reports have to be filed with the Registrar of Companies in the same manner as at present.

    7. Internal audit

This is a new provision. At present, the Internal Audit can be conducted by the company’s staff. Now section 138 provides that such class or classes of companies as may be prescribed, the Board of Directors will have to appoint a Chartered Accountant, Cost Accountant or other professional for carrying out Internal Audit. For this purpose, the Government is authorised to make Rules as to how this audit should be conducted.
    

    8. Corporate social responsibilities

8.1 This is a new provision made in section 135. This section applies to every company having net worth of Rs.500 crore or more or turnover of Rs.1000 crore or more or a net profit of Rs.5 crore or more during any financial year. The Board of such a company has to constitute a corporate social responsibility committee consisting of 3 or more directors of which one should be an Independent Director. The Board Report to the members should disclose the details of composition of this committee.

8.2    The functions of this committee shall be as under:

    i) To formulate and recommend to the Board a Corporate Responsibility Policy giving details of activities in the fields listed in Schedule VII.

    ii) To recommend about the expenditure to be incurred for these activities.

    iii) To supervise the implementation of this policy.

8.3 The Board has to consider the recommendations of this committee and formulate the policy for such expenditure every year. The Board should make all efforts to spend at least 2% of the average profits of the preceding 3 years for this purpose. If the Board is not able to spend this amount it will have to give reasons for not spending the same.

8.4 The type of activities for which the company has to spend for its social responsibilities, as listed in Schedule VII, are as under:

    i) Eradicating extreme hunger and poverty.

    ii) Promotion of education, gender equity, empowerment of women, reducing child mortality and improving maternal health.

    iii) Combating HIV, AIDS, malaria and other diseases.

    iv) Ensuring environment sustainability.

    v) Enhancing vocational skills and social business projects.

    vi) Contribution to P.M. National Relief Fund or any other fund set up by Central or State Governments for social development and relief work, welfare of SC, ST and backward classes, minorities and women.

    9. Audit of accounts of companies

Sections 139 to 148 deal with provisions for audit of accounts of companies and auditors. Every company is required to get its accounts audited for each financial year from a Chartered Accountant or a Firm of Chartered Accountants. For this purpose, ‘Firm’ will include a Limited Liability Partnership (LLP) engaged in the profession as Chartered Accountants. U/s.139, the first auditor can be appointed by the Board of Directors. At present, auditors are appointed by the members at the Annual General Meeting every year. Now, at the annual general meeting the members have to appoint auditors for a term of 5 years. Thereafter, on expiry of every 5 years, the members have to appoint auditors for a further term of 5 years. It is also provided in section 139 that the members will have to follow the procedure for selecting the auditors as per the Rules which will be notified by the Government. The company has to file the notice of appointment of auditors within 15 days with the Registrar of Companies.

    10. Rotation of auditors

10.1 In the case of listed companies and such class or classes of companies as may be prescribed a new provision is made in section 139(2) for rotation of auditors. This provision is as under:

    i) An Individual auditor shall not be appointed for more than 5 consecutive years.

    ii) A firm of auditors shall not be appointed for more than 10 consecutive years.

    iii) The auditors who have completed the above term, cannot be reappointed as auditors of that company for a period of 5 years. This restriction for reappointment shall apply to the audit firm which is to be appointed after completion of the above term to any audit firm in which one or more partners are partners in the firm which has completed its term as stated above.

    iv) In respect an existing company to which this provision applies it is provided that such company shall comply with the above provision within 3 years from the date of commencement of the Companies Act, 2011.

    v) Members of the company can resolve that the firm of auditors appointed by them shall rotate the audit partner and his team every year or the members may decide to appoint two or more audit firms as auditors of the company.

    vi) The Government may frame rules about the manner in which the companies shall rotate the auditors.

10.2 As regards Government companies the procedure for appointment and removal of auditors by C & AG is the same as existing at present. The provisions relating to appointment of another auditor in the case of casual vacancy in the office of auditor due to resignation, death, etc. are more or less the same as existing at present.

  

 11. Removal of auditors

11.1 The auditor of a company once appointed can be removed before expiry of his term by passing a special resolution after obtaining previous approval of the Government as provided in the rules. If the auditor submits his resignation before the expiry of his term of office, he has to file within 30 days a statement in the prescribed form about the reasons and other facts relevant to whis resignation with the company and the ROC. If this statement is not filed by the auditor he can be penalised by levy of minimum fine of Rs.50,000 which may extend up to maximum of Rs.5 lac.

11.2 On the expiry of the term of the appointment of the auditor, the retiring auditor is to be appointed if he is eligible for this purpose. If the members desire to appoint another person as auditor in his place, special notice from a member is required for this purpose. The procedure to be followed by the company is similar to the existing provisions for appointment of another auditor in place of retiring auditor.

    12. Penal provisions

Section 140(5) gives very wide powers to the Tribunal to take action against the auditor or the audit firm. It is provided in this section that if the Tribunal is satisfied on its own, or on an application by the Government or any person that the auditor of a company has acted in a fraudulent manner or assisted in any fraud by the company, its directors or officers, it can order the company to change the auditor. Further, if the Government makes an application to the Tribunal, and it is satisfied, the Tribunal can pass an order within 15 days that the auditor of the company shall not function as auditor and the Government shall, thereafter, appoint another auditor in place of the auditor so removed. It is also provided that if any final order is passed by the Tribunal against the auditor u/s.140, such auditor will not be eligible for appointment as auditor of any company for 5 years. Further, section 447 provides that if found to be guilty of fraud he shall be punishable with imprisonment for a minimum period of six months which may extend up to 10 years. If the fraud involves public interest, the minimum period of imprisonment shall be 3 years. Apart from this punishment, such auditor shall also be liable to pay minimum fine equal to the amount of the fraud which may extend up to three times of the fraud amount.

    13. Qualifications of auditors

13.1 Section 141 provides that only Chartered Accountants can be appointed as auditors of a company. A firm of Chartered Accountants or LLP engaged in the practice as Chartered Accountants can also be appointed as auditors.

13.2 It is, however, provided that the following persons cannot be appointed as auditors of a company:

    i) A Body Corporate other than LLP.

    ii) An officer or an employee of the company or a person who is a partner or who is in employment of the officer or employee of the company.

    iii) A person (including his relative or his partner) who (a) holds any security or interest in the company, its subsidiary, its holding or its associate company, etc. It may be noted that if such security or interest is less than Rs.1,000 or such sum as may be prescribed by rules, this provision will not apply. (b) is indebted to or who has given guarantee for any debt in relation to the company, its subsidiary, its holding company or its associate company of such amount as may be prescribed.

    iv) A person or a firm has business relationship with the company, its subsidiary, its holding or its associate company directly or indirectly.

    v) A person who is relative of a director or is in the employment of the company as a director or key managerial personnel.

    vi) A person who is convicted by any Court of an offence involving fraud, and a period of 10 years has not elapsed from the date of such conviction.

    vii) Any person, firm or its associate is engaged on the date of appointment in consulting and specified services as provided in section
144.

13.3 A person who is an employee of any other organisation cannot be appointed as auditor of a company. Further, the auditor should not be auditor of more than the specified number of companies as provided by the rules to be framed by the Government.

    14. Remuneration of auditors and other functions

The remuneration of the auditors of a company shall be fixed in its General Meeting or shall be determined in such a manner as may be decided by General Meeting. As regards powers and duties of the auditors and the reporting requirements, the provisions are contained in section 143 which are more or less similar to section 227 of the existing Act. It is also provided that every auditor shall comply with the auditing standards as notified by the Government. The Government is also given authority to pass an order specifying the matters on which the auditors have to report. Such order can be passed in consultation with the NFRA appointed u/s.132. If the auditor of a company finds that an offence involving fraud has been committed against the company by officers or employees of the company he has to report to the Government within such time and in such manner as may be prescribed by rules. The above provisions apply even to a Cost Accountant in practice relating to cost audit of a company u/s.148 as well as to the Company Secretary in practice conducting secretarial audit u/s.204.

    15. Consultancy services

15.1 Section 144 is a new section in which it is provided that the auditors of a company can render such other services as are approved by the Board of Directors or the Audit Committee. It is, however, provided that such services shall not include:

    i. Accounting and book-keeping services.

    ii. Internal audit.

    iii. Design and implementation of any financial information system.

    iv. Actuarial services.

    v. Investment advisory, investment banking or any other financial services.

    vi. Management services.

    vii. Any other services as may be prescribed by rules.

15.2 It is clarified in this section that the above services cannot be rendered to the company either directly or indirectly by the auditors of the company. In the case of an individual auditor or an audit firm, such services cannot be rendered by any relative or any other partners or by any of the associate concerns in which the auditors have significant influence or control or whose name or trade mark or brand is used by the auditor or audit firm or any of the partners of the audit firm.

    16. Punishment for contravention

If the auditors of a company contravene the provisions of sections 143 to 145, the auditors shall be punishable with a minimum fine of Rs.25,000 which may extend up to Rs.5 lac. It is further provided that if the auditor has contravened these provisions with the intention to deceive the company or its shareholders or creditors or other persons interested in the company, he shall be punishable with imprisonment for a term which may extend up to one year or with a minimum fine of Rs.1 lac which may extend up to Rs.25 lac. Further, the auditor is also liable to refund the remuneration received by him and pay for damages to the company or other person for loss arising out of incorrect or misleading statement made in the audit report.

    17. Some suggestions

17.1 The above provisions relating to accounts and audit contained in the Companies Bill, 2011, will have far-reaching impact on the companies and auditors. It appears that these provisions are being made with a view to curb the present-day tendency on the part of some companies to manipulate accounts with a view to benefit those in management or with a view to reduce tax. Some of these provisions are harsh and they are likely to affect the development of the profession of Chartered Accountants.

17.2 At present, the National Advisory Committee of Accounting Standards (NACAS) is working satisfactorily. There is no need to replace this body by appointment of NFRA. Further, the provisions of sections 132 and 133 giving wide powers to this authority to regulate the auditing profession cut at the very root of autonomy conferred on ICAI which is set up by an Act of the Parliament. It is, therefore, suggested that the existing advisory body viz. NACAS should not be replaced by NFRA.

17.3 Further, ICAI is the only competent authority to issue auditing standards for members of C.A. profession. Therefore, provisions in section 143(10) giving power to the Government to notify the auditing standards will curtail the autonomy given to ICAI under the C.A. Act.

17.4 Section 139(2) provides for maximum limit of 10 years for an audit firm to continue as auditors of any listed or large specified companies. Thereafter, there is a cooling period of 5 years. When this provision is made there is no need of again providing in section 139(4) that the Government can notify the rules for rotation of auditors in cases of such companies.

17.5 The provisions of section 140 for removal of auditors and punishment of erring auditors as discussed in para 11 and 12 above are very harsh and apply to auditors of all companies. It is suggested that these provisions should be restricted to only auditors of listed and large specified companies.

17.6 Similarly, provisions of section 147 providing for punishment and fine as discussed in para 16 above also apply to auditors of all companies. These provisions should be made applicable to only auditors of listed and large specified companies.

17.7 The provisions of section 144 prohibiting auditors from rendering certain consultancy services apply to all companies. This will hamper the development of C.A. profession. It is, therefore, suggested that section 144 should be made applicable to listed and large specified companies only.

17.8 If the present Companies Bill is passed in its present form it will curtail the autonomy of ICAI in relation to issue of auditing standards and disciplinary matters. Further, considering the additional responsibilities being thrust on the auditors it appears that small and medium-size audit firms will find it difficult to continue in audit practice. This will affect the development and progress of auditing profession in India.

Whoever fights monsters should see to it that in the process he does not become a monster.
— Friedrich Nietzsche