AUDITORS AND COMPANIES BILL - AN ANALYSIS
The Companies Bill 2009 as amended by the 21st Report of Standing Committee on Finance, Parliament of India proposes to bring out several major changes impacting the working of corporate sector, accounts, and audit besides corporate administration, fines, penalties and prosecutions.
There are number of provisions proposing important changes in the field of auditing. The following paragraph proposes to outline various changes and their impact on the auditing profession as well as the corporate sector :
Rotation of Auditors
The bill proposes to introduce mandatory rotation of auditors in case of all Companies including small private limited companies, closely held public limited companies as well as listed companies. The bill proposes mandatory rotation of audit firms after every 5 years and mandatory rotation of
audit partners after every 3 years. The same audit partners/ proprietor cannot be reappointed for a period of 3 years. Rotation is proposed, with a view to achieve independence of auditors and to make audit more effective. This noble objective will not be achieved by the proposed changes.
There are no convincing reasons to mandatory rotate auditors in case of Companies. There is no need to extend the concept of rotation of auditors to all 8 lakh Companies. The rotation by itself will not improve the independence of auditors. This decision should not be mandated and may be left to corporate democracy.
Joint Auditor
It may be more appropriate to consider appointment of joint auditors in case of all large Public Limited Listed Companies as well as Companies in which public is substantially interested. The appointment of joint auditors should also be left to the shareholders. The appointment of one of the joint auditors can be made by the shareholders who are not directly or indirectly engaged into the day-to-day management of the company. The work among joint auditors can rotate.
Auditors - Other Services Prohibition
The Companies Bill proposes to bar the auditors of companies from providing non audit services to their audit clients. This prohibition extent even to small and mid size companies is completely unwarranted. A complete bar on auditors to provide other services is not relevant for independence of auditors. The non audit services may be allowed to be provided by the auditors including tax audit,
special statutory compliance and auditors' certificate as well as tax representation subject to approval by the audit committee. The code of ethics in this regard and specific prohibition to provide non audit services like accounting, internal audit and others may be left to ICAI based on internationally acceptable Code of Ethics as promulgated by International Federation of Accountants from time to
time.
Auditors of Subsidiary Companies
The Standing Committee of Parliament proposed that auditors of holding companies should not be auditing the accounts of subsidiary companies. This provision has been proposed on the basis of completely unacceptable logic where some miscreants have wrongly pleaded before the Parliamentary Committee that the auditors of holding companies do not undertake audit of subsidiary
companies carefully. This is completely without any basis. In fact in terms of mandatory auditing standards which are acceptable even internationally the auditors of holding companies would be required to not only vet the accounting policies of subsidiary companies but is also required to exercise necessary due diligence before audit undertaken by separate auditors of subsidiary companies is accepted for the purpose of consolidation.
Panel of Auditors
The Companies Bill 2009 proposes to prepare a Panel of Auditors for the purpose of appointment of auditors of the companies including small and mid size companies. The purpose of such panel and criteria of categorization of panel have not been provided for in the bill. The proposal to appoint auditors by Registrar of Companies as suggested by some people and as recorded by the Parliamentary Committee is completely non acceptable. Any proposal to withdraw rights of shareholders to appoint auditors even in case of small , mid size companies will have far-reaching implications and may bring forth corrupt and malpractices.
Auditors' Independence
The Companies Bill 2009 has miserably failed to provide necessary checks and balances to ensure independence of auditors. It is important that the removal of auditors as well as retirement of auditors before a specific period is approved at least by 75% of the total strength of votes (and not alone by those present and voting).
That the Standing Committee has made a very abnormal suggestion, according to which it would be mandatory for the auditors to file the reasons for their resignation or removal. In case of failure to file such reasons a minimum penalty of Rs. 50,000 extendable to a penalty of Rs. 5 lakh is proposed.
It may be necessary to shift the responsibility to the companies concerned to file reasons for resignation, removal or retirement of auditors, including the comments of the retiring auditors, with the Registrar of Companies for public knowledge. Punishment of auditors for non-filing reasons for their own removal is criminal.
Auditors' Disqualification
The Provisions of Companies Bill 2009 has proposed to restrict shareholding beyond a prescribed percentage by the Auditors and their relatives. In principle this is a welcome move. However extending the list of relatives to 34 distant categories makes the provision completely illogical and unsustainable. This should be restricted only to dependant relatives. The distant relatives may not
inform the auditors at the time of acquisition of shares and some distant relatives having bad intention may even purposefully acquire shares to displace the auditors.
Auditors Remuneration
The proposal to develop benchmark for auditors remuneration is a positive move, provided it takes into account ICAI recommended scale of fee while determining the benchmark. It would be important to provide for the quantum of work and time spent to be considered as important criteria while determining auditors' remuneration benchmark. This benchmark may be used for the purpose of minimum auditors' remuneration. The final remuneration payable by the company may be left
to the shareholders democracy. The remuneration of auditors should not be delegated to the Board or to the Audit Committee and the proposal to include the remuneration and the basis of remuneration in the AGM notice is a welcome move. The management / audit committee can always allow variation of auditors' remuneration, subject to its approval by shareholders in the next General Body Meeting.
Auditors' Dues
The proposed mandatory dues prescribed for auditors include mandatory confirmation of balances of all loans, advances, debtors and liabilities above Rs. 5 lakh. The limit of Rs. 5 lakh cannot be applied across the board and even for very large companies. This limit may be decided on the basis of a percentage of net worth or similar other criteria. The delegation of this responsibility on the auditors may not be appropriate. The balance confirmation from the respective parties should be sent by the
management to the parties for direct submission to auditors, in terms of auditing standards. Financial Statements - Compliance with Auditing Standards
It was enough to prescribe that the financial statements was prepared in accordance with the mandatory accounting standards. It is difficult to appreciate as to how the financial statements can comply with auditing standards. In fact the Companies Act has no jurisdiction on the auditing standards or their applicability. The auditing standards should be left to be decided by ICAI based on internationally best practices and any bureaucratic or political interference in technical matters
will vitiate the application of auditing standards. In the present constitutional framework of Indian
democracy the political parties as well as bureaucratic cannot be given a liberty to play with professional and technical matter. This is a very dangerous direction and may tomorrow result into government interference as to how a bypass operation should be done or how medicine is given. The government may tomorrow start designing and prescribing architectural design, medical treatment
and even legal presentation/opinions.
Auditors' Punishment
The Companies Bill 2009 proposes to impose severe fine and penalties including criminal prosecution and imprisonment for auditors even for technical or other non-compliance. The proposal to include prosecution and punishment of firms has to be restricted to fine, penalty and disgorgement in case where conspiracy and abatement of firm is proved sever action could be taken if they have
fraudulently acted. The principle adopted in the LLP Act should actually be adopted and the punishment and prosecution should be restricted only to those who are actually guilty. It is completely inappropriate to extend the scope of criminal prosecution to the entire firm. The fault committed by one of the audit partners or may be an audit team cannot be the basis of prosecution of the tax partner, consulting partner or even to audit partner who have no direct or indirect role in the concerned audit. In a large number of cases the other partners might be working from different
geographical location and to involve everybody into prosecution is completely uncalled for.
In case a doctor is grossly negligent in undertaking an operation, this should not entitle a democratic government to close down the hospital and its branches all across the country. This is nothing but "va/sj uxjh pkSiV jktk" How can we permit closure of entire firm because of fault of a handful of individuals? We fully support strict punishment to all those auditors who are party to fraud (which will happen only in very exceptional circumstances) but the Chartered Accountants community cannot tolerate such a great injustice in the name of transparency, corporate governance and public
interest.
No arrest before Conviction
It is completely improper of the government and its administrative and judicial machinery to arrest
professionals like auditors based on allegation. Auditors should be arrested only on conviction and when the guilt is proved.
Class Action Suit
The government proposed to bring in a legislation thereby empowering shareholders and other stake holders to file Class Action Suit against auditors. These provisions are proposed to be inbuilt in a chapter dealing with oppression and mismanagement and will result into unnecessary litigation against auditors by disputing group of shareholders. The auditors liability towards shareholders and others who rely on the financial statement signed by the auditors is definitely understood and appreciated but providing a mechanism of Class Action Suit will only promote a litigative society on the lines of America and will bring pendency of civil and criminal suits to a very large level.
There are number of provisions proposing important changes in the field of auditing. The following paragraph proposes to outline various changes and their impact on the auditing profession as well as the corporate sector :
Rotation of Auditors
The bill proposes to introduce mandatory rotation of auditors in case of all Companies including small private limited companies, closely held public limited companies as well as listed companies. The bill proposes mandatory rotation of audit firms after every 5 years and mandatory rotation of
audit partners after every 3 years. The same audit partners/ proprietor cannot be reappointed for a period of 3 years. Rotation is proposed, with a view to achieve independence of auditors and to make audit more effective. This noble objective will not be achieved by the proposed changes.
There are no convincing reasons to mandatory rotate auditors in case of Companies. There is no need to extend the concept of rotation of auditors to all 8 lakh Companies. The rotation by itself will not improve the independence of auditors. This decision should not be mandated and may be left to corporate democracy.
Joint Auditor
It may be more appropriate to consider appointment of joint auditors in case of all large Public Limited Listed Companies as well as Companies in which public is substantially interested. The appointment of joint auditors should also be left to the shareholders. The appointment of one of the joint auditors can be made by the shareholders who are not directly or indirectly engaged into the day-to-day management of the company. The work among joint auditors can rotate.
Auditors - Other Services Prohibition
The Companies Bill proposes to bar the auditors of companies from providing non audit services to their audit clients. This prohibition extent even to small and mid size companies is completely unwarranted. A complete bar on auditors to provide other services is not relevant for independence of auditors. The non audit services may be allowed to be provided by the auditors including tax audit,
special statutory compliance and auditors' certificate as well as tax representation subject to approval by the audit committee. The code of ethics in this regard and specific prohibition to provide non audit services like accounting, internal audit and others may be left to ICAI based on internationally acceptable Code of Ethics as promulgated by International Federation of Accountants from time to
time.
Auditors of Subsidiary Companies
The Standing Committee of Parliament proposed that auditors of holding companies should not be auditing the accounts of subsidiary companies. This provision has been proposed on the basis of completely unacceptable logic where some miscreants have wrongly pleaded before the Parliamentary Committee that the auditors of holding companies do not undertake audit of subsidiary
companies carefully. This is completely without any basis. In fact in terms of mandatory auditing standards which are acceptable even internationally the auditors of holding companies would be required to not only vet the accounting policies of subsidiary companies but is also required to exercise necessary due diligence before audit undertaken by separate auditors of subsidiary companies is accepted for the purpose of consolidation.
Panel of Auditors
The Companies Bill 2009 proposes to prepare a Panel of Auditors for the purpose of appointment of auditors of the companies including small and mid size companies. The purpose of such panel and criteria of categorization of panel have not been provided for in the bill. The proposal to appoint auditors by Registrar of Companies as suggested by some people and as recorded by the Parliamentary Committee is completely non acceptable. Any proposal to withdraw rights of shareholders to appoint auditors even in case of small , mid size companies will have far-reaching implications and may bring forth corrupt and malpractices.
Auditors' Independence
The Companies Bill 2009 has miserably failed to provide necessary checks and balances to ensure independence of auditors. It is important that the removal of auditors as well as retirement of auditors before a specific period is approved at least by 75% of the total strength of votes (and not alone by those present and voting).
That the Standing Committee has made a very abnormal suggestion, according to which it would be mandatory for the auditors to file the reasons for their resignation or removal. In case of failure to file such reasons a minimum penalty of Rs. 50,000 extendable to a penalty of Rs. 5 lakh is proposed.
It may be necessary to shift the responsibility to the companies concerned to file reasons for resignation, removal or retirement of auditors, including the comments of the retiring auditors, with the Registrar of Companies for public knowledge. Punishment of auditors for non-filing reasons for their own removal is criminal.
Auditors' Disqualification
The Provisions of Companies Bill 2009 has proposed to restrict shareholding beyond a prescribed percentage by the Auditors and their relatives. In principle this is a welcome move. However extending the list of relatives to 34 distant categories makes the provision completely illogical and unsustainable. This should be restricted only to dependant relatives. The distant relatives may not
inform the auditors at the time of acquisition of shares and some distant relatives having bad intention may even purposefully acquire shares to displace the auditors.
Auditors Remuneration
The proposal to develop benchmark for auditors remuneration is a positive move, provided it takes into account ICAI recommended scale of fee while determining the benchmark. It would be important to provide for the quantum of work and time spent to be considered as important criteria while determining auditors' remuneration benchmark. This benchmark may be used for the purpose of minimum auditors' remuneration. The final remuneration payable by the company may be left
to the shareholders democracy. The remuneration of auditors should not be delegated to the Board or to the Audit Committee and the proposal to include the remuneration and the basis of remuneration in the AGM notice is a welcome move. The management / audit committee can always allow variation of auditors' remuneration, subject to its approval by shareholders in the next General Body Meeting.
Auditors' Dues
The proposed mandatory dues prescribed for auditors include mandatory confirmation of balances of all loans, advances, debtors and liabilities above Rs. 5 lakh. The limit of Rs. 5 lakh cannot be applied across the board and even for very large companies. This limit may be decided on the basis of a percentage of net worth or similar other criteria. The delegation of this responsibility on the auditors may not be appropriate. The balance confirmation from the respective parties should be sent by the
management to the parties for direct submission to auditors, in terms of auditing standards. Financial Statements - Compliance with Auditing Standards
It was enough to prescribe that the financial statements was prepared in accordance with the mandatory accounting standards. It is difficult to appreciate as to how the financial statements can comply with auditing standards. In fact the Companies Act has no jurisdiction on the auditing standards or their applicability. The auditing standards should be left to be decided by ICAI based on internationally best practices and any bureaucratic or political interference in technical matters
will vitiate the application of auditing standards. In the present constitutional framework of Indian
democracy the political parties as well as bureaucratic cannot be given a liberty to play with professional and technical matter. This is a very dangerous direction and may tomorrow result into government interference as to how a bypass operation should be done or how medicine is given. The government may tomorrow start designing and prescribing architectural design, medical treatment
and even legal presentation/opinions.
Auditors' Punishment
The Companies Bill 2009 proposes to impose severe fine and penalties including criminal prosecution and imprisonment for auditors even for technical or other non-compliance. The proposal to include prosecution and punishment of firms has to be restricted to fine, penalty and disgorgement in case where conspiracy and abatement of firm is proved sever action could be taken if they have
fraudulently acted. The principle adopted in the LLP Act should actually be adopted and the punishment and prosecution should be restricted only to those who are actually guilty. It is completely inappropriate to extend the scope of criminal prosecution to the entire firm. The fault committed by one of the audit partners or may be an audit team cannot be the basis of prosecution of the tax partner, consulting partner or even to audit partner who have no direct or indirect role in the concerned audit. In a large number of cases the other partners might be working from different
geographical location and to involve everybody into prosecution is completely uncalled for.
In case a doctor is grossly negligent in undertaking an operation, this should not entitle a democratic government to close down the hospital and its branches all across the country. This is nothing but "va/sj uxjh pkSiV jktk" How can we permit closure of entire firm because of fault of a handful of individuals? We fully support strict punishment to all those auditors who are party to fraud (which will happen only in very exceptional circumstances) but the Chartered Accountants community cannot tolerate such a great injustice in the name of transparency, corporate governance and public
interest.
No arrest before Conviction
It is completely improper of the government and its administrative and judicial machinery to arrest
professionals like auditors based on allegation. Auditors should be arrested only on conviction and when the guilt is proved.
Class Action Suit
The government proposed to bring in a legislation thereby empowering shareholders and other stake holders to file Class Action Suit against auditors. These provisions are proposed to be inbuilt in a chapter dealing with oppression and mismanagement and will result into unnecessary litigation against auditors by disputing group of shareholders. The auditors liability towards shareholders and others who rely on the financial statement signed by the auditors is definitely understood and appreciated but providing a mechanism of Class Action Suit will only promote a litigative society on the lines of America and will bring pendency of civil and criminal suits to a very large level.
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