Presentation on Accounts of Companies, Audit & Auditors – Significant changes

BY

Pradeep Singh

Date of Presentation: Sunday, 13/10/2013Timings: 10:00 a.m. onwards

Venue: Conference Room, A-40,Madhu Vihar, Delhi

Presentation onAccounts of Companies, Audit & Auditors –

Significant changes

Promulgation of Act

Passed in Lok Sabha on 18th December 2012 and then in Rajya Sabha on 8th August 2013

Assent of the President received on 30th August 2013

Accounts of Companies Chapter IX (Clause 128 to 138)

• Company may keep books of accounts or other relevant papers in electronic mode in such manner as may be prescribed.

• Branch offices to send summarized returns of transactions periodically to HO. (Sec 209(2) of Co.s Act, 1956 prescribes this period as not more than 3 months)

• A Director can inspect books of accounts of the subsidiary company only with the authority of the Board of Directors.

• In case of Inspection, Inquiry & Investigation, C/g may direct for keeping books of a/cs for such period longer than 8 years.

Books of Accounts to be kept by Companies (Clause 128)

• Financial statement to be prepared in accordance with such form and manner as prescribed in schedule III

• The term Balance Sheet and Profit & Loss Account collectively defined as Financial Statement with cash flow statement and statement showing changes in equity forming part of the same.

• All companies having one or more subsidiaries to prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own the accounts of companies in such manner as may be prescribed.

the word “subsidiary” shall include associate company and joint venture.

Financial Statements(Clause 129)

• Company can’t re-open its books of account and shall not recast its

financial statements, unless an application in this regard is made by the Central Government, the Income-tax authorities, the Securities and Exchange Board, any other statutory regulatory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that—

(i) the relevant earlier accounts were prepared in a fraudulent manner; or

(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.

Accounts revised or re-cast shall be final.

Re-opening of accounts on Court’s/Tribunal’s orders (Clause 130)

• If it appears to the directors of a company that—

(a) the financial statement of the company; or

(b) the report of the Board,

do not comply with the provisions of section 129 or section 134

they may prepare revised financial statement or a revised 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 such form and manner as may be prescribed.

Voluntary Revision of Financials and/or Board’s Report (Clause 131)

• Name of NACAS (National Advisory Committee on Accounting Standards changed to NFRA (National Financial Reporting Authority).

• Jurisdiction of NFRA extended to advising on Auditing Standards in addition to Accounting Standards.

• Constitution of NFRA does not provides for nomination of members of MCA, ICAI, ICSI & ICAI as opposed to manner provided in Co.s Act, 1956 and to be decided by Central Government.

• NFRA can investigate matters of professional/other misconduct by ICAI, ICWAI members either suo moto or on c/g’s reference for such class of body corporate/persons in such manner as may be prescribed with powers to impose penalty.

Constitution of NFRA (Clause 132)

• Central Government may prescribe Accounting Standards or any addendum thereto as recommended by ICAI in consultation with and after examination of the recommendations made by the NFRA.

• NFRA’s role limited to advising the c/g or examining the Accounting Standards prescribed by ICAI.

Central Government to prescribe Accounting Standards (Clause 133)

• Board report to contain following additional information:-

• Extract of the Annual Return

• No. of Board Meeting

• Declaration by Independent Directors regarding their appointment

• Co.s policy on Director’s appt. & remuneration if required to constitute

Nomination and Remuneration Committee.

• Explanation/Comments by the Board on every qualification, reservation or

adverse remark or disclaimer made by Company Secretary in his Secretarial

Audit Report

• Particulars of loans, guarantees or investments

• Particulars of contracts or arrangements with related parties

Financial Statement, Board’s Report e.t.c. (Clause 134)

• Material changes & commitments affecting company’s financial position

between previous year and current year & date of the report.

• Statement indicating development and implementation of risk management

policy

• Details of policy developed and implemented on CSR

• For listed companies & prescribed companies , a statement of manner of

annual evaluation of its own performance, its committees and individual

directors.

• Directors Responsibility Statement to contain following additional statement:-

• Laying down of Internal Financial Control in case of listed company.

• Devising proper system to ensure compliance of all applicable laws.

Financial Statement, Board’s Report e.t.c. (Clause 134) contd..

• Company no longer required to disclose the following in the Directors Report:-

• Reasons for non-completion of buy back within time period specified in the Bill.

• Details of employees in receipt of remuneration not less than the prescribed

rate of remuneration.

Financial Statement, Board’s Report e.t.c. (Clause 134) contd..

• Companies to set aside at least 2% of total profits for CSR.

• Reasons to be stated in case of failure to do so.

• Every company having :– Net worth of Rs. 500 crores or more, or – Turnover of Rs. 1000 crores or more; or– Net profit of Rs. 5 crores or more – during any financial year, shall constitute a Corporate Social Responsibility

(CSR) Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an independent director.

• Board report to disclose composition of CSR Committee.

Corporate Social Responsibility (CSR) (Clause 135)

• The CSR Committee shall have the following functions:

(a) Formulate and recommend to the Board, a CSR Policy indicating the activities to be undertaken by the company as specified in Schedule VII;

(b) Recommend expenditure to be incurred on the activities referred to in clause (a); and

(c) Monitor CSR Policy of the company from time to time. • The Board has to consider recommendations of the CSR Committee; approve the

CSR Policy; and disclose the contents of the Policy in its report.• The Company has to place the contents of the Policy in the Company’s website in

the prescribed manner.• Board has to ensure that the activities are undertaken by the Company • Board has to ensure that the company spends, in every financial year, at least 2%

of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy.

• The company can give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

• Board to explain reasons for not spending the amount in its Report.

CSR Committee & Role of the Board (Clause 135)

• Every listed company to place its financial statements including consolidated financial statements and all other documents on its website.

• Every company to place separate audited accounts of its subsidiary on its website, if any.

• Central government to prescribe manner of circulation of financial statements by companies having such net worth and turnover as may be prescribed.

• Exemption for sending the financial statement to members in less than 21 days before the meeting has been dispensed with.

Member’s Right to copies of Audited Financial Statements (Clause 136)

• Companies to file even un-adopted financial statements with the ROC within 30 days of AGM if financial statements are not adopted at the AGM.

Companies to file financial statements with the ROC within 30 days of adoption at adjourned AGM.

• OPC to file copy of financial statements duly adopted by its member along with other documents within 180 days from the closure of financial year.

• Every companies to also attach accounts of its subsidiaries incorporated outside India and not having place of business in India (LO/BO/PO) at the time of filing of financial statements with the ROC.

Filing of Financial Statements with the Registrar (Clause 137)

• Internal Audit to be mandatory for class of companies to be prescribed.

• Internal Auditor shall be either Chartered Accountant or Cost Accountant or such other professional decided by the Board.

• Manner & interval of internal Audit and reporting to the Board to be prescribed by the Central Government by notification of Rules.

Internal Audit (Clause 138)

AUDIT AND AUDITORS Chapter X (Clause 129 to 148)

• First auditor shall hold office till the conclusion of First AGM

Auditor appointed at First AGM can hold office till the conclusion of Sixth AGM and

thereafter till the conclusion of every sixth AGM.

In case of casual vacancy, newly appointed auditor shall hold office till the conclusion of

next AGM.

On Board’s failure to appoint first Auditor within 30 days of incorporation, members shall

appoint the same within 90 days of incorporation.

Compulsory rotation of individual auditor in every 5 years and of audit firm in every 10

years in listed companies and certain other classes of companies as may be prescribed.

In case of audit firm, the incumbent audit firm shall not have any common partners with

retiring firm.

Appointment of Auditors (Clause 139)

Transition Period for the companies to comply with the provisions of rotation

of auditors is 3 years .

The company as well as auditor have the right to terminate their engagement

before the expiry of the term.

Liability of individual auditor extends to audit firm also.

Only chartered accountants are eligible to be appointed as auditors.

Not to be an auditor in more than 20 companies – No public/private

distinction.

Provisions for rotation of Auditing Partner and his team within the Auditing

Firm has been introduced.

Appointment of Auditors (Clause 139)

Auditors to send intimation of resignation in prescribed form within 30 days to

both company & the ROC. In case of govt. co., intimation should be sent to

CAG.

Failure to do so shall render Auditor punishable with a fine not less than Rs.

50,000 which may extend to Rs. 5 lakh.

No special notice required for removal of auditors on completion of

consecutive tenure of 5 years or 10 years as the case may be.

C/g’s approval along with shareholder’s approval vide special resolution

required for removal of an Auditor.

Copy of representation received from outgoing auditor if not sent to members

should be filed with ROC. However, no time has been prescribed for filing of

the same.

Removal, Resignation of Auditors & giving of Special Notice (Clause 140)

Introduction of new disqualifications in addition to qualifications prescribed

under current laws for appointment of Auditor:-

• Security Holder:- Person# holding security of the company*• Indebtness/ guarantee:- If such person# Indebted to company* for amount

>1000• Business Relationship:- Person having direct/indirect business relationship

with company*• Relative:- Relatives of director or KMP who are in employment of the

company• Fraud:- If convicted by court

# Company Includes its Subsidiary, holding or associates company or subsidiary of such holding company

# Person includes himself, relative or partner

Eligibility, Qualifications & Disqualifications of Auditors (Clause 141)

Board may fix remuneration of the first Auditors.

Remuneration of Subsequent Auditors to be fixed at General

Meeting or in such manner as may be determined therein.

Remuneration to also include any facility provided to Auditors.

Remuneration of Auditors (Clause 142)

Auditors may render such other services as approved by BOD or Audit Committee

except the following directly or indirectly to Company, its Holding and/or Subsidiary

Company:-

(a) Accounting and book keeping services

(b) Internal Audit

(c) Actuarial Service

(d) Investment Advisory Services/ Investment banking Service

(e) Outsourced financial services

(f) Management Services

(g) Designing/implementation of Financial System

(h) Any other services as may be prescribed.

Auditors already providing aforesaid Non Audit Services to comply with the

provisions before closure of financial year after the commencement of Act.

Auditors not to render certain services (Clause 144)

Auditors to mandatorily attend all general meetings of the Company either

themselves or through their representative (also qualified to be the Auditor

unless otherwise exempted by the Company).

No need for reading unqualified Auditor’s Report at the Company’s AGM as

opposed to existing provisions whether qualified or unqualified.

Auditors to attend General Meeting (Clause 146)

Specific penalty provided for contravention of provisions for appt. of Auditors

by both Company and Auditors.

In case of company’s default, co. shall be punishable with fine not less

than Rs. 25,000 which may extend to Rs. 5 lakhs and any officer in default

shall be punishable with imprisonment for a term extending to 1 year or with

fine not less than Rs. 10,000 extending to Rs. 1 lakh or with both.

In case of Auditor’s default (Clause 139, 144 & 145), Auditor’s shall be

punishable with fine not less than Rs. 25,000 which may extend to Rs. 5

lakhs. In case of wilful contravention, he shall be punishable with

imprisonment for a term extending to 1 year or with fine not less than Rs. 1

lakh extending to Rs. 25 lakhs or with both.

Punishment for Contravention (Clause 147)

In case of Auditor’s default (Clause 143, 144 & 146), in addition to

punishment provided earlier, Auditor’s to refund the remuneration received

by him to the co. & pay damages to co., statutory bodies or authorities or to

any person for the loss caused by misleading information.

Partners and the firm liable with Civil & Criminal liability if found that Partners

of the firm have acted in a fradulent manner.

Punishment for Contravention (Clause 147) contd..

Instead of companies engaged in production, processing, manufacturing or

mining activities, c/g can direct such class of co.s engaged in other

activities too get a Cost Audit done.

C/g’s approval no longer required for appointment of Cost Auditor.

Only Cost Accountants eligible for conducting Cost Audit.

Cost Audit to be conducted in accordance with Cost Accounting Standrads

issued by the ICAI.

Cost Auditor to send its report to Board who will forward in turn to C/g

instead of directly forwarding to c/g.

Provisions empowering c/g to conduct special audit in certain cases

discontinued.

Cost Audit (Clause 148)