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COMPANIES BILL 2012

PROVISIONS RELATING TO AUDIT & AUDITORS

CA Kamlesh S. Vikamsey

[email protected]

April 3, 2013


BACKGROUND

Year 2008 - The Companies Bill, 2008, introduced in the Lok Sabha on 23rd October, 2008 to replace The Companies Act, 1956. Lapsed, with the dissolution of the 14th Lok Sabha.

Year 2009 - The Companies Bill, 2009, introduced in the Lok Sabha on 3rd August, 2009 (with minor modifications to the Companies Bill, 2008). Referred to the Standing Committee on Finance of the Parliament on 9th September, 2009.

Year 2010 - Committee’s report introduced in the Lok Sabha on 31st August, 2010.

Year 2011 - The Companies Bill, 2011 introduced in the Lok Sabha with several changes on 14th December, 2011. Hence referred back to the Committee on 21st December, 2011 for reconsideration.

Year 2012 - Based on the recommendations the Companies Bill, 2011 was amended and was introduced as Companies Bill, 2012. The Bill was passed in the Lok Sabha on 18 December, 2012.

April 3, 2013 The Companies Bill, 2012 Audit & Auditors

2


STRUCTURE OF THE COMPANIES ACT 1956 & THE COMPANIES BILL, 2012

The Companies Act, 1956

The Companies Bill, 2012

13 Parts 658 Sections 15 Schedules

29 Chapters 470 Clauses 7 Schedules

April 3, 2013 3 The Companies Bill, 2012 Audit & Auditors


MAJOR HIGHLIGHTS (OTHER THAN ACCOUNTS & AUDIT)

Mandatory CSR – minimum spend by the specified Companies

Enhanced Accountability on Corporate entities

ID – provisions made in details & code for ID’s inserted in the Bill

Host of additional disclosures in report of Board of Directors

Restriction on Inter Corporate Loans/Investments and Guarantee

Changes in provisions pertaining to Depreciation

Private placement defined in clearer manner



MAJOR HIGHLIGHTS …. CONT’D

Merger & Acquisition procedures streamlined (Fast Track/Cross Border/Squeeze Out etc)

At least one Woman Director mandatory in specified Companies

Class action suits

NCLT given very wide powers under the Act

Trf of shares also to IEP Fund – when unpaid/unclaimed dividend is transferred

Almost no exemptions /relaxations to Private Limited Companies

Concept of One Person Company (OPC) introduced

Small Companies defined and granted some relaxations/exemptions

Many New Definitions & changes in some definitions



DELEGATED LEGISLATION

Large number of provisions in the bills are left to be determined by the Rule Making Authorities i.e. “to be specified” or “as may be prescribed.” (346 out of 470 clauses or approx 74%)

A long list of such items clause-wise attempting explain why legislating powers are delegated runs into about 23 printed pages

Not all of these items may necessarily be ‘procedural’ e.g.: List of Relatives with reference to an Individual Qualifications of an Independent Director Layers of subsidiaries Disclosures by Holding Company of details pertaining to

Subsidiary Companies Etc… Etc…



Provisions relating to accounts

Provisions relating to audit and auditors

Major new definitions

Appointment of auditors

Rotation of Auditors

Qualification of auditors

Upper limit on number of audits

Right & Duties of Auditors

Prohibition on other services

Casual vacancy, removal, & resignation of Auditors

COMPANIES BILL 2012 ….



COMPANIES BILL 2012 … AUDIT & AUDITORS

Penal Provision for Auditors

Cost Audit & Internal Audit

Re-opening of Accounts

National Financial Reporting Authority (NFRA)

Audit Committee

Class Action


ACCOUNTS OF THE COMPANY


9 CA Kamlesh S. Vikamsey


MAJOR NEW DEFINITIONS…… CONT’D

Financial statement (Clause 2(40)) - in relation to a company,

includes— (i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity; If applicable and

(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement




Potential impact and some key issues: As per definition of FS – Cash flow is required to be prepared and

presented by all companies whether public or private, whether listed or unlisted unless exempted ones like OPC or small company

Presently, AS-3 is not applicable to SMC’s. Such relaxation given by AS Rules to SMC’s which are not OPC or small Companies is taken away by this proposal

Listed Companies are required to present Cash Flow under ‘Indirect’ method under listing agreement. The proposed amendment does not specify the method. Thus, companies other than listed ones, which are preparing Cash Flow statement may have choice of ‘Direct’ or ‘Indirect’ method as per AS-3

April 3, 2013 11 The Companies Bill, 2012

Audit & Auditors


ACCOUNTING YEAR

What does the Companies Act, 1956 say ?

At present, a company can adopt any accounting year for maintaining its accounts

What does the Companies Bill, 2012 say ?

All companies shall have to follow uniform accounting year ending 31st March of every year.

Existing companies will have to comply within period of 2 years when the Bill Becomes Act

Exemption can be claimed in respect of foreign subsidiary companies which are required by the laws of foreign countries to adopt different accounting year, by applying to the tribunal

Liberty of company having smaller or larger FY than 12 months seems to have been taken




Control (Clause 2(27)) - shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner

Definition given under AS 21- Control:

(a) the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or

(b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities




Key Managerial Personnel [Clause 2(51)] - in relation to a

company, means (i) the Chief Executive Officer or the managing director or the

manager; (ii) the company secretary; (iii) the whole – time Director; (iv) the Chief Financial Officer; (v) such other officer as may be prescribed

As per AS – 18:

KMP means those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise




Subsidiary company [Clause 2(87)] - in relation to any other company (that is to say the holding company), means a company in which the holding company— (i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed

In sub-clause (ii) above the words ‘….total share capital’. Presently, the term for this purpose is ‘….total voting power’ (as in case of AS-21)

Subsidiaries are defined to include any ‘Associate’ or ‘JV’ – this may give rise to some practical issues



MAINTENANCE & PRESERVATION OF BOOKS OF ACCOUNTS What does the Companies Act, 1956 say ?

At present, the Act was silent on maintenance of accounts in electronic form.

Preservation of accounts were required for a period not less than 8 years immediately preceding the current year

What does the Companies Bill, 2012 say ? (Clause 128)

The bill seeks to permit maintenance of accounts in electronic form

The Bill provides where investigation is ordered in respect of a company, the Central Government may direct that accounts may be kept for such longer period as it thinks fit. (Otherwise 8 years)



DEPRECIATION


Sch XIV read with AS 6

95% of original cost to be depreciated over specified period

Low value items (<Rs 5K) to be fully depreciated

Separate rates for Intangibles/electricity companies/EST etc

What does the Companies Bill, 2012 say ? (Schedule II)

Schedule II provides useful Lives of assets and no rates (SLM or WDV)

No provision for low value items or rates for intangibles

Schedule Rate for some items like Building, Furniture etc are different

The balance of WDV (depreciable amount)– after Schedule II is effective to be depreciated as per provisions of this schedule

Companies may face difficulties in year of transition



BONUS SHARE Presently, no provision on issue of bonus shares by Companies

except that Table A mentions about capitalization of profits and reserves; but it does not specially prohibit capitalization of revaluation reserve.

In case of listed entities, SEBI regulates issue of Bonus shares The guidance note on availability of Revaluation Reserve for issue

of Bonus shares issued by the ICAI states that a company is not permitted to issue bonus shares out of reserve created by revaluation of its assets.

In Bhagwati Developers Vs peerless General finance and Investment Co. (2005), SC held that and unlisted company can issue bonus share out of revaluation reserve. Now clause 63 of the Bill contains the enabling provision of issue of bonus shares



BONUS SHARE ….CONT’D

April 3, 2013 19

Clause 63 - A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—

(i) its free reserves;

(ii) the securities premium account; or

(iii) the capital redemption reserve account:

Provided that no issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets.

Pre-condition for issue of Bonus share - No company shall capitalize its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless—

it is authorized by its articles;

it has, on the recommendation of the Board, been authorized in the general meeting of the company;

The Companies Bill, 2012 Audit & Auditors


BONUS SHARE ….CONT’D

April 3, 2013 20

it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;

it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;

the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;

it complies with such conditions as may be prescribed

bonus shares shall not be issued in lieu of dividend.



AUTHENTICATION OF FS

21

Bill requires that Both Standalone and consolidated financial statement to be signed by following person:

Chairperson of the company where he is authorized by the BOD

2 director out of which one shall be managing director

Chief Executive Officer, if he is director of the company

Chief Financial Officer

Company Secretary

No separate requirement for banking company as in Companies Act, 1956

In present Act, CFO not required to sign the FS, but for listed company CFO is required to issue certificate to Board that FS are free from material misstatement



REOPENING OF ACCOUNTS


At present there is no provision to reopen the accounts of the company

What does the Companies Bill, 2012 say? (Clause no. 130 & 131) : A company shall re-open its books of account and recast its financial

statements, only if 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:



REOPENING OF ACCOUNTS…. CONT’D

The court or the Tribunal, as the case may be, shall give notice to the Central Government, the Income-tax authorities, the Securities and Exchange Board or any other statutory regulatory body or authority concerned and shall take into consideration the representations, if any, made by that Government or the authorities, Securities and Exchange Board or the body or authority concerned before passing any order under this section

The accounts so recasted or revised shall be final

Clause 131 provides that it is also possible for the BoD to revise the

financial statements or Board’s report for any of the 3 previous financial years if they find that the statement and / or the report is not in accordance with the requirement of Clause 129 or 134


23



The Board will seek approval of Tribunal for the same and before giving approval the tribunal shall give notice to the Government and the Income tax Department and invite their comments

Such revision can be made only once in a financial year

The board shall give the detailed reasons for revision to the members and send revised copies to members and RoC. The revised financial statements shall be approved by members in general meeting




Potential impact and some key issues: Recently, SEBI has issued one circular, pertaining to qualifications in

accounts of listed Companies – which may require such companies to revise or restate their FS

MCA circular allows a company to reopen and revise its accounts after their adoption at AGM in some circumstances

No time-limit prescribed for reopening and revising the accounts or FS consequent to Court or tribunal order

For voluntary revision, BoD will seek approval from the tribunal, and tribunal shall give notice to the Government and the Income tax Department and invite their comments. What about SEBI, RBI, IRDA etc..?? April 3, 2013 25 The Companies Bill, 2012

Audit & Auditors


CONSOLIDATED FINANCIAL STATEMENTS (CFS)


No Provision

What does the Listing Agreement say ? (Clause no. 41) :

Holding Co. may submit quarterly and year to date consolidated financial results to the stock exchanges.

It is mandatory for the Holding Co. to submit annual audited consolidated financial results to the stock exchanges .

What does the Companies Bill, 2012 say ? (Clause no. 129) :

Holding Co. to prepare Consolidated Financial Statement in addition to Stand alone financials. (i.e. Earlier such requirement for only listed company, now it is applicable to all (private or public) if they have any subsidiary company

Subsidiary to include associate company and joint venture



Consolidated Financial Statement to be prepared by the Holding Co. in the same form and manner, as that of its own.

Consolidated Financial Statement shall also be laid before A.G.M. of the Holding Co. Therefore, Auditor’s report on CFS will have to be addressed to members

Holding Co. to attach with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiaries, in to be prescribed form. (Presently Sec. 212)

Schedule III (earlier Sch VI) contains a statement of particulars to be given as part of CFS

April 3, 2013 27

CFS….CONT’D



Name of the Entity in the

Net Assets i.e. total assets minus total liabilities Share in profit or loss

As % of Consolidated net assets

Amount As % of Consolidated profit or loss

Amount

Parent

Subsidiaries

Indian

Foreign

Minority Interest in all Subsidiaries

Associates (Investment as per the equity method)

Indian

Foreign

Joint Venture (as per proportionate consolidation/ investment as per the equity method)

Indian

Foreign

April 3, 2013 28

In Consolidated Financial Statements, the following shall be disclosed by way of additional information:

CFS….CONT’D



Potential impact and some key issues:

For the first time, Consolidated Financial Statements (CFS) are

accorded recognition under Corporate Law; in fact, where a company has subsidiary and/or joint venture and/or an associate, the Bill provides for mandatory preparation of CFS

The CFS are also required to be circulated to members and laid before AGM for approval. Currently clause 32 of Listing Agreement required listed companies to prepare and publish CFS but same was not required to be laid before AGM for approval

If company has only associate or JV & no subsidiary, provision seems to make CFS mandatory even for such cases; which is not required had the provisions of AS-21 been followed

April 3, 2013 29

CFS….CONT’D




The Bill does not contain any provision which corresponds to provisions of Section 212 of the Act and it appears that details required to be given in respect of subsidiary companies u/s 212 are dispensed with

The impact of all the proposal is that all the Companies (whether listed or unlisted and whether public or private) having subsidiary or Associate or JV would have to prepare and present CFS.

It is often noted that in some businesses (like Builders & Developers) – associate or JV is there. In addition to CFS, the statement of details contained in Schedule III and statement of salient features of FS of subsidiaries is also to be prepared and presented. The management and auditors of such Companies need to gear up to meet this requirements of CFS

April 3, 2013 30

CFS….CONT’D


AUDIT & AUDITORS




MAJOR NEW DEFINITIONS

Auditing Standards [Clause 2(7)] : means the standards of auditing or any addendum thereto for companies or class of companies referred to in Clause 143 (10);

(Clause 143(10) - The Central Government may prescribe the standards

of auditing or any addendum thereto, as recommended by the ICAI, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority )

The Standards on Auditing (SA) formulated by ICAI are in sync with

International Standards on Auditing (ISA) with minor differences. The SA to be formed or recommended by NFRA may also need to be on the lines of best international practices



APPOINTMENT OF AUDITORS

What does the Companies Act, 1956 say ? (Section 224) :

Every Company to appoint auditor or auditors at each A.G.M. to hold office until the conclusion of the next A.G.M.


Every Company, to appoint an individual or a firm as an auditor, at the first A.G.M. of the Company. [139(1)]

Auditor to hold office from the conclusion of that meeting till the conclusion of its sixth A.G.M. and thereafter till the conclusion of every sixth A.G.M. Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting.

Where at AGM, no auditor is appointed/re-appointed, the existing auditor shall continue to be the auditor of Company [139(10)]

Members of a Company may resolve to rotate audit partners and audit team at such intervals as may be resolved by members or audit to be conducted by more than one auditor [139(3)]

Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.



APPOINTMENT OF AUDITORS … CONT’D

Potential Impact and some key issues:

Presently, BOD of newly incorporated company is required to appoint statutory auditor within 30 days of incorporation which is continued but it is also provided that at first AGM an auditor shall be appointed for term of five years

The term of auditor would be that of five years in case of all companies other than first year. It is not clear whether ‘ratification’ by members every year – would amount to re-appointment OR not ratifying would tantamount to removal

Presently, in cases where no auditor is appointed/re-appointed at AGM, CG has the power to make such an appointment but Bill provides that in such cases – the existing auditor shall continue. The clarity about term of auditor and rotation etc seems lacking

The rotation of audit partner is presently regulated by mandatory SQC-1. Now a right is proposed to be given to members of appointing company to provide for such rotation



ROTATION OF AUDITORS What does the Companies Act, 1956 say ?

No provision relating to rotation of auditors

What does the Companies Bill, 2012 say ? (Clause no. 139)

Listed company or such class or classes of companies as may be prescribed, not to appoint or re-appoint —

a) an individual as auditor for more than one term of five consecutive years; and

b) an audit firm as auditor for more than two terms of five consecutive years.

Provided that— (i) an individual auditor who has completed his term of 5 years, not be re-

appointed as auditor in the same company for five years from the completion of his term;

(ii) an audit firm which has completed its 2 terms of 5 years, not to be re-appointed as auditor in the same company for five years from the completion of such term



ROTATION OF AUDITORS….CONT’D

Provided further that as on the date of appointment no audit firm:

(a) having a common partner or partners to the other audit firm;

(b) whose tenure has expired in a company in the immediately preceding the financial year;

(c) shall not be appointed as auditor of the same company for a period of five years.

Existing companies have to comply with the requirements within 3 years from the date of commencement of the Act



ROTATION OF AUDITORS….CONT’D

Potential Impact and some key issues :

Whether rotation requirement is prospectively or retrospectively?

If retrospective – the existing auditors (even if completed term of 5 or 10 years) can continue up to 3 years from the date of commencement of the new Act

If prospective – whether time of 3 years (plus 5 years or 10 years) is given to the existing auditor?

RBI & IRDA requirement concerning rotation are more stringent and will continue to override the provisions of BIll

RBI/IRDA requirements for joint auditors of insurance companies are more stringent and may continue to apply

The widespread rotation of auditors would have impact on time/efforts of the auditors in first year of the engagement as new auditor would take bit more time in assessing the prevalent systems and controls

One has to wait for the Rules pertaining to Rotation [139(4)]



QUALIFICATIONS OF AUDITORS


A person shall be CA or firm of CA (Multi Disciplinary Professional Firm)

The person shall not be a Body Corporate, an officer or employee of the company, a person who is a partner, or who is in the employment, of an officer or employee of the company, a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding Rs.1,000 and a person holding any security of that company


Following modifications and additions are made to the qualifications

Body corporate doesn’t include LLP (to facilitate LLP’s being appointed as auditors)

A person is not eligible for appointment if he or his relative or his partner

(a) holds any security or interest in the company, its subsidiary, its holding or associate company or subsidiary of such holding company. This will not apply if the security or interest is less than Rs.1,000 held by his relative

(b) is indebted to or who has given guarantee for any debt in relation the company, its subsidiary, its holding or associate company or subsidiary of such holding company of such amount as may be prescribed


Audit & Auditors


QUALIFICATIONS OF AUDITORS….CONT’D

A person is not eligible for appointment if he has direct or indirect business relationship with the company, its subsidiary, its holding or associate company or subsidiary of such holding company

A person is not eligible for appointment if he/she is in full time employment elsewhere.

A person is not eligible for appointment if he is relative of a director or is in the employment of the company as a director or KMP

A person is not eligible for appointment if he has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction

A person is also not eligible for appointment if its subsidiary or its associate or any other form of entity is engaged in consulting and specified services as provided in Clause 144 on the date of appointment





The Bill requires a firm in which majority of partners (instead of all Partners) are practicing CA’s can also be appointed; such a provision is put keeping in mind the multi-disciplinary firms (in which professionals from variety of fields can be partners, like CA, Costing, Secretary or Legal etc.)

Presently – relative holding securities would not disqualify the appointment of an auditor; it is hoped that definition of ‘relative’ for this clause is confined only to such relatives who are financial dependant on auditor

The condition of disqualification pertaining to holding of securities of an ‘Associate Company’ is newly inserted


Audit & Auditors




The amount of indebtedness of auditor, relative, partner to Company or holding or subsidiary should not exceed the sum as may be prescribed

One of the restrictions refers to entering into Business Relationship with the Company by the person or Firm. This restriction does not appear to apply to relative of person proposed to be appointed as auditor. Moreover, it is to be seen as to which business relationships are prescribed by the Government under this provisions



UPPER LIMIT ON NUMBER OF AUDITS

What does the Companies Act, 1956 say ? [Section 224 (1B)]

Ceiling on audit is as under : (a) in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees 25 lakhs, 20 such companies; (b) in any other case, 20 companies, out of which not more than 10 shall be companies each of which has a paid-up share capital of Rs 25 lakhs or more

In computing the Specified number of audits for the purpose of Section 224(1B), the following audit shall not be taken into consideration :

1. Audit of Private Company

2. Audit of Guarantee Companies not having Share Capital

3. Special Audits

4. Audit of Foreign Companies

5. Branch Audit


Audit & Auditors


UPPER LIMIT ON NUMBER OF AUDITS….. CONT’D

What does the Companies Bill, 2012 say ? (Clause no. 141)

A person or a partner of a firm holding appointment as auditor of company, will not be eligible for appointment, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies

No exclusion permitted in Bill while calculating the number of 20 Company Audits

As per ICAI Code of Ethics, a person can be appointed as an auditor only for 30 entities. Provided that the number of audit assignments of public companies each of which has a paid-up share capital of Rs. 25 lakhs or more, shall not exceed 10

The upper limit as per Bill being more stringent, the same will apply


Audit & Auditors


RIGHTS OF AUDITOR


Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company


Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company; further if he is an auditor of a holding company, shall also have right to access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries

Provisions of SA 600 compared to ISA 600 may be noted in this respect vis a vis right of Parent Company auditor with respect to books & records of Component;



DUTIES OF AUDITOR – INTERNAL CONTROL & FRAUD


CARO required to report on internal control matter relating to the inventory, fixed assets and sale of goods and services

CARO required to report of any fraud on or by the company has been noticed or reported during the year

What does the Companies Bill, 2012 say ? (Clause no. 143) : (only changes)

Auditor shall report that company has adequate internal financial controls system in place and the operating effectiveness of such controls.

If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the CG within such time and in such manner as may be prescribed

Whether had auditor has sought the information/explanations which he considered necessary and received


Audit & Auditors


DUTIES OF AUDITOR – INTERNAL CONTROL & FRAUD… CONT’D Potential Impact and some key issues:

SA 265 requires auditor to assess the Internal control and to communicate the deficiency therein to TCWG but proactive statement pertaining to adequacy of internal financial control system is new requirement in the main audit report

Auditors duty relating to intimation of possible or actual fraud by or against the Company is new requirement; it would have been better if this requirement had been made applicable only to material/significant items. Appropriate guidance from ICAI on this reporting requirement would be of help to comply with this new requirement



AUDITORS ATTENDANCE AT GENERAL MEETING


All notices and other communications relating to general meeting shall be sent to the auditor and auditor has right to attend any general meeting and be heard on matters which concerns him as an auditor


The auditor, unless exempted by the company, is required to attend any general meeting by himself or through his authorised representative who is qualified to be an auditor.

It would have been appropriate if Auditors attendance was made applicable only at AGM or at such EGM where agenda items include matters pertaining to finance and accounts



PROHIBITION ON OTHER SERVICES What does the Companies Act, 1956 say ?

No specific provision

What does the Companies Bill, 2012 say ? (Clause no. 144):

Auditor not to render, directly or indirectly, following services to the Company or its Holding Company or Subsidiary Company or Associate Company:

a) Accounting and book keeping services;

b) Internal audit;

c) Design and implementation of any financial information system;

d) Actuarial services;

e) Investment advisory services;

f) Investment Banking;

g) Any other financial services;

h) Management services; and

i) any other kind of services as may be prescribed.

Provided that an auditor or audit firm who or which has been performing any non audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement



OTHER SERVICES….CONT’D

Potential Impact an some key issues:

The CoE of ICAI also presently prohibit such services by auditor which would create conflict with independence

Terms such as investment advisory services, outsourced financial service and management services are not defined; Management consultancy services are described in CoE of ICAI. Definition

‘Directly or Indirectly’ in clause 144 shall include rendering of services:

Either by auditor himself or through relative or other associated person or entity over which he has significant influence or control or whose name, trademark or brand is used by him

In case of Firm, either by itself or through its parent, subsidiary, associate or any entity over which firm has significant influence or control or whose name, trademark or brand is used by it or any of its partners


Doc No.154 - Definiton Of Management Consultancy N Other Services.docx


OTHER SERVICES….CONT’D


Questions as to whether tax representation, tax consultancy services,

assisting management in compliance of several laws (like TDS review, Input Service Tax booking methodology etc.) would get covered under prohibited services or not, need to be carefully considered by the Companies and the Auditors

The restrictive provisions, as drafted, do not contain any threshold either of the Companies or of the transactions or services that are proposed to be covered. As such, the restrictive provisions are applicable to all companies – small or big, private or public and listed or unlisted



CASUAL VACANCY

What does the Companies Act 1956 say? [Section 224 (6)] :

Casual vacancy may be filled by the BoD, provided where such vacancy

is caused because of resignation of an auditor it shall only be filled by the company in general meeting

What does the Companies Bill, 2012 say (Clause no. 139) :

Casual vacancy to be filled by the BoD within 30 days, if such vacancy

arises because of resignation of an auditor then it can be filled by BoD, but within three months thereafter ratification from members at general meeting should be obtained



REMOVAL OF AUDITORS

What does the Companies Act 1956 say? [Section 224 (5)] : At a general meeting company can remove the auditors by passing a

special resolution and after obtaining approval from the central government

What does the Companies Bill, 2012 say ( Clause no. 140) : Central government approval and Special resolution required to

remove auditor before his term


Removal of duly appointed Auditor is continued to be difficult in the Bill. A company can remove the auditor before expiry of his five year term only by passing a special resolution at General Meeting and after obtaining prior approval from the central government



RESIGNATION OF AUDITORS


No provision of filling any document with ROC on resignation


The auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of Government companies and Government controlled companies, the auditor shall also file such statement with the C&AG, indicating the reasons and other facts as may be relevant with regard to his resignation

If the auditor does not comply with the above requirement, he or it shall be punishable with fine which shall not be less than Rs.50,000 but which may extend to Rs.5,00,000



PENAL PROVISIONS FOR AUDITORS

What does the Companies Bill, 2012 say? (Clause no. 140) :

The Clause gives very wide powers to the tribunal to take action against the auditor or the audit firm

If the Tribunal is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors

If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place



PENAL PROVISIONS FOR AUDITORS…. CONT’D

The contravention covered may relate to appointment/rotation, powers & duties, providing of prohibited services, reporting requirements etc. The punishment may include a fine not less than Rs 25,000 but which may extend to Rs 5 Lakh. If the contravention is found to be knowingly and willfully committed with intention to deceit tax authorities, members or creditors, the fine may be at least Rs 1 Lakh and extend up to Rs 25 Lakhs and imprisonment which may extend up to 1 year. Refund of fees received and paying of damages to aggrieved parties may also be ordered by authorities in willful default cases

The auditor against whom final order has been passed by the Tribunal shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall also be liable for action under Clause 447



INTERNAL AUDIT


No provision except reference in CARO

What does the Companies Bill, 2012 say? (Clause no. 138) :

Such class or classes of companies as may be prescribed, shall be required to appoint an internal auditor, who shall either be a –

- Chartered Accountant; or

- Cost Accountant; or

- such other professional as may be decided by the Board;

to conduct internal audit of the functions and activities of the Company.



INTERNAL AUDIT…. CONT’D


The Bill seeks to make internal audit mandatory in case of class of companies to be specified. The rules pertaining to this would be prescribed later.

Presently there is no such requirement except that under CARO, in case of some specified companies, statutory auditors are required to comment upon adequacy and coverage of Internal Audit System



NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

What does the Companies Bill, 2012 say? (Clause no. 132, 133 and 143) :

NACAS will be re-named as NFRA (Attempted to be on-line of PCAOB)

The Government will notify the accounting standards as recommended by ICAI in consultation with NFRA

Similarly, the Government will notify the auditing standards as recommended by ICAI in consultation with NFRA. This will mean that the present authority of ICAI to formulate auditing standards will now be taken over by the Government

NFRA has been given powers to monitor and ensure compliance with accounting and auditing standards.



NFRA….CONT’D

April 3, 2013 59

Oversee the quality of service of the profession with ensuring compliance with such standards and suggest measures required for improvement in quality of service

NFRA will have powers to investigate, either suo moto, or on reference made to it by central government for such class of companies and other bodies corporate or persons, the matters of professional or other misconduct committed by CA. (It include both practicing & non-practicing CA?)

It is proposed to grant powers to NFRA equivalent to Civil Court.(i.e. summoning and enforcing attendance of persons & examining them on oath, requiring production of books of account & other records, carrying out inspection of books & other records etc.)



NFRA….CONT’D

Once NFRA starts disciplinary proceedings, the respective Institutes, which are statutory bodies, can’t take any action against member or firm

If found guilty the NFRA has power to impose minimum penalty of Rs.1 lac which may exceed 5 times for member and Rs.10 lac which may exceed 10 times for firm and debar from professional practice (Member & Firm) for minimum 6 months and maximum upto 10 years.

Appeal against NFRA’s order shall lie to National Financial Reporting Appellate Authority to be constituted under this section



NFRA….CONT’D


Some important powers and duties of ICAI are sought to be granted to NFRA like auditing standard formulations, overseeing the quality of audit services and penalizing the errant members etc.

It is proposed that till such time any standards on auditing are notified by NFRA, the standards on auditing issued by ICAI shall be considered to be notified auditing standards under the provisions of new Act

ICAI disciplinary committee has power to impose maximum penalty either of Rs 1 Lac or Rs 5 lac depending on the nature of misconduct & debar the name of the member either 3 month to life time



NFRA….CONT’D

The disciplinary mechanism of ICAI (which is also set up under an Act of Parliament) has several government nominees on its Board and this committee has been working reasonably well considering the fact that many decisions rendered by it on disciplinary matters have been tested and, by and large, confirmed by High courts.

If there were some issues with delay in delivering the decisions of disciplinary mechanism of ICAI, those issues could have been resolved and strength of this standing committee of ICAI could have been increased. Instead Government thought it fit to create another regulatory authority – NFRA.



AUDIT COMMITTEE Applicability What does the Companies Act, 1956 say ? (Sec 292A) : Every Public Company having paid-up share capital 5 crore or more is

required to constitute the audit committee What does the listing agreement say ? (Clause no. 49) : All listed Companies What does the Companies Bill, 2012 say ? (Clause no. 177) : This requirement for listed company or prescribed class of companies



AUDIT COMMITTEE…. CONT’D Constitution What does the Companies Act, 1956 say ? (Sec 292A) :

Audit Committee should consist of minimum 3 directors of which 2/3

member will be directors, other than managing/WTD

What does the listing agreement say ? (Clause no. 49) : The audit committee shall have minimum 3 directors as members. 2/3 of

the members of audit committee shall be independent directors. If chairman id NED – 1/3 of Board should be ID, otherwise 1/2

What does the Companies Bill, 2012 say ? (Clause no. 177) : The Audit Committee shall consist of a minimum of 3 directors with

independent directors forming a majority



AUDIT COMMITTEE…. CONT’D

Qualification What does the Companies Act, 1956 say ? (Sec 292A) :

No such requirement What does the listing agreement say ? (Clause no. 49) : All members of audit committee shall be financially literate and at least 1

member shall have accounting or related financial management expertise

What does the Companies Bill, 2012 say ? (Clause no. 177) : Majority of members of Audit Committee including its Chairperson shall

be persons with ability to read and understand, the financial statement



AUDIT COMMITTEE…. CONT’D Role and Responsibility

What does the Companies Act, 1956 say ? (Sec 292A) :

Board will determine the term of reference for audit committee

What does the listing agreement say ? (Clause no. 49) : Listing agreement prescribed the role and responsibility of the Audit committee


The bill prescribes certain specific responsibility in addition to the term of reference prescribe by the board. Some key additional responsibilities prescribed in the bill Vs listing agreement are as below:

To review and monitor the auditor’s independence and performance, and effectiveness of audit process

Approval or any subsequent modification of transactions of the company with related parties

Scrutiny of inter-corporate loans and investments Valuation of undertakings or assets of the company, wherever it is necessary

Monitoring the end use of funds raised through public offers and related matters



AUDIT COMMITTEE…. CONT’D Whistle Blower Policy (Vigil Mechanism)

What does the Companies Act, 1956 say ? (Sec 292A) :

No such requirement in the act

What does the listing agreement say ? (Clause no. 49) : Such requirement is a non-mandatory requirement under the listing

agreement

What does the Companies Bill, 2012 say ? (Clause no. 177) : Every listed company or such class or classes of companies, as may be

prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. Further, the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report



AUDIT COMMITTEE…. CONT’D Potential Impact and some key issues:

Prescribed class of companies to be defined

Prescribed class of companies, non-listed companies may need to

change the composition of the audit committee formed under provisions of S. 292A

As the definition of independent Director has been made more stringent with more onerous responsibilities, availability of suitable persons to act independent director may be challenge



CLASS ACTION


No Provision


Application before Tribunal to be filed by the members or depositors of the Company if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors

Application to be filed by :

In the case of Members:

- in the case of a Company having share capital, not less than 100 members of the Company or not less than such % of the total no. of its members as may be prescribed, whichever is less; or

- by the members holding not less than such % of the issued share capital of the Company as may be prescribed



CLASS ACTION….CONT’D In the case of Deposits:

- not less than 100 depositors of the Company or not less than such % of the total no. of depositors as may be prescribed, whichever is less; or

- depositors holding such % of the total deposits of the Company as may be prescribed

The order passed by the Tribunal shall be binding on:

- the company and all its members, depositors; and

- auditor including audit firm or expert or consultant or advisor or any other person associated with the Company

Clause 245 (2) –

Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner



CLASS ACTION….CONT’D

Application can be filed to claim damages or compensation or demand any other suitable action from or against —

(i) the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or

(ii) any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part

Stringent imprisonment and fine shall be imposed on the company in case of default

An application for class action may also be filed by a person or association of persons representing the affected persons


ANY QUESTIONS ???????



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