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Sunday, February 24, 2013

AUDITORS’ APPOINTMENT, RESIGNATION ETC., UNDER NEW COMPANIES BILL 2012




AUDITORS’ APPOINTMENT,  RESIGNATION  ETC.,  UNDER  NEW COMPANIES BILL 2012
The provisions relating to appointment of auditors and duties of the auditors are modified by the New Companies Bill 2012 (hereinafter called New Companies Bill).

.Appointment of Auditors under New Companies Bill

As per the Companies Act, 1956 the First Auditor or Auditors of a company including Government Company shall be appointed by the Board of directors within one month of the incorporation of the company and the Auditor or Auditors so appointed shall hold offices until the conclusion of the first annual general meeting. Thereafter every year he will be re-appointed at the annual general meeting.
Under the Companies Bill ( Clause 224 )  the First Auditor of the company other than the government company shall be appointed by the Board within 30 days of its incorporation and on failure to do so, the members shall appoint the same within 90 days from the incorporation who shall hold office till the conclusion of first annual general meeting.
Now under the New Companies  Bill every Company shall, at its first Annual General Meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6th Annual General Meeting and thereafter till the conclusion of every 6th meeting.  However, the company shall place the matter relating to such appointment for ratification by members at every annual general meeting. 
The company shall place the matter relating to such appointment for ratification of member at every annual general meeting.
Where a company is required to constitute an Audit committee all appointments including the filling of casual vacancy of an auditor shall be made after taking into account the recommendations of such committee.

Now in case of appointment of auditor, the company has to intimate both the auditor and the Registrar within 15 days of the appointment. (As against   the Companies Act, 1956   the intimation of appointment was upon the auditors in form 23B within 30 days from the date of appointment).
 In case of Government company Controller and Auditor General of India has to appoint the first auditor within sixty days from the date of incorporation of the company and if not the Board of Directors of the company shall appoint such auditor within next thirty days if not Members of the company who shall within sixty days at an extraordinary general meeting appoint such auditor.

Disqualifications for Appointment of Auditors

In addition to the disqualifications prescribed under the Companies Act 1956, following new disqualifications have been introduced by the New Companies Bill for appointment as an Auditor of the Company:
i.          a person who by himself, or his relative or partner-
            a)         is holding any security of the Company or its Subsidiary, or of its Holding
                        Associate Company or a Subsidiary of such Holding Company:
Provided that the relative may hold security or interest in the Company of 
face value not exceeding one thousand rupees or such sum as may be prescribed;
b)         is indebted to the Company, or its Subsidiary, or its Holding or Associate Company, or its Subsidiary, or its Holding or Associate Company or a Subsidiary of such Holding Company in excess of such amount as may be prescribed; or
c)         has given a guarantee or provided any security in connection with the indebtedness of any third person to the Company or its Subsidiary, or its Holding or Associate Company or a Subsidiary of such Holding Company, for such amount as may be prescribed;
ii.         a person or a firm who, whether directly or indirectly, has business relationship with the Company, or its Subsidiary, or its Holding or Associate Company or Subsidiary of such holding company or associate company, of such nature as may be prescribed;
iii.        a person whose relative is a Director or is the employment of the Company as a director or key Managerial Personnel;
iv.        a person who has been convicted by a Court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.
Now a firm whereof majority and not all partners practicing in India are qualified for appointment as aforesaid as provided under the Companies Act 1956, may be appointed by its firm name to be auditor of a Company.
Further, as per new section 144, an auditor not to render certain services which are given below:           
(a)       accounting and book keeping services;
(b)       internal audit;
(c)        design and implementation of any financial information system;
(d)       actuarial services;
(e)       investment advisory services;
(f)         investment banking services;
(g)       rendering of outsourced financial services;
(h)       management services; and
(i)         any other kind of services as may be prescribed.

A transition period has been provided to Auditors to comply with the requirement of this clause. Accordingly auditors or the audit firms providing non-audit services before the commencement of this new act shall have to comply with these provisions before the closure of the first financial year after the commencement of the new Act.
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An auditor cannot audit more than 20 companies including private limited companies . In case of a firm, limit is applicable to each Partner.
Powers & Duties of Auditors  - As per New Companies Bill, the important new powers duties are given below:

                                              I.        The auditor of the   company shall   now be allowed to   have   access   to records of the subsidiaries.
                                            II.        Auditor shall also comply with Auditing Standards to be prescribed by the Central Government or recommended by Institute of Chartered Accountants of India (ICAI).
                                           III.        New Section 143 provides for matters to be stated by the auditor  in the auditors’ report and where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification the report
                                    shall state the reasons therefor. 
                                          IV.        Apart from Balance Sheet and Profit & Loss   Account, he shall also report on the Cash flow for the year.
                                           V.        Now a  duty  has been cast on the  Auditor to  immediately report to  the Central Government of any  fraud committed by company or its officers  which he  comes  across  during the  course of performance as an  auditor.
                                          VI.        In case of Government company  the Comptroller and Auditor General of India shall  appoint the  auditor and direct  such auditor the  manner in  which the accounts  of the Government company are required to  be  audited.
                     VII The Bill now provides that the Auditor in his report, apart from the Balance Sheet and Profit and Loss Account shall also report on the cash flow for the year and such other matter as may be prescribed .

The most important duty cast on the auditor is now he has to immediately report to the Central Government of any offence which he comes across during the course of performance as an auditor. Thus the responsibility of the auditor is to ensure any offence is reported forthwith.

Audit reports -New Points introduced with reference to Audit Reports

                                                      I.        The auditor shall make a report to the members any qualification or adverse remark relating to the maintenance of accounts and other matters connected therewith.
                                                    II.        Every   auditor shall comply with auditing standards.
                                                   III.        Certain classes of companies which the Central government in consultation with National Financial Reporting Authority may specify additional statement in Auditor Reports.
                                                  IV.        The Bill provides that the Auditors shall comply with Accounting Standards.
                                                   V.        The Auditor to report on adequate internal control system commensurate with the size of the company and the nature of its business.
                                                  VI.         Further, for certain violations of duties and obligations, an auditor can be imprisoned and made liable to pay damages to the company, statutory bodies or authorities, for loss arising out of incorrect or misleading statements in the audit report.
                                                 VII.        The existing provisions relating to giving the qualifications in bold and italics is dispensed with.
                                               VIII.        Certain classes of companies with the Central Government in consultation with the National Financial Reporting Authority may specify will have to make additional prescribed statements in their audit report.
                                                  IX.        Now a duty has been cast on the Auditor, to immediately report to the Central Government, of any offence, which he comes across during the course of performance of his duties as an auditor involving fraud, which is being or has been committed against the Company by officers or employees of the company.

Annual General   Meeting and Auditors

 As per New Clause introduced by Companies Bill, the following   points   are with reference to annual general meeting.
                                                  i.    Now it is required that the qualifications, observations ,or comments on financial transactions or matters which have any adverse effect on the functioning of the company mentioned in the Auditor’s Report shall  be read  before the Company in General Meeting.
                                                ii.    All notices of and other communications   relating to any   general meeting shall be forwarded to the auditor of the Company.
                                               iii.    All the General meetings shall now be mandatorily attended by Auditor or through his   representative who shall also be qualified by the Auditor.
                                               iv.    Now Unqualified   Auditor’s   Report need not be read out in the Annual General Meeting. (Previously it was required under the  Companies Act, 1956).
  
Rotation of Auditors as per  New Companies Bill

Under the Companies Act, 1956 there is no provision for compulsory Rotation of Auditors and Rotation of auditor is first time introduced in the Companies Bill. The Auditor shall be required to be rotated.
The New Companies Bill, provides for the compulsory rotation of auditors as follows:
ü  An auditor will be appointed in the first annual general meeting for a five-year term. Thereafter, the auditor will be changed as per the members’ decisions.
ü  For Listed   companies   states that the same individual auditor cannot be appointed for a term exceeding five consecutive years.
ü  Secondly, an audit firm cannot be re-appointed for more than two five-year terms. For re-appointment purposes for the individual auditor or audit firm, there has to be a gap of five years. Moreover, for appointment or re-appointment purposes, there should be no common partners between the new firm and old audit firm.
Another interesting clause is that members can resolve to ask the audit     firm to rotate the audit partner and team every year. These clauses will ensure that auditors rotate every five years in the listed companies.
A transition period of 3 years from the commencement of the Act has been prescribed for the company existing on or before the commencement of the new act to comply with the provisions of the rotation of Auditor.

The Bill also provides that a company can resolve for rotation of auditing partner and his team within an auditor.

Resignation of Auditor
The Auditor may vacate his office by tendering his resignation. When the Auditors resign his office, the vacancy arising there from can be filled in the Annual General Meeting. This will be treated as casual vacancy and the Board of Directors may appoint new auditors in casual vacancy caused by the existing auditor.
As per the  New  Companies  Bill, now where the  Auditor of  company other than the Government Company resigns from the company then it is required to file a statement in  prescribed form within  30 days  with the  company and the resignation in  case of government company ,such statement  shall  be filed  with Comptroller  and Auditor-General of India.
A New  provision has been introduced  whereby the  Tribunal suo moto or an  application from Central government/person concerned ,can direct the  Company to  change the  Auditor if it is  satisfied that the  Auditor of a company has  whether directly or indirectly acted  in a fraudulent  manner.
Punishment for the company and the auditor

If any of  the  provision of Section  139 to 146 is contravened, the company shall  be  punishable with fine which shall  not  be less  than Rs.25000/- but  which      may extend to Rs.500000/- , and every  officer  of the company who is in default shall  be  punishable  with  imprisonment. (Clause 147). If the auditor is guilty of any offence punishable under the new provisions he may be prosecuted.

The Bill   specifically   provides    that if it is proved that the partner or partners of Audit firm has or  have  acted  in  fraudulent  manner than the partner or          concerned partners  of the  audit firm and the  firm shall  be  jointly  and severally responsible for the liability.

                                   
Cost Auditor

Central Government may direct that the audit of cost records of class of companies which are required to maintain cost records and which have a net worth of such amount or a turnover of such amount as may be prescribed shall be conducted in the manner specified in the order. Further cost auditing standards have been mandated.

Changes in  the  Companies Bill
The changes made by the Companies Bill are given below for easy reference.
Sections under the  Companies  Act 1956
Clauses under the  Companies Bill 2012
Section 224- Appointment of Auditors
Clause 139- Appointment of Auditors
Section 225-Removal of auditors
Clause 140-Removal, Resignation of Auditors.
Section-226-Qualification and Disqualification
Clause 141- Qualification, Disqualification.
Section 227-Powers and Duties of auditors
Clause 143-   Powers   and duties of Auditors.
Section 229-Signature of Audit Report
Clause 145- Auditors to sign Audit Report.

Section 231- Rights of Auditors to Attend General Meeting.
Clause 146- Auditors to attend General Meeting.
Section 233-Penalty for non- Compliance by Auditor.
Clause 147-Punishment for Contravention.

 Deleted Sections  under Companies Act  1956 in respect of Auditors appointment and audit.

Section 224A – Auditor not to be appointed except with the approval of the company by special resolution in certain cases.           
Section 233A- Power of     the Central Government to conduct special Audit in certain cases.

The Rules to be prescribed will provide many details on some of the procedural aspects relating to audit and auditors.


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