In this blog post, Shruti Sharma, a Legal Associate at BetterPlace Safety Solutions Pvt. Ltd. who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about audit accountability and the responsibilities of an auditors.
With the advent of “New companies Act 2013,” the new era of corporate governance emerged where the accountability of auditors enhanced.
The role of auditors is like gatekeepers of corporate governance. They uphold the integrity of financial information. Moreover, investors, regulators and other stakeholders pose faith in auditors.
Appointment of auditors:
The term of appointment of an auditor has been changed to 5 years as against the earlier Companies Act, 1956. Moreover, shareholders shall be required to ratify the appointment of an auditor at every AGM (Annual General Meeting), and if audit committee has been constituted then, their recommendation is also required before appointing any auditor.
If in any case appointment is not ratified, then the board is required to appoint another auditor.
Rotation of auditors:
To enhance the audit accountability, the listed companies and certain other companies require rotating their auditors at regular intervals. Moreover, in the case of an individual auditor, he has to rotate after the expiration of his term of appointment whereas, in an audit firm, the auditor can serve maximum upto two consecutive terms, i.e., 10 years.
Removal of auditor:
The company can remove an auditor before the completion of his term and the steps involved in the removal are as follows:
- Pass a Board Resolution
- Apply to Central Government (within 30 days )
- On receipt of approval from Central Government, pass a special resolution of shareholders (within 60 days).
Resignation by auditor:
An auditor needs to provide reason for resignation to the ROC (Registrar of Companies). In the prescribed format, i.e. Form no. ADT-3 “Notice of resignation by the auditor.”
Bar on number of audits:
New Companies Act, 2013 has reduced the number of audits to be conducted by the auditors (whether individual or audit firm).
The limits are provided as under:
- As per new Companies Act, 2013 in the case of private companies a maximum number of the audit to be done by an auditor cannot exceed 20, unlike old Act where any maximum threshold was provided for the private companies.
- In the case of Public Companies having paid-up share capital of Rs 25 lacs or more the maximum threshold is 20.
- But regarding Public Companies having paid up share capital less than Rs, 25 lacs remain same i.e. 20.
The major change in the provisions above is regarding private companies, which were not covered under the limits earlier. Moreover, it may have huge implications for large audit firms having multiple clients which are private companies.
An auditor is not allowed to provide certain services directly or indirectly to the company or any of its affiliates or subsidiaries. It seems that the services are prohibited to avoid any self-review threat and independence threat. The prohibited services are as provided:
- Management services
- Investment banking services
- Actuarial science
- Accounting and bookkeeping services etc.
Fraud committed by an auditor:
If an auditor (whether directly or indirectly) has acted in a fraudulent manner or abetted or colluded in any fraud by to the company/ its directors/ officers, the Tribunal is empowered to direct the company to change its auditors. In such a case, the auditor will be debarred for 5 years and liable for appropriate actions under the Act. However, it may be worthwhile to note that among other disqualifications of an auditor, a person who has been convicted by a court of an offense involving fraud is disqualified for being appointed as an auditor for 10 years.
As per the Companies Act, 2013, the audit firm is also jointly and severally liable for civil as well as criminal liability for fraud committed by partner(s), along with the partner(s) concerned.
Comptroller and Auditor General of India:
CAG is responsible for seeing the financial soundness of public sectors.
So, CAG as per section 619 of Companies Act appoints a statutory auditor. Moreover, CAG has further taken steps to ensure the independence of auditors:
- Statutory auditors are prohibited from accepting any non-audit assignments for the year of audit and one year after he ceases to be the statutory auditor of a company.
- Rotationof auditors after every 4 years.
Duties of an auditor:
Report to members
The auditor needs to make a report for the member of the company regarding the following issues as per section 227(2)
- Whether Profit or loss account is showing the true and fair view of the profit or loss.
- Whether the state of affairs of a business is properly shown by drawing a proper Balance sheet for the company.
- Whether all the requisite items of audit has been obtained by him.
- Whether the Profit or loss account and Balance sheet of a company are in consonance with the books of accounts and returns.
- Whether proper books of account is maintained by the company.
2. Section 227 (1-A)
Auditor’s duties to Inquiry are as follows:
- Whether the company has sold any shares or debenturesor other securities at a lower price if the company is not an investment bank or a banking company.
- Whether the loans/advances made by a company have not shown as deposits.
- Whether any misuse of revenue accounts being done in the veilof personal expenses by the persons directly or indirectly having control of the affairs of a company.
3. Section 229:
- Auditors need to sign the audit report prepared by him. Moreover, it is his duty as well as right.
4. Section 165 (4)
- When the directors certify that the statutory report is correct, then the auditor needs to certify its correctness related to some shares allotted by a company, cash inflow related to such allotted shares, receipts, and payments of a company.
Liabilities of an auditor:
An auditor is liable for both: civil as well as criminal liabilities.
Civil liabilities are as under:
- An auditor works as an agent of the shareholders and shall be liable for his negligence if no reasonable case and diligence shown in the performance of the duties.
- An auditor may also be liable for Misfeasance which means a breach of duty.If an auditor doesnot perform his duties properly resulting financial loss to the company,may be held liable for misfeasance.
2. Criminal liabilities:
- Auditor can criminally liable also under the following sections:
Section 233, section 240, section 242, section 539, section 545, section 628, section 447.