After Bank Audit, Second blow of Companies bill is ready to hit the Profession?

After Bank Audit, Second blow of Companies bill is ready to hit the Profession?

 CA Amresh Vashisht

 

If the present Companies Bill No. 121 0f 2011 to be introduced to the parliament, is passed in its present form it will further curtail the autonomy of The Institute of Chartered Accountants of India in relation to issue of auditing standards and disciplinary matters. Further, considering the punishments being applied on the members of the institution I.e auditors it appears that small and medium-size audit firms will find it difficult to continue in audit practice. This will have a drastic effect on their professional avenues and shall be detrimental to the development and progress of our profession. The provisions of section 140 for removal of auditors and punishment of erring auditors are very harsh and apply to auditors of all companies.  Similarly, provisions of section 147 providing for punishment and fine also apply to auditors of all companies. The provisions of section 144 prohibiting auditors from rendering certain consultancy services apply to all companies. Just go through the proposed legislation.

 

1. Appointment Term shall be for Five years.

Hereafter Auditors shall be appointed for a term of 5 years. Thereafter, on expiry of every 5 years auditors shall be appointed for a further term of 5 years. The selection of the auditors shall be as per rules to be notified by the government U/s 139.The company has to file the notice of appointment of auditors within 15 days with the Registrar of Companies.

 

2. Appointment of Firm as auditor

Every company shall be 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.

 

3.  Rotation of auditors

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. 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

(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) 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.

4. Fine on  auditors for not giving reasons of resignation.

The auditor 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. The significant provision is fine on an Auditor if he failed to communicate the reasons of his resignation with in 30 days of tendering of his resignation Failure to do so in prescribed time , he can be penalised by levy of minimum fine of Rs.50,000 which may extend up to maximum of Rs.5 lac.

5. Imprisonment provisions against the Auditors in case of company fraud.

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.

6. Reporting by Auditors

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.

7. Restriction of Auditors working

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.

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.

8. 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.

 

CA AMRESH VASHISHT, FCA, LLB,DISA(ICAI)