National Seminar on Companies Act dated 05.07.2014

PRESENTATION

ON

AUDIT & ACCOUNTSD R . S A N J I V A G A R W A L

J A I P U R

F C A , F C SJ U L Y 5 , 2 0 1 4

© D R . S A N J I V A G A R W A L

NATIONAL SEMINAR ON NATIONAL SEMINAR ON COMPANIES ACT, 2013COMPANIES ACT, 2013

A Paradigm Shift For the A Paradigm Shift For the CorporatesCorporates

NATIONAL SEMINAR ON COMPANIES NATIONAL SEMINAR ON COMPANIES ACT, 2013ACT, 2013

This Presentation covers –

• Accounts & Financial Statements• Audit Provisions• Auditors – Appointment /Rotation etc.• National Financial Reporting Authority (NFRA)

Companies Act 2013: Companies Act 2013: The Broader PerspectiveThe Broader Perspective

At par with global practices Enhanced accountability on the part of companies. Vigil mechanism introduced Flexibility in accounting Audit accountability Compliance focused Enhanced monitoring, quality and regulatory

structure (NFRA) Innovative concepts – Audit rotation, re-opening,

auditing standards, experts, KMP.

ACCOUNTS OF COMPANIESACCOUNTS OF COMPANIES[CHAPTER IX ][CHAPTER IX ]

Statutory Provisions

Sec 128: Books of account, etc., to be kept by company. ** Sec 129: Financial statements ** Sec 130: Re-opening of accounts on Court's or Tribunal's orders.

*** Sec 131: Voluntary revision of financial statements or Board’s

report.*** Sec 132: Constitution of National Financial Reporting Authority.

*** Sec 133: Central Government to prescribe accounting

standards.*

ACCOUNTS OF COMPANIESACCOUNTS OF COMPANIES[CHAPTER IX ][CHAPTER IX ]

Sec 134: Financial Statement, Board's report, etc. ** Sec 135: Corporate Social Responsibility. ** Sec 136: Right of member to copies of audited financial

statement. ** Sec 137: Copy of financial statement to be filed with

Registrar. ** Sec 138: Internal Audit.**

^The relevant rules are The Companies(Accounts) Rules, 2014

* This Section was notified from 12/09/2013.** These Sections have come into effect from 01/04/2014 *** These Sections have not come into effect till date

First Time Entry in First Time Entry in Companies Act,2013 Companies Act,2013

Financial year Key Managerial Personnel (KMP)

(MD/CEO/WTD/CS/CFO/Others) E-books Re-opening / Recasting of Accounts Voluntary revision of financial statements Internal audit Auditing Standards Secretarial Standards National Financial Reporting Authority

Accounts of Companies- Accounts of Companies- Key Highlights Key Highlights

Books of Accounts to be kept in electronic mode

Consolidated Financial Statements –JVs/associates/subsidiaries

Re-opening of accounts and voluntary revision of financial statements or Board’s report

Uniform Financial year

Books Of AccountsBooks Of Accounts [Section 2(13)] [Section 2(13)]

“Books of accounts” include records maintained in respect of – all sum of money received and expended by a

company and matters in relation to which the receipts and expenditure take place;

all sales and purchases of goods and services by the company;

the assets and liabilities of the company; and the items of cost as may be prescribed under

Section 148 in the case of a company which belongs to any class of companies specified under that section.

Books of AccountsBooks of Accounts [Section 128] [Section 128]

q Corresponding old section : 209

• Almost similar requirement as that of the Act

• Cognizance to electronic mode of maintaining books of accounts

• Scope of inspection of books and accounts within India and outside has been enlarged

• Reduction in compliance requirement/costs with respect to returns of branches- Returns required to be sent periodically

Books of Accounts [Rules 3 ,4]Books of Accounts [Rules 3 ,4]

• Proper system for storage, retrieval, display or printout of the electronic records shall be ensured and the same shall remain complete , unaltered and in a legible form(including branch records).

• Electronic mode –as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000-data,record,images stored in electronic form , micro film,micro fiche.

• Summarised returns of books of accounts of the company maintained outside India shall be sent to registered office of the company at regular intervals as may be decided, for inspection by directors.

For any other financial information maintained outside India , director to furnish written request himself and not through POA/representative ,alongwith reasons.

Information to be provided to the director within 15 days

Financial Year [Section 2(41)]Financial Year [Section 2(41)]

Definition of Financial year changed – ‘April to March’Ø Lack of flexibilityØ Increased cost of compliance

Transition Period : 2 years from commencement of the Act

Exception/ exemption :Ø Holding/ subsidiary of a company incorporated outside India

and required to follow different financial year for consolidation of financial statements outside India

Ø Tribunal’s approval required

Financial Statements [Section 129]Financial Statements [Section 129]

q Corresponding old section : 210,211,212

Financial Statement is defined under Section 2 (40) to include -

Ø Balance Sheet

Ø Profit and Loss account or Income and Expenditure account

Ø Cash flow Statement

Ø Statement of change in equity, if applicable

Ø any explanatory notes annexed to or forming part of financial statements, giving

information required to be given and allowed to be given in the form of notes.

For the financial statement with respect to one person company , small company and

dormant company, may not include the cash flow statement.

Financial statements to be prepared for financial year and shall be in form as per

Schedule III.

RELEVANT RULESRELEVANT RULES

Consolidation of financial statements to be done in accordance with Accounting Standards , even if the holding company is outside India.

Format as per Schedule III to be followed.

Consolidated financial statements now mandatory for all classes of companies.

Duplication of information: requirement to give summary statement for all subsidiaries / associates / joint ventures continues.

Important Points for Consolidated Important Points for Consolidated Financial StatementsFinancial Statements

Preparation of consolidated financial statements by holding company of its and its subsidiaries / associates / joint ventures is compulsory

Wherever applicable, consolidated financial statements are to be laid before the Annual General Meeting.

Company is also required to attach the accounts of its foreign subsidiary which does not have place of business in India. (Section 137)

Consolidated financial statements shall be prepared in the same form and manner as that of its own and comply with Accounting Standards.

Important Points for Consolidated Important Points for Consolidated Financial StatementsFinancial Statements

A separate statement in prescribed form containing salient features of financial statement of its subsidiaries required to be attached along with its own financial statement.

Subsidiary includes associate company and joint venture.

Central Government empowered to exempt any company or class of companies from such compliance .

Reopening / Recasting of Books of Reopening / Recasting of Books of Accounts [Section 130]Accounts [Section 130]

A company shall not re-open its books of accounts and shall not recast its financial statements, unless an application in this regard is made by any one or more of the following – Ø the Central Government, or Ø the Income-tax authorities, orØ the Securities and Exchange Board of India (SEBI), or Ø any other statutory regulatory body or authority or any person concerned,

and Ø an order in this regard is made by a court of competent jurisdiction or the

Tribunal.

• Court/Tribunal to give Notice.

The re-opening and recasting of financial statements is permitted only for the following reasons –Ø the relevant earlier accounts were prepared in a fraudulent manner; orØ the affairs of the company were mismanaged during the relevant period,

casting a doubt on the reliability of financial statements.

The accounts so revised or re-cast under this section shall be final.

Voluntary Revision of Financial Statements [Section Voluntary Revision of Financial Statements [Section 131]131]

Directors of a Company on their own may prepare revised financial statements or a revised Board's Report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the Company in prescribed form and manner, if it appears to them that –

Ø financial statements of the Company; or Ø the Report of the Board, Ø does not comply with the provisions of clause 129 related to financial

statements or clause 134 related to financial statements /Board’s Report.

National Financial Reporting National Financial Reporting Authority (NFRA) [Section 132]Authority (NFRA) [Section 132]

qCorresponding old section : 210A

• Wide powers to NFRAØFormulation of AASØMonitor/enforce compliance with AASØOversee quality of service of professionalØSuggest measures to improve quality of services

Quasi-judicial powers to NFRA Severe action where professional misconduct is proved Yet to come into force. Constitution of NFRA-independent members

National Financial ReportingNational Financial ReportingAuthority (NFRA) [Section132]Authority (NFRA) [Section132]

• Quasi-judicial powers to NFRAØ InvestigationØ Power as a civil courtØ Power to impose penalty

• Appeal against NFRA orderØ to appellate authorityØ to be constituted by CG

• Severe action where professional misconduct is proved

• Penalty Ø Individuals : 1 lac – 5 times of the fee Ø Firm :10 lacs – 10 times fee

Debarment from professional practice :6 months – 10 years

Central Government to prescribe Central Government to prescribe Accounting Standards [Section 133]Accounting Standards [Section 133]

qCorresponding old section : 211

Central Government to prescribe standards of accounting (AS)

AS to be recommended by ICAI In consultation with / after examination to

recommendations made by NFRA Till AS are prescribed, existing AS under 1956 Act

shall continue to apply (General Circular No. 15 /2013 dated 13.09.2013)

Requirements as to Financial Statements Requirements as to Financial Statements [Section 134][Section 134]

q Corresponding old sections : 215,216,217

Financial statement of the company including consolidated financial

statements, if applicable, should be approved by the Board of Directors,

before such statements are signed.

Financial statement should be signed on behalf of the board by atleast

Chairperson of company, duly authorised by board, or

Ø two directors of whom one should be the Managing Director, and

Chief Executive Officer, if he is director, chief financial officer and

company secretary, if any, in the company

Requirements Requirements as as to to Financial Financial Statements Statements [Section134][Section134]

Such sign is required for submission of financial statements to the auditor for his report.

One person company's financial statements shall be signed by only one director.

Auditors report is required to be attached to every financial statement

Board report shall be attached to the statements laid before the company in general meeting

Signed copy of financial statements (including cash flow statement) shall be issued / circulated

/ published alongwith copy of – v notes to accounts forming part of financial statements v auditor’s report thereon v board's report

Financial Statements-Rule 8Financial Statements-Rule 8

Matters to be included in Board Report:

ØBoard Report shall contain separate report on performance and financial position of each subsidiary , associate and joint ventures.

ØA statement of formal annual evaluation of Board’s report, it’s committees and individual directors by every listed co. and every other co. having paid up share capital of Rs. 25 crores or more at FY end.

ØOther detailed additional matters as specified in Rules.

CORPORATE SOCIAL RESPONSIBILITY :CORPORATE SOCIAL RESPONSIBILITY :THE NEW GAME CHANGER[Sec 135]THE NEW GAME CHANGER[Sec 135]

Provisions of CSR will be applicable to:Ø companies whose net worth is Rs. 500 crore or more ORØ turnover of Rs. 1000 crore or more OR Ønet profit of Rs. 5 crore or moreduring any FY shall constitute a CSR Committee.

Spend ,every year, at least 2% of average net profits of three immediate preceding FYs.

• CSR Committee shall fomulate and recommend a CSR Policy for activities to be undertaken as specified in Schedule VII and expenditure to be incurred therein ; monitor CSR Policy.

• Content of CSR Policy to be disclosed in Board Report and Company website.

Corporate Social Responsibility Corporate Social Responsibility

“Net Profit “ means net profit of company as per financial statements prepared in accordance with the applicable provisions of the Act , but shall not include the following :Ø Any profit arising from overseas branch (es) of company ,

whether operated as a separate company or otherwise; andØ Any dividend received from other companies in India , which

are covered under and complying provisions of Section 135.

• Where net profit has been calculated as per provisions of Companies Act,1956 , no need to recalculate under this Act.

• Average Net Profit shall be calculated in accordance with Section 198 of this Act.

Corporate Social Corporate Social ResponsibilityResponsibility

Emphasis to local area where company operating. Such activities only to be carried out in India.

May collaborate with other companies.

Programs for benefit of employees or their families not included in CSR activities.

Board Report to include annual report on CSR.

Right of members to copies of financial Right of members to copies of financial statements statements

[Section 136][Section 136]

qCorresponding old section : 219 Copies of financial statements including CFS, Auditors

report shall be sent to every member/trustee/debenture holders 21 days before general meeting

Every member allowed to inspect financial statements at registered office during business hours

Listed company to place its financial statements(including CFS) on its website

Copy of financial statements adopted in AGM to be filed with ROC within 30 days of AGM.[Section 137]

ØClass of companies as specified by CG , shall file financial statements in XBRL Format.

Right of members to copies of Right of members to copies of financial statements financial statements -RULES 10, 11-RULES 10, 11

All listed companies and such public companies having

v Net worth > one crore rupees and v Turnover >ten crore rupees,

financial statements to be sent v Electronically, to those who consentedv Physical through recognized mode of delivery as

specified under Section 20 of the Act, otherwise.v Modes under Section 20 –courier, registered post,

speed post.

Internal Audit [Section 138]Internal Audit [Section 138]

Not compulsory for all companies CA or CWA or other professional to conduct internal audit Appointment by Board of Directors Transition Period :6 Months Following companies to appoint internal auditor : Rule 13 Rule 13vListed companiesvUnlisted Public company whose

Ø paid up capital of 50 crores or more,orØ turnover of 100 crores or more,orØ O/s loans and borrowings from banks or public financial institutions

exceeding 100 crores or more, orØ O/s deposits of 25 crores or more;

vPrivate company whose :Ø Turnover of 200 crores or more ,orØ O/s loans and borrowings from banks or public financial institutions

exceeding 100 crores or more in previous financial year

Audit & Auditors Audit & Auditors Chapter XChapter X

Section 139: Appointment of auditors Section 140: Removal, resignation of auditor and giving of

special notice Section 141: Eligibility, Qualifications and Disqualifications of

auditors Section 142: Remuneration of Auditors Section 143 : Powers & Duties of auditors Section 144 : Auditor not to render certain services Section 145 : Auditors to sign audit reports etc. Section 146 : Auditors to attend General Meeting Section 147 : Punishment for contravention Section 148 :CG to specify audit of items of cost in respect of

certain companies** The relevant Rules are The Companies (Audit and Auditors )

Rules,2014.

TYPES OF AUDITSTYPES OF AUDITS

COST AUDITINTERNAL AUDIT

STATUTORY AUDIT

SECRETARIAL AUDIT

Appointment of AuditorsAppointment of Auditors [Section 139][Section 139]

qCorresponding old section : 224

• Auditors’ appointment for 5 years at AGM.

• But ratification at each AGM.

• Auditors to give certificate of qualifications

• If audit committee exists – all appointments based on its recommendations

Rotation of Auditors Rotation of Auditors [139(2)][139(2)]

• Compulsory rotation

• Transition period– to comply within three years from commencement of new Companies Act

• Applicable toØ Listed companiesØ Class/classes of companies as prescribed in rules

• Rotation rules not applicable to one-person companies and small companies

• Rotation criteriaØ Individual – one term of five consecutive yearsØ Audit firm – two terms of five consecutive years

Additional Conditions.

In case of Government companies, CAG shall appoint an auditor within 180 days from end of the Financial Year and direct such auditor the manner in which accounts shall be audited.-Section 139(5)

Rotation of AuditorsRotation of Auditors

• Reappointment holiday/cool-off periodØ Individual – five years from completion of termØ Audit firm – five years from completion of termØ Common partner(s) of audit firm – five years from completion of

term

• Audit ‘firm’ shall include LLP

Restriction on common partner firmsØ If no common partner but part of the same group/networkØ No common partner – same addressØ No common partner – but common relative as defined in section 6 of

the Companies Act 1956/section 2(77) of Companies Act, 2013

Auditors-Rules 3,4,5,6Auditors-Rules 3,4,5,6

• Audit Committee(ACB) and Board to take into consideration qualifications and experience of proposed person for appointment of auditor. Also to consider completed/pending proceedings before ICAI/NFRA/Tribunal/any other court of law and recommend to members in AGM for appointment.

• Members to appoint auditors to hold office from conclusion of that

meeting till conclusion of 6th AGM, counting current meeting as first subject to ratification by members at every AGM.

• Period of office before commencement of the Act to be included for calculating term of 5/10 years. [Rule 6(3)]

• Incoming auditor cannot operate under the same network /brand of outgoing audit firm. [Rule 6(3)]

• In case of joint auditors, rotation to be in the manner where all joint auditors do not complete their term in the same year.

Auditors-Rules 3,4,5,6Auditors-Rules 3,4,5,6

Rule 4• Proposed appointee shall submit a certificate that:

ØHe is eligible for appointmentØAppointment is within term of the ActØAppointment is within limit of the ActØList of proceedings pending on firm or any partner with

respect to professional matters of conduct , as disclosed in certificate, are true and correct.

Rule 5• Class of companies include (except OPC and Small Company)Ø Unlisted public companies having paid up share capital >Rs.

10 croresØ Pvt. Ltd. Co having paid up capital >Rs. 20 CroresØ Below threshold limits as abovementioned, having public

borrowings from financial institutions , banks or public deposits >Rs. 50 crores.

Removal, Resignation of AuditorsRemoval, Resignation of Auditors[Section140][Section140]

Corresponding old section : 225

• Rotation on term completion – no special notice to remove• Removed auditors’ representation – not sent to members • 5 years cooling period for auditors removed.• Auditor also includes firm of auditors

Rules 10.5-10.6Rules 10.5-10.6

Section 140(1) For removal of auditor before expiry of his term:

Ø Application to Central Government

Ø Application to be filed within 30 days from date of passing of special resolution in AGM

Ø An auditor resigning from the company, shall file a statement in prescribed form.

Eligibility, Qualifications &Eligibility, Qualifications &Disqualifications for Auditors Disqualifications for Auditors

[Section 141][Section 141]q Corresponding old section : 224 , 226

• Disqualification criteriaØ Holding any security of company/subsidiary/holding/associate /

subsidiary of holdingØ Relative - less than INR 1000Ø Indebted to same category of above companies prescribed amountØProvide guarantee/security to same category of companies –

prescribed amountØDirect/indirect business relationship with same category

of companiesØRelative - director/employee director/KMPØCourt conviction on fraud in last 10 years

• Maximum no. of companies as auditor = 20

Removal/Disqualification- Rules Removal/Disqualification- Rules 7,8,107,8,10

• Removal of Auditor before expiry of term – Rule 7Ø Application to be made to CG within 30 days of resolution passed by the

Board.Ø Co. to hold general meeting within 60 days of reciept of approval of

resolution passed by Board.

• Disqualifications – Rule 10Ø Relative of auditor holding securities exceeding Rs. 1 Lakh

ØRelative/partner indebted to company/subsidiary/holding/associate exceeding Rs. 5 Lakhs

ØRelative/partner has given guarantee of indebtness of any third person to company/subsidiary/holding/associate exceeding Rs. 1 Lakh

Ø“Business relationship” =any transaction entered into for a commercial purpose except those which are in the nature of professional services as permitted to be rendered by an auditor or audit firm under the Act and Chartered Accountant Act ,1949 and except those commercial transactions under ordinary course of business at Arm’s Length Price.

Remuneration to AuditorsRemuneration to Auditors[Sec 142][Sec 142]

qCorresponding old section : 224

• To be fixed in AGM• Can be determined in any other manner• First auditor – BOD to decide• Remuneration includes facility provided to auditor• Remuneration excludes other services provided at

request of company.

Powers & Duties of AuditorsPowers & Duties of Auditors[Section 143][Section 143]

qCorresponding old sections : 227 , 228 , 619•Access to subsidiary company’s records for consolidation purpose

• Auditor’s report to includeØQualification on maintenance of accounts (alongwith

reasons)ØInternal financial controls

• Compliance with auditing standards.•Auditors to inquire and report upon loss on sale of securities – only non-investment/banking companies

Powers & Duties of AuditorsPowers & Duties of Auditors[Section 143][Section 143]

• For government company – report on directions of CAG

• Branch audit – duties and powers prescribed in Rules

• Additional reporting matters to be prescribed by NFRA

• Immediate fraud reporting to Central Governmaent-relaxation in terms of reporting fraud to CG. Now, report to Audit Committee first.

• Duties equally applicable to CWA/CS.

Auditor’s Powers and Duties -Rules Auditor’s Powers and Duties -Rules 11,12,1311,12,13

Auditors report shall include [Rule 11]ØWhether company has disclosed effect of pending

litigations on FS.ØWhether company has made provision for foreseeable

losses on long term contracts , including derivative contracts.

ØIf any delay in depositing money in Investor Education & Protection Fund.

Duties in relation to Branch Audit [Rule 12]ØBranch Auditor shall submit report to Company’s

Auditor.ØFraud reporting provisions similar to provisions of

Section143(12).

Auditor’s Powers and Duties -Rules Auditor’s Powers and Duties -Rules 11,12,1311,12,13

Reporting of Frauds [Rule 13]ØIn case of fraud, report to Board or Audit

Committee ,seeking reply within 45 days.ØOn reciept of reply, alongwith comments, forward

report to CG.ØIn case of no reply from Board/Audit Committee,

forward report to CG.

• Send report to Secretary, Ministry of Corporate Affairs.

Restriction on other services byRestriction on other services byAuditor [Section 144]Auditor [Section 144]

• Approved servicesØApproved by Board of DirectorsØApproved by Audit Committee

• Restricted servicesØ accounting and book keeping servicesØ internal auditØ design and implementation of any financial information systemØ actuarial servicesØ investment advisory servicesØ investment banking servicesØ rendering of outsourced financial servicesØ management servicesØany other kind of services as may be prescribed

Restriction on other services by Restriction on other services by Auditor [Section 144]Auditor [Section 144]

• Transition period - before closure of 1st financial year

• Restriction also on rendering services directly or indirectly to holding / subsidiary company

• Direct/indirect – ‘individual’– includesØ IndividualØ Through relativeØ Any other person connected or associated with such individualØ Through any other entity in which such individual has

significant influence or controlØThrough any other entity whose name or trade mark or brand is

used by the individual

Restriction on other services by Restriction on other services by Auditor [Section 144]Auditor [Section 144]

• Direct/indirect – ‘firm’– includesØ Either itselfØ Through any of its partnersØ Through its parent, subsidiary or associate entityØ Any other entity in which the firm/partner has significant

influence or controlØAny other entity whose name or trademark or brand is used by the

firm/partner(s)

• Significant influence defined Ø Control of 20% of total share capitalØ Control of business decision under an agreement

Restriction on other services by Restriction on other services by Auditor [Section 144]Auditor [Section 144]

Restriction not applicable to- Audit under any statute

- Certification work required to be done by the statutory auditors

- Any representation before an authority

Associate concern defined to include proprietor/partner/relative who is director/partner/holding substantial interest

Signing Report/ Attending AGMs-Section 145-146

Auditor to sign Audit reports etc.[Section 145]qCorresponding old section : 229,230• Qualifications having adverse effect

Ø Shall be read in AGMØ Open for inspection

Auditors to attend AGM [Section 146]q Corresponding old section : 231

• AGM notices to be forwarded to auditor

• Auditor to attend AGMØUnless exempted by company

Ø Can attend through authorised representative (AR)ØAR to be qualified to be auditor

• Right to be heard at AGM

Punishment for Contravention [Section Punishment for Contravention [Section 147]147]

qCorresponding old section : 232,233

• Default by Company – 25,000 – 5,00,000 Officer – 1 year/10,000-1,00,000/both

• Default by auditor – 25,000 – 5,00,000 provided Willful contravention – 1 year and 1,00,000 –25,00,000

[Appointment 139, powers duties 145, other services 144,signing 145]

• Conviction of auditorØ Additional penal provisionsØ Refund remunerationØ Pay damages

CG to specify audit of items of cost CG to specify audit of items of cost in respect of certain companies- in respect of certain companies- Section Section

148148• Board shall appoint a cost accountant in practice or

a firm of cost auditors in practice on recommendation of Audit Committee.

• Remuneration to be decided by Board[recommended by Audit Committee] and ratified by shareholders.

Auditor appointed under section 139 cannot be cost auditor.

Likely impact of Audit/Accounts Likely impact of Audit/Accounts related provisions related provisions

Enhanced transparency, objectivity and accountability

Substantial increase in cost of compliance Audit as a profession may suffer setback Audit risk/liability issues Financial year change

THANK YOU

FOR

YOUR

PRECIOUS TIME

AND

ATTENTION

Dr. Sanjiv Agarwal

FCA, FCS, Jaipur

[email protected]

[email protected]