8/11/2019 The Companies Act, 2013 Impact on Auditors and Audit Firms

1/3

The Companies Act, 2013: Impact on auditors andaudit firms

When the draft rules relating to the Companies Act, 2013, were first rolled out, Zenobia Auntysauditor friends wereshell-shocked. Typically, it is just the annual audit season that gets them down; else they are a more cheerful lot thantheir counterpartsthose poor tax practitioners who battle it out in tax offices and tribunals.

What was the reason for their dismay? Well, rotation of auditors had been proposed not just for listed companies butfor all companies, including private companies irrespective of its size. If rotation of auditors is to ensure shareholderprotection by ensuring a comfort-level doesnt develop between the auditor and the Company over the years, what isthe logic of extending rotation to private companies?, queried a young chartered accountant.

The chairman of a Big 4 concurred, by adding that: Nowhere in the world is rotation prescribed for privatecompanies. Mind you, a loop-hole, if one could call it that was also effectively plugged in by prohibiting rotationamong network firms or associate or affiliates of an existing audit firm.

Today, all rules relating to chapter X of the Companies Act, 2013, relating to audit and auditors have been notified.Further, The Companies Act, 2013, has come into effect from April 1, 2014.

Many of the final rules are more rational, even as auditors will continue to find some new requirements challenging.

Mandatory rotation of auditors: The final rules, which were recently issued, on the eve of coming into force of theCompanies Act itself, are comparatively more reasonable for the auditor community without diluting the interest ofany stakeholder (say, creditors) of large private companies.

Rotation of auditors is now mandatory for all listed companies and only those unlisted and private companies whichmeet the prescribed criteria.

Unlisted public companies with a paid up share capital of Rs. 10 crore or more; private limited companies with a paidup share capital of Rs. 20 crore or more; and companies with public borrowings from financial institutions, banks orfrom the public (by way of deposits) of Rs. 50 crore or more; will need to rotate their auditors.

A press release from The Institute of Chartered Accountants of India (ICAI) quotes its President, C.A. K Raghu assaying: Rotation of Auditors which has not been accepted across the world is now only restricted to certain class ofcompanies leaving close to 90% of the companies outside the scope of rotation. This will benefit small and mediumpractitioners (which means auditors) and corporates.

Last December, member countries of the European Union, approved new auditor regulations, which provide thatauditor of public interest entities, be rotated every ten yearswith provisions for a longer tenure when auditengagements are put out for bid or joint audits are performed. Public interest entities include banks, insurance firmsand listed companies. A point to note is that private companies continue to remain out of the ambit of auditor rotationrequirement, points out a retired auditor friend to Zenobia Aunty. Moreover, he adds: Auditor rotation isnt yet onthelegislative books in the United States of America.

8/11/2019 The Companies Act, 2013 Impact on Auditors and Audit Firms

2/3

8/11/2019 The Companies Act, 2013 Impact on Auditors and Audit Firms

3/3

In other words, he or she is not meant to attack the books of accounts with a preconceived notion that a fraud exists.Alas all her dreams of playing Sherlock Holmes had promptly disappeared during her first week of internship itself!But she soon learnt what it means to be a truly independent auditor, one whom the stakeholders can rely on. Theauditor, after all, is responsible for verifying whether the financial statements exhibit a true and fair view of the state ofaffairs of the business.

Over the years, while auditors have continued to bank upon Lord Justice Lopes verdict, public perception haschanged. Incidents of fraud, even if ingenious and conducted by top managementsuch as Satyam in India havewidened this perception gap.

Perhaps this change in perception is captured in the Companies Act, 2013 and notified rules. It was required underthe new Act that the auditor should immediately inform the Central Government within a prescribed time frame and inthe prescribed manner, if the auditor had reason to believe that an offence involving fraud is being or has beencommitted against the company by its officers or employees. No materiality limit was set for such reporting. The termFraud as defined under the Act, covers every act of omission or commission.

ICAI in its press note comments: We also understand that there are going to be practical difficulties in dealing with therequirement to report on every fraud. However, the silver lining in the final rules on reporting of fraud is that now theauditor need not report the fraud directly to the Central Government. In the first instance, the report would have to begiven to the Board of Directors of the Company and the Audit Committee and within next sixty days, the report onfraud shall have to be submitted to the Central Government. We are looking at various possibilities and hope toresolve this issue in a practical manner soon.

Now, the auditor is required at first to report the fraud to the board and the audit committee, seek their reply within aforty-five day period and within fifteen days of this reply, report the fraud to the Central Government together with theresponse of the board and audit committee. Well, this puts some degree of onus on the board and audit committee aswell.

It remains to be seen how this new requirement pans out.

Having finished dictating her points of view, to this long suffering niece, Zenobia Aunty trundled off in search of herdog. Spot alone was loyal enough to listen to her off-tune rendition of Que-Sera-Sera, whatever will be, will be, thefutures not ours to see, Que-Sera-Sera.