the companies act 2013: the dawn of a new era key provisions accounts audit...

© Grant Thornton India LLP. All rights reserved.

The Companies Act 2013: The dawn of a new era

Key provisions – Accounts Audit and Auditors

May 2014

Presented by:

Pasupathi KG


Companies Act, 2013

The dawn of a new era…

Improve

Governance

Auditor

Regulation

Investor

Protection

Contemporary


Companies Act 2013 – Introduction

• passed by the Lok Sabha on 18 December 2012

• passed by the Rajya Sabha on 8 August 2013, without any modification

• received President’s assent on 29 August 2013

• replaces around 60 year old Companies Act, 1956 and becomes the Companies Act, 2013

• fine print to be defined by Rules, currently available on MCA website

• simple yet complex- sections reduced from 650+ to 470. However, over 300 places in the

Companies Act, 2013 where it mentions of rules

• expected to be implemented in phases- provides flexibility to have different effective dates for

different sections

• 98 Sections notified with immediate effect (12 September 2014)

• 184 sections notified with effective date of 1 April 2014

• the MCA is yet to notify certain sections/chapters of the new Act relating to NFRA , voluntary

revision of financial statements or boards report , re-opening of accounts on court's or

Tribunal's orders , Investor & Education Protection Fund, compromise and arrangement,

oppression & mismanagement, winding up, sick companies, special courts and NCLT which are

also expected to be notified soon in the due course


Companies Act 2013 – Salient features

The new legislation with 29 Chapters, 470 Sections and 7 Schedules

aims at:

• enhancing transparency

• enhancing protection measures for investor and minority shareholders

• having stringent Corporate Governance measures

• CSR initiatives introduced

• greater responsibility on auditors

• having business friendly corporate regulations

• bringing in e-governance measures

• improving accountability in India’s corporate sector



Accounts,

Audit and

Auditors • Consolidated financial

statements

• Restatement of financial

statements

• Tenure and re-

appointment of auditors

• Mandatory rotation

• Fraud reporting

• Restriction on number of

audits

• Class action suits

• Restricted services


Companies Act 2013 – Accounts

Financial Statements

• 31 March to be the mandatory financial year-

end (except for the purpose of aligning the

financial year with that of holding/subsidiary

incorporated outside India, with prior approval

of the NCLT)

• consolidation mandatory for all companies with

subsidiaries

• the word subsidiary includes associate

company and joint venture

• requirement to show minority interest

separately within equity on the balance sheet

• the 2013 Act eliminates the current flexibility

in having a financial year different than 31

March, as well as in making amendments to

the year-end to suit requirements

• consolidation for all companies , including

intermediate companies is onerous.

Internationally the requirements apply only to

listed companies

• the requirement to present minority as part of

equity is currently not required under the

existing Indian accounting practices. However

the international practices are consistent with

the 2013 Act.

Key c

han

ges

An

aly

sis

Final Rules

• consolidation requirement as per schedule III of the Act

• Listed companies and public companies, having net worth more than 1 crore rupees and turnover of more than 10 crore rupees may send the financial statements to the members through electronic mode



Financial Statements

• Cash flow statement shall form part of the FS

for all companies (except one person co., small

co and dormant co.)

• the 2013 Act prescribes the format (similar to

existing revised schedule VI of the Act) for

preparation of Consolidated financial

statements

• FS shall also include statement of changes in

equity, if applicable

Financial Statements Authentication

• both separate and consolidated financial

statements of all companies (including banking

companies) to be signed at least by the

Chairperson of the company if he is authorized

by the Board , or by two directors out of which

one will be MD and CEO, if he is director in the

Company, the CFO, and the CS, if appointed

• the existing Indian and international

accounting practices do not require

preparation of CFS when the Company has

investments only in associates and joint

ventures (no subsidiaries).

• the banking companies need to comply with

the requirements of the 2013 Act as well as

the Banking Companies Act 1956.

• by attesting the FS, the CFO will be

assuming responsibility of ensuring that the

FS are true and fair.

Key c

han

ges

An

aly

sis


Companies Act 2013 – Board report

Board's Report - made more informative and

includes extensive disclosures:

• extracts of the annual return;

• recommendations of the audit committee not

accepted by the Board with reasons;

• compliance declaration by the IDs on their

compliance being IDs;

• CSR Policy developed and implemented;

• statement indicating the manner in which

annual evaluation has been made by the Board

of its performance, its committee and individual

directors (listed entities);

• development and implementation of risk

management policy;

• policy on director’s appointment and

remuneration, ratio of remuneration to each

director to the median employee’s

remuneration

• explanation or comments by the board on

every qualification, reservation or adverse

remark or disclaimer made by the auditor and

by the company secretary in their reports

• increases responsibility and improves

transparency of functioning of the Board.

• the disclosures may also contain information

that is commercially sensitive and accordingly

companies will need to develop the disclosures

carefully.

Key c

ha

ng

es

An

aly

sis


Companies Act 2013 – Board report

Board's Report - made more informative and

includes extensive disclosures:

• material changes and commitments, affecting

company’s financial position subsequent to the

year end; to which the financial statements

relate and the date of the reports;

• related party transactions not in the ordinary

course of business and not at arm’s length

basis

Directors responsibility statement

• The 2013 Act has included the following

additional matters in the Directors’

responsibility statement:

− in case of listed company, the directors had

laid down internal financial controls to be

followed by the company and they are

adequate and operating effectively;

− the directors have devised proper systems

to ensure compliance with all applicable

laws and such systems are adequate and

operating effectively.

• The requirements for ICOEB (internal financial

control to ensure orderly and efficient conduct

of business) appear to be onerous, and can be

read to cover:

− not just financial reporting aspects, but also

operational areas

− looks at efficiency of operations

− requires conformation of operating

effectiveness

• The ICOEB and its monitoring by the board will

require companies to set up appropriate

mechanism/ processes/ systems to be able to

give such declarations.

• The auditors are also required to report on the

ICOEB.

Key c

ha

ng

es

An

aly

sis



Estimated useful life

• the threshold for minimum useful life of fixed

asset has been removed and a list for

indicative useful lives has been prescribed.

• any variation from the useful life of an asset

needs to be justified.

• no transition period provided and the change

needs to be applied prospectively.

• if on the date of implementation of the 2013

Act, there is no useful life left for an asset

with carrying value on transitioning, the

same may be adjusted through opening

reserves.

• componentisation required

Restatement of Financial statements (not yet

notified)

• Court or NCLT may order re-opening and re-

casting of financial statements upon

application by Central Govt. or any other

statutory body

• voluntary restatement can be done to

comply with accounting standards with the

approval of the tribunal

Estimated Useful Life

• deviations are allowed but would need to

be justified.

• componentisation requirement will

require significant efforts as needs to be

done from a retrospective effect

Ke

y c

ha

ng

es

An

aly

sis


Companies Act 2013 – Audit and Auditors

Tenure and Re-appointment of Auditors

• Auditors appointed in AGM to hold office from

the conclusion of that meeting until the

conclusion of the ensuing sixth AGM (subject to

ratification by members at every AGM).

• an auditor/ audit firm is eligible for re-

appointment after expiry of 5 years since

completion of the previous tenure.

• an audit firm having common partner (s) with

another firm which has completed its term is not

eligible for re-appointment for a period of five

years from the completion of the other firm’s

term.

• as per the 2013 Act, before the expiry of the

term of appointment, the company may remove

the auditors (subject to special resolution and

prior approval from Central Government) and

the auditors, as well, have the right to resign.

`

• the auditor’s tenure will be protected for 5

years as there are stringent provisions on

removal of auditors.

• while rotation affects the long-term continuity of

the company-auditor relationship, the 5 year

appointment, brings in stability for a limited

period.

Key c

han

ges

An

aly

sis

Final Rules

• rotation requirements apply retrospectively i.e. period prior to the commencement of the 2013 Act, included in computing 5/10 consecutive years.

• incoming auditor/audit firm disqualified for appointment, if associated with the outgoing auditor/audit firm under the same network of audit firms or operating under the same trade mark or brand.



Mandatory Rotation

• in case of listed companies (or prescribed class

of companies) the term of appointment of an

individual auditor/ an audit firm is restricted to a

period of 5 years/ 10 years.

• an auditor/ audit firm should mandatorily rotate

at the expiry of the term. Shareholders can

mandate:

‒ more frequent rotation of audit partner

and team

‒ audit can be conducted by more than one

auditor (joint audit)

• transition period of 3 years provided to comply

with the requirement of mandatory rotation of

auditor.

• mandatory rotation is expected to change the

Indian audit market structure significantly as

several large companies have retained their

auditors for more than 10 years.

• mandatory rotation could possibly result in both

positive and negative influences on the quality

of the financial reporting processes and on

overall audit quality.

• moves away from international practice of only

mandatory partner rotation and will be an

implementation challenge.

Key c

han

ges

An

aly

sis

Final Rules

• Auditor rotation mandatory for the following class of companies, excluding one person companies and small companies:

― unlisted public companies with paid up share capital of Rs. 10 crore or more

― private companies with paid up share capital of Rs. 20 crore or more

― all companies with borrowings from bank/public financials institution or public deposit of Rs. 50 crore or more.



Eligibility

• the new Act proposes that a firm wherein a

majority of the partners practicing in India are

qualified for appointment, may be appointed to

be an auditor of a company.

• where a firm, including a Limited Liability

Partnership (‘LLP’), is appointed as an auditor

of a company, only partners, who are chartered

accountants are permitted to act and sign on

behalf of the firm.

• several additional disqualifications included

• the introduction of LLP as an auditor and ability

to operate with partners who are not Chartered

Accountants is a welcome change and in line

with international practices. This will also pave

the way for multi-disciplinary partnership firms.

• Auditor needs to submit eligibility certificate

before proposal the appointment is taken up

• the company need to file a form with the

government within 15 days of appointment of

auditors

• existing auditor relationships needs to be re-

evaluated considering the several

disqualifications included Key c

han

ges

An

aly

sis



Additional disqualification for auditors:

• whose relative is a non-executive/ executive

director or key managerial personnel of the

company.

• who is in full time employment elsewhere.

• holding interest greater than Rs 1 lac face

value or indebted for greater than Rs 5 lacs

• any person who has a business relationship

with the company / its subsidiary / its

associate / its holding company / subsidiary

or associate of its holding company

• whose appointment will result in the person

being the auditor of more than twenty

companies; and

• whose subsidiary or associate or any other

form of entity is engaged in providing non-

audit services as on the date of

appointment (non-audit services

disqualifications).

• a person who 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.

• some of the disqualifications seem to be quite

punitive and may be difficult to implement.

• the non-audit services may be provided in the

year of the appointment without affecting

eligibility provided the engagement is

terminated prior to the date of the appointment

Key c

han

ges

An

aly

sis

Final Rules

• for auditor’s disqualification with respect to business relationships, the term ‘business relationships’ defined to construe any transaction entered into for a commercial purpose except for

― commercial transactions in the nature of professional services permitted for auditors under the Act and the CA Act

― commercial transactions in the ordinary course of business at arm's length price


Companies Act 2013 – Restrictions on Auditors

Restriction on audit limits

• limit on number of companies that can be

audited by a firm: 20 per partner (including

private companies)

• provisions prohibit auditors of a company to

render non-audit services to an audit client (or

its holding company or its subsidiary

company)

Restriction on services

• severe restrictions on providing non-audit

services, directly or indirectly include:

‒ accounting and book keeping services;

‒ internal audit;

‒ design and implementation of any

financial information system;

‒ actuarial services;

‒ investment advisory services;

‒ investment banking services;

‒ rendering of out sourced financial

services; and

‒ management services.

• one year from the date of enactment of the

2013 Act.

• no restrictions based on nature/size of the

companies and private companies will also be

considered for calculating the limit of twenty

audits per partner

• whilst the provision of some non-audit services

to audit clients can pose a risk, the objectivity

of auditors is not compromised by providing

non audit services to audit clients or their

holding companies provided that auditors

comply with independence standards.

• scope of service restrictions significantly

hamper the ability of auditors to provide valid

non-audit services that don’t impact

independence.

• the risk associated with the audits increases

significantly, and have a severe impact on the

cost of professional indemnity insurance and

hence costs of audits

Key c

han

ges

An

aly

sis


An

aly

sis

Reporting Requirements

• the Act includes following additional matters

for auditor reporting;

‒ adequacy of the internal financial controls

system and the operating effectiveness

of such controls;

‒ any qualification, reservation or adverse

remark relating to the maintenance of

accounts and other matters connected

therewith.

‒ any fraud by officers or employees on the

Company is being or has been

committed (reported to CG within 60

days)

• for listed entities, in the director’s report, the

2013 Act requires for directors to provide a

similar report on internal financial controls.

• the auditors are subjected to wider and onerous

responsibility of providing a comfort on internal

controls and on operational effectiveness of the

conduct of the business, in addition to the true

and fair opinion on financial statements.

• scope of audit inquiries/testing may no longer

be restricted to financial information and may

include more qualitative operational

assessments as well. It is not yet clear as to

what 'Other matters connected herewith' may

include

• for unlisted entities the requirements related to

reporting in internal financial controls apply only

to auditors and not to the directors which is

inconsistent with the company's / directors

primary responsibility for implementing such

controls.

Key c

han

ges

Final Rules • Auditors to report of fraud to the Central Government if sufficient evidence, within 60 days.

• initial report to be given to Board/Audit Committee for their comments. Time limit for responses set at 45 days. Within 15 days of receipt of comments or expiry of 45 days (in case comments not received) , report to be sent to Central Government.

• the rule is also applicable to a cost auditor and a secretarial auditor

Companies Act 2013 – Auditor's Report


Companies Act 2013 – Accounts, Audit and Auditors

Other audits

• Internal audit and Secretarial audit - mandatory

for listed and prescribed classes of companies

• cost audit has been mandated for specified

class of companies

• mandatory internal audit requirement will

strengthen the system of internal controls

in the wake of recent corporate frauds

• mandatory secretarial audit report would

be a good measure to ensure compliance

with legal requirements as any adverse

comment in the report could have

significant impact from a regulatory

perspective Key c

han

ges

An

aly

sis

• Internal audit made mandatory for listed companies, unlisted public companies with paid up share capital of Rs. 50 crore or more or turnover of Rs. 200 crore or more or outstanding loans or borrowings exceeding Rs. 100 crore or outstanding deposits of Rs. 25 crore or more at any point of time during the last financial year and private companies with turnover of Rs. 200 crore or more or outstanding loans or borrowings exceeding Rs. 100 crore at any point of time during the last financial year

• secretarial audit made mandatory for every public company with a paid up capital of Rs. 50 crore or more or turnover of Rs. 250 crore or more.

Final Rules


Companies Act 2013 – NFRA (National Financial Reporting Authority) –

Not yet notified

National Financial Reporting Authority

(NFRA)

• monitor and enforce compliance with

accounting and auditing standards

• oversee the quality of service of the profession

• not merely an advisory body but will have

power to investigate matters of professional

misconduct by CA’s or firms

• no other body shall initiate proceedings in

matters where investigation initiated by NFRA

• will have the powers vested in a Civil Court

while trying a suit

Class Action Suits (not yet notified)

• will allow a requisite number of members or

depositors with common interest, in a matter,

to file an application in the National Company

Law Tribunal (‘NCLT’) against the company/its

management/its auditors or a section of its

shareholders for damages or compensation if

they are of the opinion that the management or

conduct of the affairs of the company are being

conducted in a manner prejudicial to their

interest.

• the constitution of the NFRA will bring in a

significant change to the current structure of

standard setting regulations.

• in the absence of significant anti-abuse

provisions in the implementation of class action

suit rules, this can be misused.

• the new risks and liabilities will enforce more

responsibility into the role of an auditor.

Key c

ha

ng

es

An

aly

sis

Draft Rules

• Draft National Financial Reporting Authority Rules, 2013 released and NFRA structure to have Committees on Accounting Standards, Auditing Standards and on Enforcement.

• NFRA shall undertake investigation or conduct quality review of audit of following class of companies:

‒ Listed Companies;

‒ Unlisted companies with net worth or paid up capital of not less than Rs. 500 crores or annual turnover not less than Rs.1,000 crores as on 31st March of immediately preceding financial year; or

‒ Companies having securities listed outside India



Penalties & Prosecution

• in case if the auditor has contravened any of

his duties, he shall be punishable as below:

‒ required to refund the remuneration

‒ pay damages to the company, statutory

bodies/authorities or any other person for

losses arising of incorrect or misleading

statements in his audit report

‒ pay a fine which shall not be less than 25

thousand rupees but which may extend to

5 lakh rupees

• where, in case of audit of a company being

conducted by an audit firm, it is proved that the

partner(s) have acted in a fraudulent manner:

‒ imprisonment for a term not less than six

months and may extent upto 10 years,

provided that where the matter involves

public interest, the minimum term will be

3 years; and

‒ fine for an amount ranging from 1-3 times

the amount involved in the fraud.

• high penalties in case a certain specified

person (director, promoter, experts and

auditor) has provided misleading information

and people have acted on such information.

• the terms mentioned in the Act like

"intention to deceive" or ‘improper or

misleading statement of particulars’, etc. are

vague and subject to wide interpretation

which might result in unnecessary

litigations.

• potential unlimited liability on auditor may

result in adverse impact on auditing

profession and may give rise to long

disputes and increase audit costs.

• also there could be an unlimited liability to

the firm for an act of a partner and this

seems a disproportionate punishment for an

individual act.

• this requirement results into auditor’s being

held liable to every person and the liability is

not limited to his involvement and work

performed.

• also, the reference’ by an expert or advisor

or consultant is very broad and vague and

could result in wide and unintended

interpretations of the intent of the clause.

Key c

han

ges

An

aly

sis



Thank you!

Q&A

For any further discussions, please contact us-

Pasupathi KG

[email protected] / [email protected]

www.grantthornton.in

Contact Us

To know more about Grant Thornton India LLP, please visit www.grantthornton.in or contact any of our offices

as mentioned below:


Grant Thornton India LLP (formerly Grant Thornton India) is registered with limited liability with identity number AAA-7677 and its registered office at

L-41 Connaught Circus, New Delhi, 110001

Grant Thornton India LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’).

Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.

For more information or for any queries, write to us at [email protected]

www.grantthornton.in

NEW DELHI National Office Outer Circle L 41 Connaught Circus New Delhi 110 001 T +91 11 4278 7070

BENGALURU “Wings”, 1st floor 16/1 Cambridge Road Ulsoor Bengaluru 560 008 T +91 80 4243 0700

CHANDIGARH SCO 17 2nd floor Sector 17 E Chandigarh 160 017 T +91 172 4338 000

CHENNAI Arihant Nitco Park, 6th floor No.90, Dr. Radhakrishnan Salai Mylapore Chennai 600 004 T +91 44 4294 0000

GURGAON 21st floor, DLF Square Jacaranda Marg DLF Phase II Gurgaon 122 002 T +91 124 462 8000

HYDERABAD 7th floor, Block III White House Kundan Bagh, Begumpet Hyderabad 500 016 T +91 40 6630 8200

KOLKATA

10C Hungerford Street

5th floor

Kolkata 700 017

T +91 33 4050 8000

MUMBAI

16th floor, Tower II

Indiabulls Finance Centre

SB Marg, Elphinstone (W)

Mumbai 400 013

T +91 22 6626 2600

NOIDA

Plot No. 19A, 7th Floor

Sector – 16A,

Noida – 201301

T +91 120 7109001

PUNE 401 Century Arcade Narangi Baug Road Off Boat Club Road Pune 411 001 T +91 20 4105 7000

http://www.grantthornton.in/

the companies act 2013: the dawn of a new era key provisions accounts audit...

Documents