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Company Act 2013 & Auditor's responsibility

Company Act Auditors Responsibility

Companies Act, 2013:

ISSUES CONCERNING AUDITORS AUDIT AND  AUDITORS APPOINTMENTS:
---------------------------------------------------------------------Compiled by CA S.M.Vhanbatte

ü      Individual/ Audit Firm shall be appointed for a block of 5 years.

ü      Compulsory rotation in 5 years (individual)/ 10 years (firm)

Applicable to the following companies:

·         Listed Companies

·         Public Companies (Unlisted)                     with paid up capital        Rs.10 Cr or more

·         Private Companies                                         with paid up capital        Rs.20 Cr or more

·         All Companies                                                  with borrowings               Rs.50 Cr or more

Table for Proprietor as auditor

Number of consecutive Years for which a Proprietor has been auditor in the same Company	ADDITIONAL TENURE INCLUDING Transitional period	Aggregate period for which he can be the auditor
5 or More	3	8 or more
4	3	7
3	3	6
2	3	5
1	4	5
0	5	5

Table for Partnership Firm as auditor:

Number of consecutive Years for which a firm has been auditor in the same Company	ADDITIONAL TENURE INCLUDING Transitional period	Aggregate period for which he can be the auditor
10 or More	3	13 or more
9	3	12
8	3	11
7	3	10
6	4	10
5	5	10
4	6	10
3	7	10
2	8	10
1	9	10
0	10	10

ü      APPOINTMENT OF FIRST AUDITORS IN CASE OF COMPANIES OTHER THAN GOVT. CO. [SEC 139(6)]

Appointment by Board: within 1 month of the date of registration.

Appointment in EGM within 90 days : On failure of Board, Co. shall inform the members, who shall appoint at EGM.

 Tenure of office: Till the conclusion of the first AGM.

No notice of appointment to ROC

ü      Appointment at 1^st AGM:

Every company shall, at the first AGM, appoint an individual or a firm as an auditor.

Tenure of office:  Till the conclusion of 6^th AGM and thereafter till the conclusion of every 6^th meeting.

Ratification:  The Company shall place the matter relating to such appointment of ratification by member at every Annual General Meeting.

ü      APPOINTMENT OF SUBSEQUENT AUDITORS [SEC 139(1)]

·         Written consent: Before such appointment is made, the written consent of the auditor to such appointment shall be obtained from the auditor.

·         Certificate: A certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor. The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.

·         Notice of appointment: The Company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

·         CONDITIONS FOR APPOINTMENT(rule 10.2)

Rule 10.2: For the purposes of the second proviso to sub-section (1) of section 139, the proposed appointee shall submit a certificate that

(1) He or it is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and Rules and Regulations made therein

(2) The proposed appointment is within the term allowed under the Act

(3) The proposed appointment is within the limit laid down in the Act

ü      INTIMATION OF APPOINTMENT to roc

Within 15 days of appointment by the company to the auditor

The company shall within 15 days of appointment, inform the ROC  his acceptance.

ü      Errant auditor-removed and may not be allowed to become auditor of other Companies also for 5 years.

ü      CASUAL VACANCY

•          Any casual vacancy in the office of an auditor shall be filled by the Board of Directors within 30 days.

·         If it is because of RESIGNATION:

                                                              i.      At a general meeting

                                                            ii.      Convened within 3 months of the recommendation of the BOD

                                                          iii.      The Auditor to hold the office till the conclusion of the next annual general meeting

•          In addition to accounting standards, auditing standards also being made compulsory

ü      Removal, RESIGNATION & SPECIAL NOTICE of Auditor: (Sec 140)

REMOVAL: The auditor may be removed by special resolution after obtaining the previous approval of CG and after giving an opportunity of being heard.

RESIGNATION: When Auditor resigns, a statement in prescribed form is to be filled with the Company and the Registrar within 30 days.

Special notice shall be required for appointing a person as auditor other than a retiring auditor.

The Tribunal is empowered to change auditor of a Co. in case of any fraudulent activities by auditor.

INTIMATION OF RESIGNATION

•          The auditor shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with (Form no.10.2):

   a. the Company and

   b. the Registrar and

   c. the CAG (where applicable)

   indicating the reasons and other facts (for resignation)

•          Non-compliance of it by the auditor:

                   Penalty – Fine Rs.50,000 to Rs.5 lakhs

ü      Eligibility, Qualifications of Auditors (Sec  141)

A CA within the meaning of the CA Act, 1949 may be appointed as an auditor. Only a CA holding a CP can be appointed as an auditor.

A firm whereof all the partners practicing in India are qualified for appointment may be appointed by its firm name to be the auditor of a company.

Where a firm including a LLP is appointed as an auditor of a company, only the partners who are CA shall be authorised to act and sign on behalf of firm.

DISQUALIFICATIONS OF AUDITORS (SEC  141)

ü      A body corporate other than a LLP:

ü      An officer or employee of the company.

ü      A person who is a partner, or who is in the employment, of an officer or employee of the company.

ü      A person who, or his relative or partner—

·         is holding any security of or interest (beneficial owner)  in the company or its subsidiary, or of its holding or associate co. or a subsidiary of such holding co.
However, the relative may hold security or interest in the company of face value not exceeding Rs. 1,000 or such sum as may be prescribed (1 Lakh) ;

·         is indebted to the co., or its subsidiary, or its holding or associate co. or a subsidiary of such holding co., in excess of such amount as may be prescribed (1 Lakh); or

·         has given a guarantee or provided any security in connection with the indebtedness of any third person to the co., or its subsidiary, or its holding or associate co. or a subsidiary of such holding co., for such amount as may be prescribed (1 Lakh);

ü      a person or a firm who, whether directly or indirectly, has business relationship with co., or its subsidiary, or its holding or associate co. or subsidiary of such holding co. or associate co. of prescribed nature;

ü      a person whose relative is a director or is in employment of the co. as a director or KMP;

ü      a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies .

ü      a person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction;

ü      any person whose subsidiary or associate co. or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in sec. 144.

MEANING OF “FINANCIAL STATEMENT” [Sec. 2(40)]

ü      It includes:

        a) Balance Sheet

        b) Profit & Loss statement

c) Cash Flow statement (not mandatory for small companies, OPCs & Dormant companies)

                        Small Company : Paid up Capital Rs.50 Lakhs and Turnover up to Rs.2 Cr

        d) Statement of Changes in Equity, if applicable

        e)Explanatory statement Note annexed to & forming part of Financial statements        

ü      Schedule VI of the Companies Act,1956 is replaced by Schedule III of the new Act. Schedule II and Schedule III came into effect from 01.04.2014 hence new formats need to be adopted for the statements in respect of financial period commencing on or after 01.04.2014.

ü      In addition to the accounting standards even the auditing standards need to be complied by the auditors.

ü      Recognition for maintenance of books of accounts in electronic form.

ü      Auditors to attend AGM unless specifically exempted.

ü      Internal Audit made mandatory to listed and various other classes of companies.

REPORTING OF FRAUD TO CG [Sec. 143 (12)]

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  report   the matter   to the  CG
• Immediately or within  prescribed time  & manner.

•          NO DUTY OF CONFIDENTIALITY UNDER THE CA  ACT. [SEC. 143(13)]

Ø      No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the CA  Act, 1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith.

·         APPLICABLE TO COST & SECRETARIAL AUDITORS (SEC. 143(14)

·         PENALTY FOR NOT-REPORTING OF FRAUD [Sec. 143 (15)].

Fine Rs. 1,00,000/- to Rs. 25,00,000/-

                REPORTING OF MATERIAL FRAUD

For the purpose of Sec.143(12), in case:

• The auditor has sufficient reason and information to believe that an offence  involving fraud, is being or has been committed against the company by officers or employees of the  company,    such   fraud is likely to materially affect the company, he shall report the matter to CG within 30 days.

MEANING OF MATERIALITY
[DRAFT RULES 10.10(2)]

A.      Fraud(s) that is or are happening frequently; or

B.      Fraud(s) where the amount involved or likely to be involved is not less than:

§         5% of net profit or

§         2 % of  turnover    of   the   company for   the   preceding    FY.

• Report shall be in the form of a statement as given in Form No. 10.3:
• Report to be sent immediately but not later than 30 days of his knowledge or information, with a copy,

§         to the audit committee or

§         in case the company has not constituted an audit committee, to the Board.

•          REPORTING OF NON-MATERIAL FRAUD [DRAFT RULES 10.10(3)]

ž      Auditors shall send a report in writing

§         to   the   audit committee     and

§         Where the co. has not constituted an audit committee, to Board.

ž      The audit committee or the Board, as the case may be, shall reply to the auditors in writing as to steps taken by the audit committee or the Board in addressing the issues of fraud, including systemic issues.

ž      In case the audit committee or the Board, as the case may be, is not taking action or the auditor is not satisfied with  the action  taken, he may report to the CG even if the fraud is not material in nature.

•          PENALTY FOR FRAUD (Sec. 447)

Ø      Any person guilty of fraud –

Ø      Imprisonment: 6 months to 10 years; and

Ø      Fine: Atleast amount involved in fraud, but may extend to 3 times the amount involved in fraud.

Ø      Where the fraud involves public interest, imprisonment shall not be less than 3 years.

ADDITIONAL COVERAGE IN THE AUDIT REPORT

·         Whether the company has disclosed the impact of any of the pending litigations on its financial position in its statements?

·         Whether the company has made provisions required under the respective law/Accounting Standard for material foreseeable losses if any on long term contracts including derivative contracts?

·         Whether there are any delays in transferring the due amount to Investor Education and Protection Fund.

DEPRECIATION

The highlights of the overhauled system of depreciation are as under:

ü      Schedule II introduced.

ü      Depreciation to be based on useful life & residual value

ü      Useful lives of various tangible assets prescribed

ü      Residual Value not more than 5% of the original cost of the asset

In case of such class of companies, as may be prescribed   these two   can be different provided they disclose ‘justification’ for the same.

ü      From the date Schedule II becomes effective,  carrying amount of the asset shall be depreciated over the remaining useful life of the asset

ü       The term depreciation includes amortisation

ü       For intangible assets, the provisions of the Accounting Standards mentioned under sub-para (i) or (ii), as applicable, shall apply.

ü      The useful lives of assets working on shift basis have been specified in the Schedule based on their single shift working. Except for assets in respect of which no extra shift depreciation is permitted (indicated by NESD in Part C above), if an asset is used for any time during the year for double shift, the depreciation will increase by 50% for that period and in case of the triple shift the depreciation shall be calculated on the basis of 100% for that period.

ü       "Factory buildings" does not include offices, godowns, staff quarters

ü       Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or  destroyed.

ü       The following information shall also be disclosed in the accounts, namely:—

          (i) depreciation methods used; and

(ii) the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule.

ü      Useful life specified in Part C of the Schedule is for whole of the asset. Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately.

ü       From the date this Schedule comes into effect, the carrying amount of the asset as on that date—

                                (a) shall be depreciated over the remaining useful life of the asset as per this Schedule;

(b) after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

No	Companies Act, 1956	Companies Act, 2013
1	Schedule XIV	Schedule II
2	Rate of Depreciation Given	Useful Life and Residual Value of the assets given. No Rates Given.
3	100 % depreciation on assets individually costing < Rs.5000	No such provision
4	Depreciation on the asset as a whole ignoring the component	Sch II talks about depreciation on Components separately.
5	Definition of Building under Schedule Vi was generic and with no specifications	In Schedule II, Building has been elaborated to cover RCC Frame Structure
6	Purely temporary erections such as wooden structures were being depreciated @ 100% on SLM	In Schedule II, useful working life of the Temporary structures has been increased to 3 years leading to charging of depreciation @ 33.33% PA on SLM basis
7	Data Processing machines including Computers were depreciated @ 16.21% on SLM Basis. This may take around 6 years to write off even computers	Detailed break up is given. Servers and Networks are under category of 6 years while end user devises like Desktop/ Laptop etc are under category of 3 years as useful life.
8	General Furniture and fittings were being written off @ 6.33% on SLM. Practically it  takes more than 15 years to retire a furniture item from Books	In respect of General Furniture and fittings, the useful working life is specified as 10 years which means that now those items will be written off over a period of 10 years. .

ACCEPTANCE OF DEPOSITS

1.       DEFINITION OF “DEPOSIT”  [Sec. 2(31)] UNDER CO Act, 2013

“Deposit” includes:

 Any receipt of money by way of deposit or loan or in any other form by a company, but does not include:  such categories of amount as may be prescribed in consultation with the Reserve Bank of India

2. DEFINITION OF “DEPOSIT”  UNDER Deposit Rules, 2014

“deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

ü      any amount received by a company from any other company

ü      any amount received from a person who, at the time of the receipt of the amount, was a director of the company.

3.       Exemption for deposits from relative of director or member to a private company has thus been withdrawn.

4. Section 73: Prohibition on acceptance of deposits from public

(Similar to Section 58A of The Companies Act, 1956)

1) Co., except Banks, NBFC and other specified companies(Public co:100/500cr), shall not invite, accept or renew deposits from public.

2) Co. may, by resolution in GM and subject to prescribed rules & conditions accept deposits from members.

ü      Issuance of Circular in Form DPT -1

ü      Filing copy of the Circular with ROC within 30 days/ on company’s website.

ü      Create Deposit Repayment Reserve Account with a scheduled bank and deposit at least 15 % of the amount of deposits maturing in the financial year and in the next financial year.

ü      Creation of Charge on the property of the company

ü      Ceiling 25 % of paid up capital+ free rserves

3) If co. does not secure deposits then, the deposits shall be termed as “unsecured deposits” and shall be quoted all document related to invitation or acceptance of deposits.

4) Deposits accepted shall be repaid with interest.

5) If co. fails to repay, depositor may apply to Tribunal for an order directing co. to pay sum due or loss incurred.

6) The deposit repayment reserve a/c shall only be used for repayment of deposits.

5. Section 74 : Repayment of deposits, etc. accepted before commencement of this Act (New Provision)

1)      If deposit or any interest remains unpaid on commencement of this Act, co. shall file, within 3 months, with ROC a statement (Form DPT-4) of all deposits accepted & sums remaining unpaid and repay the dues within 1 year or due date, whichever is earlier.

2)      Tribunal may, on application made by co., allow further time to repay the deposit.

6.       CONSEQUENCE OF CONTRAVENTION

ü                        Company – shall pay deposit and interest along with fine Rs. 1 crore to Rs. 10 crores &

ü                        Officer in default - Imprisonment up to 7 years or fine Rs. 25 Lakhs to Rs. 2 Crores, or both.

7.       SECTION  76:  Acceptance of deposits from public by Eligible Companies

ü      This new clause provides that a public company having specified net worth ( 100 Cr) or turnover ( Rs.500 Cr) may accept deposits from persons other than its members subject to compliance with Sec 73(2), rules and credit rating.

ü      Ceiling 10 % (paid up capital + free reserves) from members and 25 % others.

8.       No company referred to in sub-section (2) of section 73 and no eligible company shall accept or renew any deposit, which is repayable on demand or upon receiving a notice within a period of less than six months or more than thirty-six months from the date of acceptance or renewal of such deposit .

Loans etc to Directors   Section 185

1. No company can directly or “indirectly” advance loan to its “directors” or to “other persons in whom directors are interested”.

ü      Loan has not been defined under Co Act. Any transaction of giving money to be returned in money with or without interest can be treated as “loan”. 

ü      ADVANCE NOT COVERED BY SEC 185 Normally an advance is not repayable as an advance. It usually conveys an idea of a prepayment, that is, paying something in advance before it is actually due.

2.       No company can give any guarantee or provide any security in connection with any loan taken by him or such other person.

ü      Guarantee covered, not letter of comfort. In case of Guarantee, guarantor undertakes the liability of principal debtor, whereas In case of letter of Comfort, intention is to give introduction of debtor,  without undertaking the liability of principal debtor.

3.       Company can’t give loan represented by a book debt to above mentioned person”.

4.       Meaning of the word ‘Indirect’

The word ‘indirect’ used means that the co does not give a loan to director through the agency of one or more intermediaries. The word ‘indirect’ cannot be read as converting what is not a loan into a loan. [Dr. Fredie Ardeshir Mehta V Union of India (1991) 70 Comp Cas 210]

5.       MEANING OF “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED”

ü      INDIVIDUAL: Director of  lending co., or holding co. or any partner or relative of any    “such director”

ü      FIRM: in which any such director or relative is a partner;

ü      PVT LTD CO: of which  such director is a director or member;[ Relative of Director are not covered  under this sub clause]

ü      BODY CORPORATE at a general meeting of which at least 25 % of  voting power may be exercised  or “controlled” by such director, or by two or more such directors, together; or
[Note - Relative of Director  also not covered  under this sub-clause]

ü      BODY CORPORATE Board, MD or manager, whereof is accustomed to act in accordance with  directions or instructions of  Board, or of any director or directors, of  lending company.

6.       EXCEPTIONS

a)      MD/WTD - The giving of any loan to a Managing or Whole-time director-

ü      As a part of the conditions of service extended by the company to all its employees; or

ü      Pursuant to any scheme approved by the members by a special resolution;

b)      ORDINARY COURSE –

ü      A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by RBI. 

7. CONSEQUENCE OF CONTRAVENTION

•          Lender Company – Fine Rs. 5 lakhs to Rs. 25 lakhs &

•          Receiver: Director or other person to whom any loan is advanced or guarantee or security is given -Imprisonment upto 6 months or fine Rs. 5 lakhs to Rs. 25 Lakhs, or both.

8.       Existing Loans and Guarantees:

Repay on due dates.

Existing loan/guarantee/security provided before 12th Sep, 2013 is not affected by above provisions. However, it should not be renewed & should be repaid on due date.

“Loan repayable on demand” should be repaid on demand.

“Loan repayable after fixed period” should be repaid on expiry of Fixed period.

9.       LOAN given after 11^th Sept.

ü      If any loan had already been given after 11th sep., there is contravention.

ü      However, if share application money/ advance for property/purchase of goods/ services etc. is given than there is no contravention.

10.   SHOULD PRIVATE LTD COMPANIES BE CONVERTED INTO PUBLIC LTD COMPANIES  ??

1)      Clause (d) is not applicable to a company at a general meeting of which less than 25% of the total voting power of Body corporate may be exercised or controlled by any such director, or by two or more such directors, together

2)      We can plan accordingly and take benefit.

3)      So, we can convert our existing Pvt Ltd companies to public Ltd companies and take benefits.

                                                                                                                               

LOAN AND INVESTMENT BY A COMPANY    Section 186

Ø      According to section 186 without prejudice of the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies;

  Provided that provisions of this sub-section shall not affect:

a)      A company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

b)      A subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Ø      No company shall directly or indirectly-

a)      give any loan to any person or other body corporate;

b)      give any guarantee or provide security in connection with a loan to any other body corporate or person; and

c)       acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding 60% of its paid-up share capital, free reserve and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Ø      Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a GM shall be necessary.

WAY OUT :  ???

PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP

1)      LLP is not a company, hence limit of audit of 20 company  will not be applicable.

2)      As Companies Act will not be applicable, you can transfer fund from one LLP to another group LLP.

3)      Many of exemption which Pvt Ltd company enjoy under old Companies Act has been withdrawn, which are not applicable to LLP.

4)      Compliances under new companies Act for Pvt Ltd Companies has been substantially increased, which are not applicable for LLPs.

5)      There is heavy penalty for non compliances under New Company Act. Penalty of Rs 50,000 is a small amount for a single violation.

6)      Cost benefit analysis suggests that these should be converted into LLP.

7)      However, as per Sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion , turnover of Pvt Ltd company  in any of last 3 years must not exceeds 60 lakhs. So, if turnover exceeds 60 lakhs than such conversion will be subject to income tax.

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Disclaimer

These lecture notes are just that--notes. They do not replace any of the readings or the lectures themselves. The best way to treat them is as a high-level summary; the actual lectures went more in depth (explained the examples, for instance) and contained other information.

The notes were written by CA S.M. Vhanbatte as an aid for myself. You may find them hard to understand, so if you get confused, just ignore them. If you find them useful, good for you. In short, there are no guarantees on the correctness or quality of these notes.