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  • 1. Session on Accounting & AuditingStandards under the Companies Bill 2012By CA Huzeifa Unwala
  • 2. 2Topics for discussion• Accounts of Companies• Financial Statements• Constitution of NFRA• Concluding thoughts
  • 3. CHAPTER IXACCOUNTS OF COMPANIESSections/ Clauses128. Books of account, etc., to be kept by company.129. Financial statement.130. Re-opening of accounts on courts or Tribunals orders.131. Voluntary revision of financial statements or Board’s report.132. Constitution of National Financial Reporting Authority.133. Central Government to prescribe accounting standards.134. Financial Statement, Boards report, etc.135. Corporate Social Responsibility.136. Right of member to copies of audited financial statement.137. Copy of financial statement to be filed with Registrar.138. Internal Audit.3
  • 4. Clause 128 – Books of Accounts to be kept by company• Can be maintained in electronic mode. Branches and Foreign offices to furnish periodicalstatements to Head Office.• Books shall be kept open for inspection by director during business hours. For inspection ofsubsidiaries only a person with authority through a Board resolution shall be allowed.Company officials/ employees to provide reasonable assistance during inspection.• Maintenance of books and records including vouchers for 8 years, sole exception wherethe Central Government has ordered inspection.• Failure to comply with above provisions attract imprisonment and/ or fine upto 5 lacs.Clause 129 – Financial Statements• The financial statements shall give a true and fair view of the state of affairs of the company orcompanies, comply with the accounting standards notified under section 133 and shall be inthe form or forms as may be provided for different class or classes of companies in Schedule III.• Where a company has one or more subsidiaries, it shall, in addition to financial statementsprovided under sub-section (2), prepare a consolidated financial statement of the companyand of all the subsidiaries in the same form and manner as that of its own which shall alsobe laid before the annual general meeting of the company along with the laying of itsfinancial statement under sub-section (2).• Provided that the company shall also attach alongwith its financial statement, a separatestatement containing the salient features of the financial statement of its subsidiaries orsubsidiaries in such form as may be prescribed.In case of imprisonment penalty the term “wilfully committed” has been eliminated for contravention ofthese provisions. Therefore, if there is failure of MD, CFO or any other person charged with the responsibilityof complying with the Clause 129 he/ she shall be open to imprisonment. 4
  • 5. COSO study on Fraudulent Financial Reporting:There were 347 alleged cases of US public company fraudulent financial reporting from 1998 to2007, versus 294 cases from 1987 to 1997. Consistent with the high-profile frauds at Enron,WorldCom, etc., the dollar magnitude of fraudulent financial reporting soared in the last decade,with total cumulative misstatement or misappropriation of nearly $120 billion across 300 fraudcases with available information (mean of nearly $400 million per case).The most common fraud technique involved improper revenue recognition, followed by theoverstatement of existing assets or capitalization of expenses. Revenue frauds accounted for over60 percent of the cases, versus 50 percent in 1987-1997.5
  • 6. • 130. (1) A company shall not re-open its books of account and shall not recast its financial statements,unless an application in this regard is made by the Central Government, the Income-tax authorities, theSecurities and Exchange Board, any other statutory regulatory body or authority or any person concerned andan order is made by a court of competent jurisdiction or the Tribunal to the effect that—(i) the relevant earlier accounts were prepared in a fraudulent manner; or(ii) the affairs of the company were mismanaged during the relevant period,casting a doubt on the reliability of financial statements:Clause 130 – Recasting of Financial Statements• 131. (1) If it appears to the directors of a company that—(a) the financial statement of the company; or (b) the report of the Board, do not comply with the provisionsof section 129 or section 134 they may prepare revised financial statement or a revised report in respect of anyof the three preceding financial years after obtaining approval of the Tribunal on an application made by thecompany in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shallbe filed with the Registrar:Provided that the Tribunal shall give notice to the Central Government and the Income tax authorities and shalltake into consideration the representations, if any, made by that Government or the authorities before passingany order under this section.• Provided further that such revised financial statement or report shall not be prepared or filed more than once ina financial year: Provided also that the detailed reasons for revision of such financial statement or report shallalso be disclosed in the Boards report in the relevant financial year in which such revision is being made.Clause 131 – Voluntary Revision of financial statements6
  • 7. • 132. (1) The Central Government may, by notification, constitute a National Financial ReportingAuthority to provide for matters relating to accounting and auditing standards under this Act. (2)Notwithstanding anything contained in any other law for the time being in force, the National FinancialReportingAuthority shall(a) make recommendations to the Central Government on the formulation and laying down ofaccounting and auditing policies and standards for adoption by companies or class ofcompanies or their auditors, as the case may be;(b) monitor and enforce the compliance with accounting standards and auditing standards insuch manner as may be prescribed;(c) oversee the quality of service of the professions associated with ensuring compliance withsuch standards, and suggest measures required for improvement in quality of service andsuch other related matters as may be prescribed; and (d) perform such other functions relating toclauses (a), (b) and (c) as may be prescribed.• (3) The National Financial Reporting Authority shall consist of a chairperson, who shall be a person ofeminence and having expertise in accountancy, auditing, finance or law to be appointed by the CentralGovernment and such other members not exceeding fifteen consisting of part-time and full-time membersas may be prescribed.Provided further that the chairperson and members shall make a declaration to the Central Government in theprescribed form regarding no conflict of interest or lack of independence in respect of his or their appointment:Provided also that the chairperson and members, who are in full-time employment with National FinancialReporting Authority shall not be associated with any audit firm (including related consultancy firms) during thecourse of their appointment and two years after ceasing to hold such appointment.Clause 132 – Constitution of the NFRA7
  • 8. • (4) Notwithstanding anything contained in any other law for the time being in force, the National FinancialReportingAuthority shall—have the power to investigate, either suo moto the Central Government, for such class of bodiescorporate or persons, in such manner as may be prescribed into the matters of professional or othermisconduct committed by any member or firm of chartered accountants, registered under the CharteredAccountants Act, 1949: Provided that no other institute or body shall initiate or continue any proceedings insuch matters of misconduct where the NFRA initiated an investigation under this section;• (c) where professional or other misconduct is proved, have the power to make order for (A) imposing penalty of—(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case ofindividuals; and(II) not less than ten lakh rupees, but which may extend to ten timesof the fees received, in case of firms;(B) debarring the member or the firm from engaging himself or itself from practice as member of the Instituteof Chartered Accountant of India refund to in clause (e) of sub-section (1) of section 2 of the CharteredAccountants Act, 1949 for a minimum period of six months or for such higher period not exceeding tenyears as may be decided by the National Financial Reporting Authority.Explanation.—For the purposes of his sub-section, the expression "professional or other misconduct" shall have thesame meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.Clause 132 – Constitution of the NFRA (cont’d)8
  • 9. • 133. The Central Government may prescribe the standards of accounting or any addendum thereto, asrecommended by the Institute of Chartered Accountants of India, constituted under section 3 of theChartered Accountants Act, 1949, in consultation with and after examination of the recommendations madeby the National Financial Reporting Authority.Clause 133 – Central Govt. to prescribe Accounting StandardsClause 134 – Financial Statements, Board Report• (n) a statement indicating development and implementation of a risk management policy for the companyincluding identification therein of elements of risk, if any which in the opinion of the Board may threaten theexistence of the company;• (o) the details about the policy developed and implemented by the company on corporate social responsibilityinitiatives taken during the year;• (p) in case of a listed company and every other public company having such paid-up share capital as may beprescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board ofits own performance and that of its committees and individual directors;9
  • 10. (5) The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along withproper explanation relating to material departures;(b) the directors had selected such accounting policies and applied them consistently and made judgments andestimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of thecompany at the end of the financial year and of the profit and loss of the company for that period;(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting records inaccordance with the provisions of this Act for safeguarding the assets of the company and for preventing anddetecting fraud and other irregularities;(d) the directors had prepared the annual accounts on a going concern basis; and (e) the directors, in the caseof a listed company, had laid down internal financial controls to be followed by the company and thatsuch internal financial controls are adequate and were operating effectively.Clause 134 – Directors’ Responsibility StatementExplanation.—For the purposes of this clause, the term “internal financial controls” means the policies andprocedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherenceto company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracyand completeness of the accounting records, and the timely preparation of reliable financial information; (f) thedirectors had devised proper systems to ensure compliance with the provisions of all applicable laws and that suchsystems were adequate and operating effectively.(8) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall notbe less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the companywho is in default shall be punishable with imprisonment for a term which may extend to three years or with fine whichshall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.In case of imprisonment penalty the term “wilfully committed” has been eliminated for contravention ofthese provisions.10
  • 11. • The term Financial Year in relation to companies shall mean year ending 31st March every year.• Financial statement in relation to companies shall mean Balance Sheet, P & L, Cash flow Statement (notapplicable to dormant and one man company) , Statement of Changes in equity (if applicable) andexplanatory notes.• Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor,who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided bythe Board to conduct internal audit of the functions and activities of the company. The Central Government may, byrules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to theBoard.• “accounting standards” means the standards of accounting or any addendum thereto for companies or class ofcompanies referred to in section 133;• Every auditor shall comply with the auditing standards.• “auditing standards” means the standards of auditing or any addendum thereto for companies or class ofcompanies referred to in sub-section (10) of section 143;11Other updates
  • 12. 12• Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by thecompanys auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposedin the scheme of compromise or arrangement is in conformity with the accounting standards prescribed undersection 133.• Schedule III - Where compliance with the requirements of the Act including Accounting Standards as applicableto the companies require any change in treatment or disclosure including addition, amendment, substitution ordeletion in the head or sub-head or any changes, inter se, in the financial statements or statements forming partthereof, the same shall be made and the requirements of this Schedule shall stand modified accordingly.• Schedule III - The disclosure requirements specified in this Schedule are in addition to and not in substitutionof the disclosure requirements specified in the Accounting Standards prescribed under the Companies Act,2011. Additional disclosures specified in the Accounting Standards shall be made in the notes to accounts or byway of additional statement unless required to be disclosed on the face of the Financial Statements. Similarly,all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to therequirements set out in this Schedule.Other updates
  • 13. • Sustainable growth of Corporates in India – focus on Value creation for all stakeholders• Protection of different sections of Society• Cost of compliances to increase substantially on account of increasing legal complexity theAuditors, Independent Directors shall act with greater caution and there will be greater emphasis ondocumentation/ second opinions.• Rules should clearly differentiate the applicability of various provisions to different classes ofcompanies• Audit to become an unattractive profession and it will be increasingly difficult to attract audit talent• Increase in audit risk and liability issues will place burden on Corporates to pay higher audit fee.• Uniformity of financial year ending shall impact the Companies that follow 31st December or anyother period. This would cost of compliance.Concluding thoughts