Auditors as a profession are unhappy with the Companies Bill 2012
(Bill) on the multiple checks and controls it seeks to impose on their
functions. The Statutory Regulator, the Institute of Chartered
Accountants (ICAI) is faced with marginalisation with the creation of
the National Financing Reporting Authority (NFRA). A statutory body
vested with quasi- judicial powers, NFRA is authorised to investigate
and penalise Auditors and Accountants for misconduct with the power to
even bar Auditors from practising in extreme cases – thereby intruding
into what has been ICAI’s exclusive turf. NFRA is also authorised to
recommend Accounting and Auditing Policies and Standards directly to the
Government, again the sole prerogative of ICAI. Further, if NFRA
initiates proceedings, no other Institute or body can initiate or
continue proceedings in the same matter. Effectively this will restrict
ICAI’s role to acting as a certifying body. In undertaking audit
assignments, alimit of twenty companies has been fixed for the
individual Auditor. In case of Audit firms, the limit is applicable to
each partner. Intended to improve the quality of audit, it appears that
the approach has been adopted without taking into account the structure,
number of businesses, or the classification of companies. What the Bill
does not appear to have considered is that all classes of companies
that the Bill provides for, such as, One Person Company, Small Company,
Dormant Company, Associate Company, as well as the existing versions,
listed and unlisted Public and vanilla Private Companies, are to be
audited by the same thumb rule. That the basic principles in undertaking
the audit of a private company, closely held or otherwise, which is not
reliant on debt or any third party funding, would not merit such
arigorous regime, is an issue that should be addressed before the Bill
becomes a law. The mechanism of appointment of Auditors has not been
substantially changed, except that it is no longer
vested with the Board. Auditors are to be appointed at the First Annual
General Meeting (AGM) of the Company for aduration of five years,
provided it is validated at every AGM, instead of being reappointed.
There is an additional mechanism for listed companies. No individual
Auditor can continue for more than five years and an Audit firm can
serve a maximum two terms of five consecutive years, again subject to
shareholders ratification. No re- appointment is permitted. This could
be subjected to the Audit Committee’s review, taking into account that
the track record of the Auditor is unblemished; the value the
continuation of an Auditor can bring in the long term to a company is
substantial. An Auditor may be removed only by way of a Special
Resolution, but subject to Central Government’s prior approval. This is
yet another assault on shareholder autonomy and again unwarranted for
the smaller classes of companies. That the Bill restricts Auditors
from providing other services, such as internal audit services,
accounting, actuarial, investment banking and other financial and
management services is fully justified on grounds of conflict of
interest. The Firms engaging in such activities have to be weaned off
within a time frame. Disqualifications/ restrictions have been imposed
on acquiring of the Company’s securities by the Auditor and relatives –
nothing new in that one. On resignation, the Auditor has to submit a
statement within thirty days thereof, providing reasons for the
resignation - default to comply can result in a hefty fine. And this
filing does not have to be made with the MCA, nor any of its agencies,
but with the Office of the Comptroller & Auditor General (CAG), no
less. Holding all partners of an Audit firm liable if the representative
partner has colluded or abetted in a fraud is only extending the law
under the Partnership Act. The Bill makes it mandatory for the
Auditor to attend the AGM, under the 1956 Act the Auditor was entitled
to attend but not bound. The Auditor is expected to be a whistle blower
if he comes across any suspect fraud. Though specifically not provided
for, this is envisaged under Section 245 of the Bill - the Class Action
provision. Apart from NFRA, Section 245 of the Bill entitles Members and
/or Depositors, to claim damages or any appropriate action against
Auditors for any improper or misleading statement made in the Audit
Report or any fraudulent, unlawful or wrongful act or conduct. What if
the Auditor is prosecuted, but found innocent? The Bill does not address
this. The 1956 Act on the other hand till the 2000 amendment removed
the provision, under Section 201 thereof required the Company obligation
to indemnify Auditors, in respect of any liability or costs incurred in
defending such action, in cases of breach of trust, misfeasance etc, in
the event of acquittal or discharge. Such
protections have to be in place and are critical to ensure that people
of integrity and quality are attracted to the profession, are not
deterred by the Big Brother is watching you approach. Sadly – that is
what is likely to happen. - www.business-standard.com