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Kumkum Sen: Companies Bill 2012 - The scanner is on the auditor

The Bill makes it mandatory for the Auditor to attend the AGM

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Auditors as a profession are unhappy with the 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 (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, a limit 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 a rigorous 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 (AGM) of the Company for a duration 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.


Kumkum Sen is a partner at Bharucha & Partners Delhi Office. Email: kumkum.sen@bharucha.in  

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