This article is written by Mrinal Mukul and further updated by Clara D’Costa. This article explores the rights and duties of an auditor in today’s corporate world. Throughout the article, we can find a comprehensive guide to understand the role of an auditor, the significance, types of auditors, and their distinct roles and responsibilities towards the company and clients. 

It has been published by Anshi Mudgal.

Introduction

You have heard right from your schooling years that the true intention of running any business is to earn profits. But have you ever thought about how a company maintains this graph? Or how do they calculate their expenditures and profits? We all have heard and learnt that the primary objective of any company is to earn profits. Well, it is very important to have an entire team that manages, collects data and further analyses it. However, there’s more to financial responsibility than just analysing data. Various laws are laid down by the Central Government and statutory bodies.  

We have seen a lot of companies that are profitable throughout the whole financial year; however, if the regulatory bodies sense a financial scam, they call for an external check. If proven to be guilty, they will be penalised by the Government and could also lose their license. Hence, it is very crucial that a company carefully recruits and builds a team to oversee the financial operations and, more importantly. appoints auditors that help the company maintain the integrity of regulations.

Auditors play a significant role in maintaining the integrity of the financial reporting for a company. Over the past years, the growth in the financial sector internationally has created a need to strengthen corporate governance on a global scale. Let us understand it like this, one of the most important functions for a company is the financial audit, and the person who is the cornerstone in this entire process is an auditor. Therefore, an auditor is one of the key individuals to make sure that a company complies with all the regulations and thereby maintains its morals in the financial sphere.

You might wonder what impact an audit can have apart from the financial goals. Well, one of the objectives of conducting a financial audit is to keep the stakeholders informed about the internal functioning of the company. These laws are mainly provided by the Companies Act 2013 (hereinafter mentioned as the “Act”). We shall now learn more about the role of an auditor, the duties, and the laws that are laid down by the statutory financial bodies. 

Who is an auditor? 

Now that we have been introduced to the concept of an auditor, let us learn more about the origin and exact functions of an auditor in a company. The word ‘audit’ has been taken from the Latin word “audire”, it means to “hear”. For a better understanding, in simple terms, a person who is appointed to analyse the financial records of a company and check their compliance with the regulations is known as an “auditor”. 

Auditors are appointed by the companies to cross-examine and check the accuracy of the records that are maintained by the company. However, not everyone can be appointed as an auditor, it is a role that comes with huge responsibility and liability.  Hence, only when an individual is registered with the Institute of Chartered Accountants of India (hereinafter referred to as the ‘ICAI’) as a practising Chartered Accountant (CA), he/she is appointed by a company as their auditor.

Every year, financial reports are made by the financial committees, they prepare reports that highlight the current financial position of the company and are known as audit reports. This examination that is conducted by the auditors along with the finance department is known as an audit.

The company appoints an auditor to check the accounting records and form a report highlighting the necessary details. It is very important to appoint the right auditor as they make sure that a company is aligned with both the tax laws and accounting standards. Therefore we can safely say that it is the auditor who is responsible for making sure that the company is functioning honestly and there are no financial frauds. 

The financial department of a company relies heavily on the role of an auditor. Investigating and scrutinising the accounting records and transactions, and verifying their compliance with the auditing standards laid down by the ICAI, is the responsibility of an auditor. A company appoints internal auditors who work as employees of the company. They have the responsibility to examine the transactions, maintain the records of these transactions, and make and present reports to the company officials. 

While internal auditors are the ones who maintain the internal compliance of a company, external auditors are appointed to give an unbiased and fair opinion. As there are chances that the reports can be fabricated at the hands of the internal auditors, external auditors are given the responsibility to ensure that there are accurate reports. The Companies Act, 2013, is the rule book for appointing auditors and lists down an entire process for appointing auditors. 

Therefore, we know by now that the role of an auditor is extremely important as it protects the company from any scams, or internal fabrication of records and also ensures that the company follows all the rules and regulations that are provided by the statutory bodies. The company then maintains corporate integrity and gives the investors a clear picture of the financial position of the company.

Duties of an auditor

Now that we have understood “who” is an auditor, it is now time to know about their duties in a company. We all have heard of the popular saying “with every great power comes an even greater responsibility”; the same is true in the case of an auditor. An auditor has a significant role in the company, and as part of their duty, it is their responsibility to maintain the financial records of the company while examining and analysing their books of accounts. We have to understand that the auditor must classify an issue based on priority and then secure information from the financial department.

Let us now move to Section 143 of the Companies Act, 2013. Under this section, auditors are provided with various powers and also listed down their duties. Due to the importance of their position and responsibilities, this act has given a set of powers to the auditors to go forth and check the records and financial documents of the company. There shall be a few questions that arise in your mind, what about the documents that are not available at the company office? Or what about the documents that are with any other departments of the company?

The Companies Act, 2013 lists down the answers for all of these questions. In cases when the documents are not available at the registered office, the auditors have the power to ask the finance committee or any other departments to source the information that is required. Matters that are mentioned in the Section 143 subclauses (a) to (f) are also included as necessary in the auditor’s report.

It is the function of an auditor to conduct a thorough investigation concerning the issues mentioned above, along with other matters, and if the auditor is content, it is not mandatory to mention these facts in the audit report. However, if an auditor during the enquiry finds any discrepancies in the financial statements or any other adverse features, they are obligated to report the same. 

Enquiries to be carried out by an auditor as per Section 143(1) of the Companies Act, 2013

Loans and advances issued by the company

An auditor is responsible for seeking information regarding the lendings and borrowings granted or undertaken by the organisation as security. As an auditor, they have various responsibilities such as reviewing, inquiring and certifying that the loans and advances records are fair and correct. For every business organisation, the shareholders and stakeholders are their priority, and thus, making them feel secure about their funds is the responsibility of the auditors or auditing firm. An auditor is responsible for all the loans and advances that the organisation has issued, and they must maintain them.

Transactions recorded in accounting books

An auditor is also responsible for verifying the records of the financial transactions that are made in the accounting records of the company. The auditor’s duty is vast, and therefore they also oversee the accuracy of these records and make sure that they do not go against the values and objectives of the business. The auditors have to ensure that a thorough search is conducted wherein they confirm that these records are true and fair without any fabrications. In simpler terms, this helps maintain the financial standings of a business.

Sale of investments

For a company, investments are of great importance, and hence it becomes the responsibility and role of auditors to do a background check of the valuation of assets.  Auditors also have to confirm the stocks, debentures and any other investments if they were sold for a price lower than at which they were purchased. There is one thing that we need to make a note of, that is, the companies should not be a part of the investment and banking sector.

Apart from these background inquiries and investigations, it is the duty of an auditor to certify the transactions that involve the liquidation of debt securities, stocks and other financial securities for a rate higher than when they were acquired by these transactions of liquidation. 

When an auditor has concluded that all these transactions are in good faith and the selling amount of these securities is within a reasonable limit there is no requirement for any further investigation or reporting. But as every situation is different these transactions are also subjective.

Loans and advances are shown as deposits.

As the auditor is appointed as the main element of the company’s audit, it is their responsibility to check all the loans and advances that are taken by the company have been bifurcated and recorded as deposits in the financial records. An auditor is accountable to do a thorough research about the background, value and origin of these records and verify that they are not put into the deposits class in the records.

Charging of personal expenses to revenue account

A company’s balance sheet or financial records shall only hold the transactions that are made for the company’s purpose. It is the responsibility of the auditor to see that any personal expenses that the directors, officials and company executives make are not added to the company’s accounts. These expenses are personal and hence they need to be separate from the expenses and records of the company.

Allotment of shares for cash

Shares bring money into the company and hence are a very important asset to the organisation. It is the responsibility of auditors to find out about the shares that were allotted for cash. They also have to maintain records about the cash value and further verify the balance sheets. Auditors have to make sure that the amount of cash received is equivalent to the shares that are allotted by the company. 

The company’s auditors are given the total responsibility and authority to conduct any searches to certify these records in the main office as well as in any other subsidiaries of the company. 

Reporting these records and transactions to the shareholders during the Annual General Meeting (hereinafter referred to as the ‘AGM’) as per the standards set by the ICAI is the responsibility of the auditors. As per the rules laid down in the Companies Act, 2013. An auditor must also submit the profits, cash flows, and losses of the company as per the Companies Act, 2013 and certify the accuracy of these statements. The auditors must report this submission to the shareholders in the AGM according to this Act. 

To make an audit report

While we all now know the importance of an audit report, let us now learn how to make the audit report. As per Section 143(3) of the Companies Act, 2013. The auditor must make a review containing the analysis and examination of every transaction of a company. The auditors must oversee the auditing records and ensure that they are as per the auditing standards set by the ICAI, National Financial Reporting Authority (hereinafter referred to as the ‘NFRA’, and regulations of law.

For a company to progress, it is essential to know its financial position and its standings as per the capital generated, loss incurred etc. The Audit Report showcases the result of the evaluation of the financial records of the company. The records maintained in the company’s books of accounts should be aligned with the rules and regulations and therefore be in compliance.

Throughout the article, we have read about the importance of following the rules, procedures and regulations that are laid down by the Act. it is very important that the auditor mentions the correct values of the profits, losses etc of the company.

Let us now have a look at what Clause 3 of Section 143 speaks about:

This Section has listed out the essentials of an audit report, every audit report must contain this information, as it showcases the company’s position and hence is of great importance.

1. It is important to conduct a proper inquiry about every minute aspect of the company’s financial transactions. This has to be mentioned in the report.
2. An auditor has to include the records of accounting statements as per the procedure that aligns with the auditing standards. Any information that is required to formulate reports of the offices of the company has to be duly noted. The report should also include the branch report of the offices not investigated by the auditor; the branch officer is responsible for providing the auditor with this report.
3. Whether the audit report that mentions the profit and loss account corresponds with the one mentioned in the balance sheet of the organisation.
4. Whether, according to the auditor, the financial statements comply with the auditing regulations.
5. The auditors must present their opinions on the findings in the statements that may present any potential threat to the organisation. 
6. Whether any director is disqualified from being appointed as a director according to Section 164(2) of the Act.
7. Any reservation, adverse remark, or qualification that is related to the maintenance of the company’s accounts and any other matter related therewith.
8. Whether the company has adequate internal financial controls concerning the financial statements in place and operating effectiveness of such controls; this shall not apply to companies that are:

• A one-person company or a small company;
• A company with a revenue of less than Rs. 50 crores according to the current financial statements and a company with overall borrowings of not more than Rs. 25 crores, from banking financial institutions, or any organisation, throughout the previous banking year;
• Whether the company had delivered necessary disclosures in the statements regarding holdings and dealings in specified bank notes during the period from 8th November, 2016 to 30th December, 2016 and whether these disclosures were consistent with the accounting records maintained by the company.

It is an auditor’s responsibility to specify the reasons wherein any of the matters mentioned above in the audit report do not correspond or have a qualification as per clause 4 of Section 143. Rule 11 states that the report shall contain the observations of an auditor regarding the impact of the ongoing litigation matters upon the financial position of the organisation. Any rule that is formulated by the organisation as per the accounting standards to deal with anticipated financial shortfalls and information about the delay on the amounts that are to be transferred to the company’s Investors Education and Protection Fund.

According to the provisions laid down in Section 227 (4A) (repealed as of now), the Central Government may issue a general or special order directing specific classes of companies to include a statement on those matters and ensure it is incorporated into the auditor’s report. The Central Government shall consult the Institute of Chartered Accountants in India regarding the class of companies to be mentioned in the order if the government thinks it is necessary.

Compliance with the auditing standards

As we saw earlier in the provisions laid down in Section 143(9) and (10), it is the auditor’s responsibility to fulfil the requirements of the auditing standards laid by the Central Government. These standards are formulated by the Central Government after consulting the NFRA and ICAI. The auditors have to mandatorily comply with the regulations prescribed by the ICAI until the Central Government specifies any other standards for the auditing process. One thing we have to understand is that all these duties and powers have to be carried out as per the standards of accounting that are set by the statutory bodies.

These regulations are formulated and laid down by the Central Government along with the National Financial Reporting Authority. The regulations specified by the statutory authorities provide aid to the auditors to conduct their tasks in the prescribed manner. In order to grow the efficiency of their work, an auditor is expected to comply with these standards while conducting an audit or formulating an audit report.

Take action against fraud 

In his course of duty, if an auditor senses any suspicious activity in the accounting records or transactions of the company, the auditor must report such matters to the Central Government as prescribed in Section 143(15) and Rule 13 of the Companies (Audit and Auditors) Rules, 2014.  

In case of any fraud, an auditor shall make a report and forward it to the Central Government as under:

1. The auditor shall notify the directors or the audit committee immediately but not later than 2 days of knowing about the fraud and shall seek their response or remark on the fraud within 45 days to the Central Government.
2. If the board of directors gives their remarks and observations to the auditors, these suggestions and opinions need to be further reported to the Central Government within 15 days from when they have been notified or they have received the acknowledgement of the responses;
3. If the board of directors or audit committee fail to constitute a reply within a span of 45 days, the auditor shall forward the report according to their observations to the Central Government. It is the duty of the auditor to mention details of the report that was earlier sent to the board of directors and the audit board for which there was no response or remark.

Further, the report must be in Form ADT- 4 and on the letter-head of the auditor, which will be sent to the Secretary, Ministry of Corporate Affairs, in a sealed registered post with the acknowledgement due or by speed post along with an email in confirmation of the same.

If the fraud involves a sum lesser than one crore rupees, it is the duty of the auditor to report it to the board or the audit committee within within two days of his/her awareness. This fraudulent report to the board and the audit committee shall be further mentioned in the board’s report. Both the reports submitted shall contain the:

1. Type of fraud;
2. The estimated sum involved in the fraud.
3. Parties associated; 
4. Whether remedial action has been taken or not (to be mentioned in the Board report)

The provision of these rules shall also be applicable mutatis mutandis to the Cost Auditor and Secretarial Auditor under Sections 148 and 204 of the Companies Act, 2013, respectively.

Assist with a branch audit

When an auditor is a branch auditor of a company, he/she will assist in fulfilling the branch audit. He/she should prepare a review depending on the branch records analysed by him/her and then send it to the company’s auditor. 

Internal auditors have to include these data in the report prepared by them. The branch auditor may further provide his opinions and results of his analysis and review to the internal auditor of the company auditor to aid in the given audit. 

Duties of the auditor during insolvency

We have seen the duties of an auditor during the working of a company, however, they are not limited to only when a company is operational. When it is the voluntary winding up of an organisation according to Section 305 of the Companies Act, 2013 it is a requisite that the auditor shall add a copy of the financial audits made by him/her.

During the time of winding up, we will see that the responsibility rests on the auditor’s shoulders as they are expected to have the knowledge of all regulations and standards laid down by the statutory organisations thereby safeguarding the board from any misleading trading claims.

Following the rules and regulations of professional conduct

The auditor must comply with professional conduct and ethics as they are placed in a significant position in the organisation. It is his\her duty to keep the information confidential and take due care while dealing with important details of the financial transactions of a company. Auditors have to maintain the standards of integrity and ensure fairness at all times. 

It is very important that an auditor maintains confidentiality throughout the process of formulating an audit report. An auditor cannot leak out information that is of great importance to the company merely to gain any individual gains that can result in the shortfall of the company.

Illustration:  A is an auditor and is one of the fastest-growing companies. If its rival company offers A a great deal to surrender some sensitive data, it is A’s responsibility to reject the deal and maintain confidentiality. It is not just about moral ethics, but it is an important rule in the rules and regulations of professional conduct.

Auditors shall strive to maintain fairness and express a conclusion or their opinion without any bias, undue influence of others, or any conflict of interest against the company. The information that is gained by an auditor during the process of making an audit report shall be kept confidential and make appropriate use of the same.

They should possess a good understanding to interpreting the laws laid down by the ICAI and the NFRA, thereby following all the necessary auditing, accounting, financial, and management standards and practices. 

Additional statutory duties of an auditor

An auditor’s duty is not limited to just the rights and duties; apart from them, an auditor is also responsible for conducting various inquiries and investigations to further correct the financial position of a company. For any business to flourish, it is important that the finances are thoroughly checked and accurate records are maintained. An auditor must ensure that the company functions in compliance with the accounting standards. Let us have a look at the additional statutory duties of an auditor:

1. Under the provisions of Section 145 of the Companies Act, 2013, auditors shall certify and sign every report that is classified as an audit report. After the financial audit of the company is complete, an exhaustive report is made on the findings and analysis of the audit. The auditor is required to sign and certify the contents of this report. We have to understand that only the auditor who is a partner practising his profession in India can certify this report.
2. Under Section 26 (b), it is the responsibility of the company to make its shareholders aware of the situation of the company. The prospectus is a significant document that shall contain all the information about the profits, losses, capital, loans, etc, of the company and its other offices. The auditor has to further certify that the information given in the prospectus is verified and is correct. The report shall also contain the dividend rates of the previous five years that the company has given to their shareholders.

Rights of an auditor 

Now that we have understood the duties of an auditor, it is time to learn about the rights of an auditor. An auditor is responsible for maintaining the integrity of the business and presenting correct records about the financial position of the company. 

While we have understood the duties, let us look at the rights that are conferred upon the auditors by The Companies Act, 2013. According to this provision, an auditor has the following rights mentioned below and cannot be deprived of them.

Right to have access to the company’s accounts 

An auditor leads the auditing committee and hence under Section 143 (1) of the Companies Act, 2013 an auditor has the right to check the financial records or any other documents that are required to form an audit report. This is the highest form of power that is given to an auditor as he has access to any financial records.

Under these provisions, auditors have the right and powers to check the records, source information from the auditing committee, and do thorough research and check the information concerning factors that are laid down under this Section sub-clauses (a) to (f). When we speak about books of accounts, we are referring to accounting books, costing books, statistical books, etc. The auditor also has the right to check and verify the data of both the main company as well as their subsidiaries.

The company’s auditor can carry out sudden inspections of the accounting records. This section grants the auditors the authority to inspect all accounts of the holding as well as subsidiary companies to integrate the accounting records of all offices or branches of the organisation and even their subsidiary companies.

Right to make suggestions

During the course of an audit, the auditor has the right to suggest improvements or changes to be made in the financial transactions or the documentation. The auditor has a right to suggest suitable modifications in methods of accounting, and if such suggestions are made, then the director should comply with them. 

In case the auditor, in his review, has come across any inconsistency or faulty entry, they can put forth their suggestions to correct the errors and comply with the auditing regulations set by the NFRA, ICAI, and Central Government. If the auditor assesses the statements and concludes a potential threat to the company in the valuation, depreciation methods, etc., he/she can make recommendations to the management about the same. 

If the audit team does not comply with the suggestions, the auditor has full authority to report the same to the board members. This does not grant the auditors the authority to make any independent changes in the company accounts. If, despite reporting it to the management, no action is undertaken, the auditor can report it to the shareholders of the company, and the final decision then lies with the management.

Right to sign the audit report 

Every document that is of great importance is certified. Similarly, an audit report is one of the most important documents during an audit and thus verifying the contents and further certifying them to be accurate is a big responsibility given by Section 145. This right is conferred upon an auditor to sign these reports and further present them to the shareholders etc. As per Section 142 (2), it is the major responsibility that an auditor to sign the report as it is certified to be accurate.

An auditor is responsible to provide clarity on any transactions or statements that can have a negative effect on how the company functions, these have to be mentioned in the AGM and every member should be provided access to inspect it. As an auditor plays a big role in the AGM, they are also responsible to present their opinions regarding the current financial position of the company before the investors and shareholders.

Only an auditor of the company has the right to sign the auditor’s report. In cases wherein a firm is appointed to conduct the audit, any partner of the firm who is practising in India has the right to authorise the audit report.

Right to conduct branch visits

Under Section 143(8) of the Companies Act, an auditor has full authority to visit the company’s branch offices to inspect the financial statements and accounts related to the company. In cases wherein the company’s auditor questions the accuracy or correctness of the books of accounts, he can visit the branch to investigate and inspect their transactions. 

A branch audit can help find out any potential threats to the finances of the company, unregulated transactions, or any other unethical practices by the management that could not be traced in the overall audit. In the case of branches situated outside the country, the accounts shall be audited by the company’s auditor or any other individual who fulfils the requirements to audit the branch according to the accounting standards of the foreign country.

Right to receive a notice and attend meetings

It is the right of an auditor to obtain the information and notifications regarding the AGM, shareholder meetings, and board of directors meetings during their tenure as given under Section 146 of the Companies Act, 2013. The company has to send notice to the auditor during all meetings wherein the finances of the organisation are reviewed, even when his audited accounts are not discussed in the meeting. 

The whole financial handling of a company is led by the auditor, and hence they have the right to be present in the meetings and not just be a silent participant but present their opinions and further offer a clear picture of the position of the company. 

Right to be indemnified 

Since the auditor has the power to take over the major financial aspects of the company, it also comes with liability. If it is found that fraud has been committed or there is some discrepancy in the accounts, an auditor can be held responsible. The company has the right to take legal action however, the auditor has the right to defend himself/herself during the trial.

During cases wherein the decision is in the interests of the auditor and all the accusations that were made against them are stated to be false, the organisation is responsible for compensating the auditors for the costs they sustained. This ensures that the auditor is under the shield against any unnecessary challenges, individual accountability, and unfair circumstances that can surface during their work tenure.

Right to make representation

When a special notice is issued by the company for the removal or appointment of an auditor, the retiring auditor has a legal right to obtain the transcript of the special notice regarding the removal or appointment of any individual as an auditor. It is the right of the retiring auditor to present a written request to inform the members of the organisation to represent himself.

Therefore, the auditor’s opportunity to represent themselves when the end of their tenure is being discussed and thus justify their designation and further present their considerations regarding their removal.

Right to be remunerated 

According to Section 142 of the Companies Act, 2013 the remuneration of an auditor of a company shall be decided in its AGM or in any other matter as decided therein. The board of directors finalises the salary of the first auditor. 

The salary compensated to the auditor shall be more than the out-of-pocket expenses that are incurred by the auditor in the course of his work with the company. While the auditor is given a salary for the work that is required of him, in case he has to do anything beyond his/her line of work, the company shall duly compensate him/her.

Right to seek legal and technical support

The auditor is given the responsibility to make sure that the company functions as per the accounting standards. If the auditor finds an issue, they have the right to further inspect and gain clarity on it. The auditor has to then put this before the

It is the role of an auditor to guarantee that the company is functioning as per the rules and regulations set forth by the statutory bodies. During their tenure, it is the duty of the auditor to investigate and analyse an accurate report to maintain a state of clarity between the members and the organisation.

An auditor in certain situations, due to the nature of work, can require some assistance or advice on issues that are not in their expertise, and hence companies have in-house counsels, tax specialists and analysts for matters regarding tax laws, compliance laws, etc. These experts are employed by the organisation itself in order to aid the auditing process. However, it is important that independent opinions are presented by the auditors and should not be influenced by these industry experts.

Landmark orders and judgments

Re: London and General Bank (No.2) (1895) Ch. 673

Facts of the case  

This case is ranked as the first case that set down the duties of an auditor regarding the reporting of crucial information to the shareholders. Here, the auditors knew about the ongoing imbalance in the value of assets of the company but did not disclose it to the shareholders and continued showing them as reliable assets. They also maintained that the financial records were accurate, seeing that there was a declaration for dividends by the shareholders. Now that the company had shown such high stakes, they had to pay it out of the capital, and therefore, the liquidator set the auditors for a trial and stated that they were liable to pay the company.

Issues raised

1. Here, the issue raised was whether it was the responsibility of the auditor to convey such information to the shareholders. 

Judgment

As the company faced a loss by paying the dividend, the court declared that it was indeed the responsibility of the auditors. They showed that the assets were reliable and were generating high value. It is the main responsibility of an auditor to do a thorough check of the information and data before putting it out to the general public and members of the company.

The auditors have to take reasonable care to verify the information and then present it to the shareholders. The reasonability depends upon various circumstances. As the auditor had knowledge of this situation, he should have notified the shareholders and should have presented an honest and correct report. The liability of an auditor for their client’s actions has been extensively discussed in this case. 

Re: Allen Craig and Co. (London) Ltd. (1934) CH 483

Facts of the case

In this case, Allen Craig and Co., a company dealing with the imports of oils and chemicals, was registered with a capital of £10,000 in the year 1921. Right from the establishment of the company till the year 1930, they showed that the business suffered losses amounting to. In this case, both the directors and the auditors were responsible as despite inspecting the documents they certified them to be accurate. 

The liquidator then proceeded to issue charges against them and argued that despite the fact that the auditors knew that the secretary did not present their findings to the members and hence it was the responsibility of the auditors to do so.

Issues raised: 

1. If it was the auditor’s duty to notify to the shareholders of the directors and call for a meeting?
2. Whether it was the auditor’s responsibility to inform the members and present a clear picture of the transactions.

Judgement

After going through all the facts, the English High Court ruled that there is no responsibility on the auditors to call or arrange for the members’ meeting or to tell the directors to arrange a meeting. It was also stated by the court that, as per the accounting standards, auditors were required to notify the shareholders about the current financial standings of the organisation. They have to make sure that these documents are certified by them before presenting them to the members. If the auditor has made a report and sent it to the secretary, but the secretary failed to present it at the meeting, then the auditor will not be held liable.

It was held by the court that the managing director of the company was the person responsible for this situation regarding debts and they concluded that the auditors presented their findings before the directors. However, they chose to not pay heed to this and hence no further action was taken and therefore the auditors were free from all charges.

The court further decided to hold the managing director of the organisation responsible for these debts. It was reasoned by the court that the auditors appointed by the company indeed presented and notified the directors with several reports and letters that provided the details of the financial position of the company. Despite this, no further step was taken by the managing director. Thus, the court held that all the charges against the auditors of the company were dismissed.

M/s BSR Associates LLP and Coffee Day Enterprises Ltd. (CDEL) (2024)

Facts of the case

This case unveiled a scam that was worth ₹ 2,549 crores; the National Financing Reporting Authority found that funds were being redirected from the subsidiaries of CDEL. They were concealed under cheques worth ₹ 1,706  issued by the Mysore Amalgamated Coffee Estate Ltd. (which is hereinafter mentioned as “MACEL”). MACEL did not have enough funds in their account, yet these cheques were issued by them. Due to this, the funds in the subsidiaries reached a total of ₹ 842.49 crores. It was found that there was a total diversion of funds amounting to ₹ 3,535 crores. 

The Securities and Exchange Board of India (which is hereinafter mentioned as “SEBI”) did a thorough examination and went through the statements of both CDEL and MACEL and found that MACEL did not have any transactions with the other subsidiaries that were mentioned. They were used to send funds to the accounts of V. G. Siddharta (founder of Cafe Coffee Day), his relatives and all those entities that were in the control of his relatives etc.  

V.G. Siddharta used to ask the assigned employees to approve them and show them as loans or advances, and keep the cheques in his possession. Even the auditors of CDEL, M/s BSR Associates LLP, for the year 2018-2019 withdrew due to low payment. When an extensive investigation was conducted after V.G. Siddharta passed away, these fraudulent activities were unveiled. It was found that Aravind Maiya, who was the engagement partner for the year 2018-2019, and Amit Somani, who was the quality reviewer, were responsible for these transactions.

Issues raised:

1. Was there professional misconduct by the auditors in the financial year 2018-2019 audit of CDEL?
2. Was there a violation of the code of conduct by the auditors as they participated in diverting these funds?

Judgement

It was then held by the NFRA that the auditors had indeed acted beyond their duties. M/s BSR LLP was fined for a total of ₹ 10 crores. This was recorded to be the highest-ever penalty charged by the NFRA. NFRA barred Aravind Maiya from practising as an auditor for 10 years and fined him ₹ 50 Lakhs. Amit Somani was further barred from 5 years of practice and charged ₹ 25 Lakhs for violating the code of conduct.

Tri-Sure India Ltd. vs. A.F. Ferguson And Co. And Others (1985)

Facts of the case 

In this case, the company Tri-Sure India Limited issued a prospectus in February 1975 and invited the general public to subscribe to their shares. The prospectus issued included the financial report from auditors A.F. Ferguson & Co., for the year 1973-74, which showcased an exceptional rise in the company’s profits. 

This was because during the public issue, shares were oversubscribed and the company did allot them according to the terms of a public issue. However, it was found that the financial report was manipulated in the year 1973-74. The director and executives of the company had collectively prepared a fraudulent report.

The company then offered to refund the money that was subscribed by the allottees and sued the auditors for damages amounting to ₹ 63.85 lakhs. The company alleged that it was the responsibility of the auditors who failed to properly investigate and examine the reasons for such an abnormal increase in profits as shown in the prospectus.

Issues raised:

1. Whether the auditors negligent in examining the sharp increase in profits for 1973-74?
2. Whether it was the duty of the auditors to verify the reasons for the disproportionate ratio of debts to turnover, change in the prices and consumption of raw materials for production, etc.?

Judgement 

It was ruled by the High Court that Tri-Sure India Ltd. could not establish that the auditors had committed negligence. Therefore, the suit against them was dropped. It was stated by the court that the auditor must follow the regulations and maintain compliance with the auditing standards. They further stated that auditors are, however, not obligated to begin an investigation unless the reports lead to any suspicion. They have to do a thorough check of the financial statements, but cannot act like a detective and investigate for any fraud. Therefore, the court stated that if the internal function were satisfactory, there was no reason for suspicion and hence the auditors had taken reasonable care.

Liabilities of auditors

As we discussed earlier, “with great power comes greater responsibilities” In cases of failure, an auditor can be further held liable and penalised for the same. Let us have a look at the penalties and liabilities given under this act:

Civil liability

As per Section 147(2) of the  Companies Act, 2013 if an auditor does not comply with the provisions of Section 139, Section 143, Section 144, or Section 145 of the Act regarding his duties, the auditor is liable to pay a fine of ₹25 thousand rupees that can extend to ₹ 5 lakh rupees the damages and refund any amount that is paid to him by the company or any other individual for the loss arising out of the auditor’s failure to fulfil his duty. 

In case the auditor has contravened the provision despite prior knowledge, or with an intention to commit fraud, he shall be punished for a term that can be extended to 1 year along with a fine of ₹ 1 lakh rupees, which can extend to ₹ 20 lakh rupees.

Criminal liability

As per Section 147(5) of the Companies Act, 2013, in case of an audit of a company being conducted by an auditing firm, if it is proved that the partner or partners of the firm have acted intentionally to commit fraud, there shall be criminal liability along with civil liability. It is to be noted that this act shall be considered the act on behalf of the partner or the partners of the firm jointly and severally.

Disqualification and ban

As per the provisions of Section 140(5) of the Act, the Central Government can direct the tribunal to further direct a company to replace the auditor who has been proven guilty of committing fraud individually or jointly with the executives of the company. If the Central Government has applied for such a change, the Tribunal shall take action within 15 days of the application and replace the auditor.

The auditor who is proven to be guilty should be disqualified and barred from performing an audit for five years and shall further face penalties as per Section 447 of the Act. In cases that involve audit firms, all partners of the firm who have committed fraud are held liable.

Penalties for failure to report a fraud

As per Section 143(12), if an auditor, during his course of employment or while carrying out an audit, comes across a fraud that is being committed by the executives or employees of the company, he must report it to the Central Government in the time and manner as prescribed. According to Section 143 (15) of the Act, if the auditor does not comply with the standards and fails to discharge his responsibility, he will be penalised an amount of ₹ One Lakh, which can, depending upon the situation, extend up to ₹ Twenty-five Lakhs.

Conclusion

Therefore, as we reach the end of our article, it is safe to say that auditors indeed have great significance in the financial department of a Company. It is very important for companies to bring a reliable and qualified auditor to abide by the standards. For a company, an auditor is the individual that keeps the company in check. Their main duties are to collect data and analyse the financial statements and create a report. 

The NFRA, ICAI and Companies Act, 2013 have laid down various rules and regulations, it is the responsibility of the auditor to oversee that the company is abiding by these rules and regulations.

An auditor works extensively with senior management to gather the financial data of the company to conduct a review and examination for the audit. The statutory auditor must maintain a level of independence and therefore avoid being influenced by the employees and officials of the organisation. In essence, a company needs to have an auditor so that the financial records are regulated and comply with the auditing standards to support the company’s growth. 

Frequently Asked Questions (FAQs) 

What should every auditor know? 

Every auditor must have the knowledge of the company where they are appointed. They should observe the people in the company and the business culture. Auditors should monitor the functioning of the company and therefore prioritise the growth of the company and work towards growing the financial position of the organisation in the market.

Is an auditor and accountant the same?

Auditors are often considered to be accountants. However, accountants are the employees who are responsible for formulating the accounting records consisting of the day-to-day transactions, filing the tax forms for the organisation, etc. The role of an auditor is to investigate and analyse these accounting records, certify the correctness of these transactions, inquire in depth about the transactions, and report to the board in case of any potential fraud or suspicions regarding false financial statements and assess the same.

References

https://oaji.net/articles/2016/1707-1475498693.pdft.

https://blog.ipleaders.in/rights-retiring-auditors-companies-act-2013/ 

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