This article has been written by Prasenjeet Kirtikar, pursuing a Diploma in Corporate Litigation from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

Every company is established on the finance provided by persons (members) who are not practically in control of the money provided by them. However, to safeguard the interests of the members and shareholders of the company, it has become essential to keep a check not only on the financial matters of the company but also on overall company affairs.

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Through the evolution of the modern corporate system, it has become necessary to ensure that every affair of the company administration strictly follows corporate ethics along with the rules and regulations laid down in the corporate laws. The Companies Act of 2013 (the Act) provides for the appointment of a competent and independent auditor to audit the accounts of the company. The auditor, as per the Act, is provided with intensive powers and duties to perform as compared to the role of auditor as per the previous Company Act of 1956.

J.J. Irani Committee report

The Companies Act 2013 was enacted on the basis of recommendations from the J. J. Irani Committee report. The committee was constituted in December 2004 and submitted its final report on May 31, 2005, providing various suggestions pertaining to the modification and modernization of corporate law in India. In relation to the audit functioning in corporate administration, the committee provided its recommendations about the appointment of an auditor, his qualifications, disqualification, remuneration, and rotation. The vital recommendation in relation to the duties of auditors was prohibiting him from providing certain services to a company and its subsidiaries.

As per the committee report, since many stakeholders rely on auditors’ reports to know the financial status of the company, it is the duty of an auditor to conduct an audit without anyone`s influence or self-interest. He must hold high morals and values and work independently. The auditor is to be vested with powers to access books, records, and documents related to accounts at all times.

It has also recommended a committee of the board to keep an eye on accounting and financial matters, known as the auditing committee. The committee has the duty to appoint auditors, examine auditors’ reports and conduct cost audits.

Powers and duties of auditors as per Companies Act, 2013

Chapter X of the Act, from Section 139 to Section 148, talks about the provisions of the audit and auditors relating to appointment, eligibility, qualification, disqualification, remuneration and removal of the auditor. 

Now let us cover the significant provisions related to auditors as per the Act:

Section 143 of Companies Act, 2013

Section 143 of the Act exclusively talks about the powers and duties of the auditor and auditing standards. 

  1. The auditor of the company has the power to have all time access to the books of accounts and vouchers of the company, irrespective of the place where they are kept. 
  2. He can inquire into the matter of loans and advances made by the company.
  3. He can check whether transactions of company is in coordination with the interest of the company 
  4. If personal loans are charged to company accounts or company loans are shown as deposits, he will keep an eye on such transactions.
  5. He will comment on the transactions if shares or debentures for other securities are sold at a price less than that at which they were purchased by the company.
  6. He will check if the accounting books are maintained in coordination with the balance sheet.
  7. Even the auditor of a holding company has right to access accounts of its subsidiary company
  8. It is a mandatory duty (or obligation) of the auditor to make a report to the members of the company upon examination of accounts.
  9. The auditor’s report also must state:
    1. The extent to which you obtained and received information to complete his audit.
    2. His opinion on maintenance of records kept by the company.
    3. His comments indicate that the company’s balance sheet and profit and loss accounts are in coordination with books of account and that financial statements comply with accounting standards. If any financial matter has an adverse effect on operation of company administration.
    4. His observations as to the internal financial control system of the company.
    5. In the case of a government company or any other company owned by  the Central or state government, the Comptroller and Auditor General (CAG) has the power to appoint an auditor to look into the financial matters of the company and upon receiving the audit report, he has the power to conduct a supplementary audit and to comment on such an audit report.

During the conduct of such an audit, if the auditor finds out any fraud committed by officers of the company, it is his obligation to report such fraud to the central government within the prescribed time limit.

Section 144 of Companies Act, 2013

Section 144 talks about the roles that must not be played by the auditor, along with his official role as an auditor of the company.

As per Section 144 of the Act, it is the duty of the auditor not to provide the below services directly or indirectly to the company or to the subsidiary company:

  • accounting and bookkeeping,
  • internal audit,
  • design and implementation of financial control system,
  • investment advisory services,
  • investment banking services,
  • management services, and 
  • performing outsourced financial services.

The rationale behind such a provision of mandatory duty lies in the guideline “The maker cannot be the checker”.

It simply means that the one who is formulating, creating or making the system cannot check for its drawbacks or faults. 

This is a question of credibility and competency!

Section 145 of Companies Act, 2013

As per Section 145 of the Act, it is the mandatory duty of the auditor to sign his audit report and mention financial concerns having an adverse effect on the functioning of the company, which shall be read in the general meeting.

Section 146 of Companies Act, 2013

According to Section 146 of the Act, it is an obligation on the auditor to attend the general meeting either by himself or through an authorised representative Section 146 also provides the auditor with the right to receive notice of such a meeting and to be heard at the meeting if he wants to express his concern about the functioning of the company or any other financial aspect.

Here, it is also important to note that if an auditor fails to comply with the obligations provided in Sections 139, 143, 144, and 145, he is liable for punishment under Section 147 of the Act and he must refund the remuneration received by him to the company and pay for damages to the company.

Section 148 of Companies Act, 2013

As per Section 148 of the Act, the Central Government has the power to direct the company to appoint a cost accountant to conduct a cost audit other than an auditor under Section 139. The cost auditor appointed will enjoy the same kinds of powers and duties as the auditor appointed as per Chapter X of the Act.

Companies (Accounts) Rules, 2014

Rule 13 of the Companies (Accounts) Rules, 2014 provides for the mandatory requirement for a company to appoint an internal auditor. The internal auditor may or may not be an employee of the company. The audit committee or the board of the company, in consultation with the internal auditor, has the power to formulate the scope, frequency and mode of conduct of the internal audit.

This rule is applicable to:

  • every listed company, 
  • For every private company, if turnover is more than 200 crore rupees or debt is more than 100 crore rupees, 
  • every unlisted public company having paid up share capital of more than 50 crore rupees turned over more than 200 crore rupees or owed more than 100 crore rupees.

Companies (Audit and Auditors) Rules, 2014 

Rule 10A of the Companies (Audit and Auditors) Rules, 2014– In coordination with Section 143(3), clause (i), the auditor’s report shall mention the details of the internal auditing system and comment on how effective or efficient the system is in order to curb the financial losses to the company.

Rule 11 of the Companies (Audit and Auditors) Rules, 2014- It is the duty of the auditor to note his observations in his report pertaining to the disclosure of the impact of any pending litigation by the company, precautionary provisions by the company to sustain any losses in long term contracts, and any delay in the transfer of funds to the Investor Education and Protection Fund (IEPF) by the company.

Rule 12 of the Companies (Audit and Auditors) Rules, 2014 explains the powers and duties of the company’s auditor. It is the duty of the branch auditor to submit his report to the company auditor and he also must report fraud in financial matters as per Section 143 of the Act.

Rule 13 of the Companies (Audit and Auditors) Rules, 2014 explains the powers of the auditor to report any fraud to the central government during the performance of his duty if the amount of fraud is one crore or more. This rule also explains the manner and steps in which fraud is to be reported to the board, audit committee and Central Government.

Companies (Auditor`s Report) Order, 2016

The Central Government, under the provisions of subsection 11 of Section 143 of the Act, has formulated this order and provided guidelines for matters to be included in the auditor’s reports of all kinds of companies, including foreign companies.

This order also provides for directions whenever there is an unfavourable or qualified answer to any question pertaining to the financial audit, the auditor’s report must mention the basis explanation for such an unfavourable or qualified answer. Also, if auditor is not able to express his opinion on any of the matters, he must explain the reasons for the same in his report.

Landmark case laws

Union of India v. Deloitte Haskins and Sells LLP and Anr. (2023)

Facts of the case

In this case, the Ministry of Corporate Affairs (MCA) directed the Serious Fraud Investigating Officer (SFIO) to investigate the alleged defaults with a debt burden of more than Rs. 90,000 crore in relation to the company ILFS and filed the case in NCLT based on the report of the SFIO under Section 140(5) of the Companies Act of 2013 for the removal and barring of the auditor from audit activities. The report of the SFIO also directed the reopening and recasting of the accounts of ILFS. The auditors, BSR & Associates LLP and Deloitte Haskins & Sells LLP, were also given notice.

Issues involved in the case

  1. Whether Section 140(5) of the Companies Act is constitutional?
  2. Whether a petition under Section 140(5) of the Companies Act is maintainable against an auditor who is no longer  an auditor of the company?

Judgement of the Court

The Supreme Court held that even though auditors resigned, NCLT still has the power to take action against them. It also upheld the constitutional validity of Section 140(5) of the Companies Act, emphasising that the duty and liabilities of the auditor do not end upon his removal from the service.

Pipara & Co LLP vs. Tourism Corporation of Gujarat (2021)

Facts of the case

In this case, the Tourism Corporation of Gujarat (TCG) terminated the appointment of Pipara & Co. LLP as its statutory auditor without giving any reason.

Issues involved in the case

Can a company, public or private or a corporation fire its auditor without giving any notice or opportunity of being heard?

Judgement of the Court

 The Gujarat High Court held that statutory auditors have a right to be heard before terminating their service, and such termination must be according to the law to protect the independence of auditors and the quality of corporate administration.

Comparison between Companies Act, 2013 and Companies Act, 1956

  • As per the Companies Act 2013, the auditor has powers and obligations to comment regarding internal financial controls and their effectiveness. Such a provision was not present in the previous Act.
  • Reporting fraud to the Central Government is a legal obligation on the auditor and the Act 2013 provides punishment for the violation of the same. No such provision of duty was present in the 1956 Act.
  • As per Section 144 of the Companies Act, 2013, there is a provision for certain services not to be availed of by the auditor for the company. Such a provision was not present in the 1956 Act.

Also, the Companies Act 2013 very efficiently provides powers to the auditor to monitor company administration as compared to the Companies Act 1956.

Conclusion

The J.J. The Irani Committee report paved the way for the modernisation of company law in India in the form of the Companies Act 2013. Moreover, the committee recommended efficient, fraud less and transparent corporate functioning. It had recommended the constitution of an independent, competent and efficient auditing system. The Companies Act 2013, absorbing the recommendations of the committee, provided extensive power and obligations to the auditors. According to the Act, the auditors have powers to comment on the financial situation of the company, bring out the fraud, escalate the matter to the central government and also have obligations not to render certain services to the company. 

The report of the Companies Law Committee published in February 2016 proposed significant changes related to the rotation of the auditor, his removal and his powers and duties. A link to the report is provided for the reader`s reference.

References

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