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Co bill audit & auditors 030413


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Co bill audit & auditors 030413

  2. 2. CA Kamlesh S. VikamseyBACKGROUNDYear 2008 - The CompaniesBill, 2008, introduced inthe Lok Sabha on 23rdOctober, 2008 to replaceThe Companies Act, 1956.Lapsed, with thedissolution of the 14thLokSabha.Year 2009 - The Companies Bill,2009, introduced in the LokSabha on 3rdAugust, 2009 (withminor modifications to theCompanies Bill, 2008). Referredto the Standing Committee onFinance of the Parliament on 9thSeptember, 2009.Year 2010 -Committee’s reportintroduced in theLok Sabha on 31stAugust, 2010.Year 2011 - The Companies Bill,2011 introduced in the Lok Sabhawith several changes on 14thDecember, 2011. Hence referredback to the Committee on 21stDecember, 2011 forreconsideration.Year 2012 - Based on therecommendations the CompaniesBill, 2011 was amended and wasintroduced as Companies Bill,2012. The Bill was passed in theLok Sabha on 18 December, 2012.April 3, 2013The Companies Bill, 2012Audit & Auditors2
  3. 3. CA Kamlesh S. VikamseySTRUCTURE OF THE COMPANIES ACT 1956& THE COMPANIES BILL, 2012The CompaniesAct, 1956The CompaniesBill, 201213 Parts658 Sections15 Schedules13 Parts658 Sections15 Schedules29 Chapters470 Clauses7 Schedules29 Chapters470 Clauses7 SchedulesApril 3, 2013 3The Companies Bill, 2012Audit & Auditors
  4. 4. CA Kamlesh S. VikamseyMAJOR HIGHLIGHTS (OTHER THAN ACCOUNTS& AUDIT) Mandatory CSR – minimum spend by the specifiedCompanies Enhanced Accountability on Corporate entities ID – provisions made in details & code for ID’s inserted in theBill Host of additional disclosures in report of Board of Directors Restriction on Inter Corporate Loans/Investments andGuarantee Changes in provisions pertaining to Depreciation Private placement defined in clearer mannerApril 3, 2013 4The Companies Bill, 2012Audit & Auditors
  5. 5. CA Kamlesh S. VikamseyMAJOR HIGHLIGHTS …. CONT’D Merger & Acquisition procedures streamlined (Fast Track/CrossBorder/Squeeze Out etc) At least one Woman Director mandatory in specified Companies Class action suits NCLT given very wide powers under the Act Trf of shares also to IEP Fund – when unpaid/unclaimed dividend istransferred Almost no exemptions /relaxations to Private Limited Companies Concept of One Person Company (OPC) introduced Small Companies defined and granted some relaxations/exemptions Many New Definitions & changes in some definitionsApril 3, 2013 5The Companies Bill, 2012Audit & Auditors
  6. 6. CA Kamlesh S. VikamseyDELEGATED LEGISLATION Large number of provisions in the bills are left to be determined bythe Rule Making Authorities i.e. “to be specified” or “as may beprescribed.” (346 out of 470 clauses or approx 74%) A long list of such items clause-wise attempting explain whylegislating powers are delegated runs into about 23 printed pages Not all of these items may necessarily be ‘procedural’ e.g.: List of Relatives with reference to an Individual Qualifications of an Independent Director Layers of subsidiaries Disclosures by Holding Company of details pertaining toSubsidiary Companies Etc… Etc…April 3, 2013 6The Companies Bill, 2012Audit & Auditors
  7. 7. CA Kamlesh S. Vikamsey Provisions relating to accounts Provisions relating to audit and auditors Major new definitions Appointment of auditors Rotation of Auditors Qualification of auditors Upper limit on number of audits Right & Duties of Auditors Prohibition on other services Casual vacancy, removal, & resignation of AuditorsCOMPANIES BILL 2012 ….April 3, 2013 7The Companies Bill, 2012Audit & Auditors
  8. 8. CA Kamlesh S. VikamseyCOMPANIES BILL 2012 … AUDIT &AUDITORS Penal Provision for Auditors Cost Audit & Internal Audit Re-opening of Accounts National Financial Reporting Authority (NFRA) Audit Committee Class ActionApril 3, 2013 8The Companies Bill, 2012Audit & Auditors
  9. 9. ACCOUNTS OF THE COMPANYApril 3, 2013The Companies Bill, 2012Audit & Auditors9CA Kamlesh S. Vikamsey
  10. 10. CA Kamlesh S. VikamseyMAJOR NEW DEFINITIONS…… CONT’DFinancial statement (Clause 2(40)) - in relation to a company,includes—(i) a balance sheet as at the end of the financial year;(ii) a profit and loss account, or in the case of a company carrying onany activity not for profit, an income and expenditure account for thefinancial year;(iii) cash flow statement for the financial year;(iv) a statement of changes in equity; If applicable and(v) any explanatory note annexed to, or forming part of, any documentreferred to in sub-clause (i) to sub-clause (iv):Provided that the financial statement, with respect to One PersonCompany, small company and dormant company, may not include thecash flow statementApril 3, 2013 10The Companies Bill, 2012Audit & Auditors
  11. 11. CA Kamlesh S. VikamseyMAJOR NEW DEFINITIONS…… CONT’DPotential impact and some key issues:As per definition of FS – Cash flow is required to be prepared andpresented by all companies whether public or private, whether listed orunlisted unless exempted ones like OPC or small companyPresently, AS-3 is not applicable to SMC’s. Such relaxation given byAS Rules to SMC’s which are not OPC or small Companies is taken awayby this proposalListed Companies are required to present Cash Flow under ‘Indirect’method under listing agreement. The proposed amendment does notspecify the method. Thus, companies other than listed ones, which arepreparing Cash Flow statement may have choice of ‘Direct’ or ‘Indirect’method as per AS-3April 3, 2013 11The Companies Bill, 2012Audit & Auditors
  12. 12. CA Kamlesh S. VikamseyACCOUNTING YEARWhat does the Companies Act, 1956 say ?At present, a company can adopt any accounting year for maintainingits accountsWhat does the Companies Bill, 2012 say ?All companies shall have to follow uniform accounting year ending 31stMarch of every year.Existing companies will have to comply within period of 2 years whenthe Bill Becomes ActExemption can be claimed in respect of foreign subsidiary companieswhich are required by the laws of foreign countries to adopt differentaccounting year, by applying to the tribunalLiberty of company having smaller or larger FY than 12 months seems tohave been takenApril 3, 2013 12The Companies Bill, 2012Audit & Auditors
  13. 13. CA Kamlesh S. VikamseyMAJOR NEW DEFINITIONS…… CONT’D Control (Clause 2(27)) - shall include the right to appoint majorityof the directors or to control the management or policy decisionsexercisable by a person or persons acting individually or in concert,directly or indirectly, including by virtue of their shareholding ormanagement rights or shareholders agreements or votingagreements or in any other mannerDefinition given under AS 21- Control:(a) the ownership, directly or indirectly through subsidiary(ies), of morethan one-half of the voting power of an enterprise; or(b) control of the composition of the board of directors in the case of acompany or of the composition of the corresponding governingbody in case of any other enterprise so as to obtain economicbenefits from its activitiesApril 3, 2013 13The Companies Bill, 2012Audit & Auditors
  14. 14. CA Kamlesh S. VikamseyMAJOR NEW DEFINITIONS…… CONT’DKey Managerial Personnel [Clause 2(51)] - in relation to a company,means(i) the Chief Executive Officer or the managing director or themanager;(ii) the company secretary;(iii) the whole – time Director;(iv) the Chief Financial Officer;(v) such other officer as may be prescribedAs per AS – 18:KMP means those persons who have the authority and responsibility forplanning, directing and controlling the activities of the reportingenterpriseApril 3, 2013 14The Companies Bill, 2012Audit & Auditors
  15. 15. CA Kamlesh S. VikamseyMAJOR NEW DEFINITIONS…… CONT’D Subsidiary company [Clause 2(87)] - in relation to any other company(that is to say the holding company), means a company in which theholding company—(i) controls the composition of the Board of Directors; or(ii) exercises or controls more than one-half of the total share capitaleither at its own or together with one or more of its subsidiarycompanies:Provided that such class or classes of holding companies as may beprescribed shall not have layers of subsidiaries beyond such numbersas may be prescribed In sub-clause (ii) above the words ‘….total share capital’. Presently,the term for this purpose is ‘….total voting power’ (as in case of AS-21) Subsidiaries are defined to include any ‘Associate’ or ‘JV’ – this maygive rise to some practical issuesApril 3, 2013 15The Companies Bill, 2012Audit & Auditors
  16. 16. CA Kamlesh S. VikamseyMAINTENANCE & PRESERVATION OF BOOKS OFACCOUNTSWhat does the Companies Act, 1956 say ? At present, the Act was silent on maintenance of accounts inelectronic form. Preservation of accounts were required for a period not less than 8years immediately preceding the current yearWhat does the Companies Bill, 2012 say ? (Clause 128) The bill seeks to permit maintenance of accounts in electronic form The Bill provides where investigation is ordered in respect of acompany, the Central Government may direct that accounts maybe kept for such longer period as it thinks fit. (Otherwise 8 years)April 3, 2013 16The Companies Bill, 2012Audit & Auditors
  17. 17. CA Kamlesh S. VikamseyDEPRECIATIONWhat does the Companies Act, 1956 say ?Sch XIV read with AS 695% of original cost to be depreciated over specified periodLow value items (<Rs 5K) to be fully depreciatedSeparate rates for Intangibles/electricity companies/EST etcWhat does the Companies Bill, 2012 say ? (Schedule II)Schedule II provides useful Lives of assets and no rates (SLM or WDV)No provision for low value items or rates for intangiblesSchedule Rate for some items like Building, Furniture etc are differentThe balance of WDV (depreciable amount)– after Schedule II is effectiveto be depreciated as per provisions of this scheduleCompanies may face difficulties in year of transitionApril 3, 2013 17The Companies Bill, 2012Audit & Auditors
  18. 18. CA Kamlesh S. VikamseyBONUS SHARE Presently, no provision on issue of bonus shares by Companiesexcept that Table A mentions about capitalization of profits andreserves; but it does not specially prohibit capitalization ofrevaluation reserve. In case of listed entities, SEBI regulates issue of Bonus shares The guidance note on availability of Revaluation Reserve for issueof Bonus shares issued by the ICAI states that a company is notpermitted to issue bonus shares out of reserve created byrevaluation of its assets. In Bhagwati Developers Vs peerless General finance andInvestment Co. (2005), SC held that and unlisted company canissue bonus share out of revaluation reserve.Now clause 63 of the Bill contains the enabling provision of issue ofbonus sharesApril 3, 2013 18The Companies Bill, 2012Audit & Auditors
  19. 19. CA Kamlesh S. VikamseyBONUS SHARE ….CONT’DApril 3, 2013 19 Clause 63 - A company may issue fully paid-up bonus shares to itsmembers, in any manner whatsoever, out of—(i) its free reserves;(ii) the securities premium account; or(iii) the capital redemption reserve account:Provided that no issue of bonus shares shall be made by capitalizingreserves created by the revaluation of assets. Pre-condition for issue of Bonus share - No company shall capitalizeits profits or reserves for the purpose of issuing fully paid-up bonusshares, unless— it is authorized by its articles; it has, on the recommendation of the Board, been authorized inthe general meeting of the company;The Companies Bill, 2012Audit & Auditors
  20. 20. CA Kamlesh S. VikamseyBONUS SHARE ….CONT’DApril 3, 2013 20 it has not defaulted in payment of interest or principal in respectof fixed deposits or debt securities issued by it; it has not defaulted in respect of the payment of statutory duesof the employees, such as, contribution to provident fund,gratuity and bonus; the partly paid-up shares, if any outstanding on the date ofallotment, are made fully paid-up; it complies with such conditions as may be prescribed bonus shares shall not be issued in lieu of dividend.The Companies Bill, 2012Audit & Auditors
  21. 21. CA Kamlesh S. VikamseyAUTHENTICATION OF FS21 Bill requires that Both Standalone and consolidated financialstatement to be signed by following person: Chairperson of the company where he is authorized by the BOD 2 director out of which one shall be managing director Chief Executive Officer, if he is director of the company Chief Financial Officer Company Secretary No separate requirement for banking company as in Companies Act,1956 In present Act, CFO not required to sign the FS, but for listed companyCFO is required to issue certificate to Board that FS are free frommaterial misstatementApril 3, 2013The Companies Bill, 2012Audit & Auditors
  22. 22. CA Kamlesh S. VikamseyREOPENING OF ACCOUNTSWhat does the Companies Act, 1956 say ? At present there is no provision to reopen the accounts of the companyWhat does the Companies Bill, 2012 say? (Clause no. 130 & 131) : A company shall re-open its books of account and recast its financialstatements, only if an application in this regard is made by the CentralGovernment, the Income-tax authorities, the Securities and ExchangeBoard, any other statutory regulatory body or authority or any personconcerned and an order is made by a court of competent jurisdiction orthe 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:April 3, 2013 22The Companies Bill, 2012Audit & Auditors
  23. 23. CA Kamlesh S. VikamseyREOPENING OF ACCOUNTS…. CONT’D The court or the Tribunal, as the case may be, shall give notice to theCentral Government, the Income-tax authorities, the Securities andExchange Board or any other statutory regulatory body or authorityconcerned and shall take into consideration the representations, ifany, made by that Government or the authorities, Securities andExchange Board or the body or authority concerned before passingany order under this section The accounts so recasted or revised shall be final Clause 131 provides that it is also possible for the BoD to revise thefinancial statements or Board’s report for any of the 3 previousfinancial years if they find that the statement and / or the report isnot in accordance with the requirement of Clause 129 or 134April 3, 2013The Companies Bill, 2012Audit & Auditors23
  24. 24. CA Kamlesh S. VikamseyREOPENING OF ACCOUNTS…. CONT’D The Board will seek approval of Tribunal for the same and beforegiving approval the tribunal shall give notice to the Government andthe Income tax Department and invite their comments Such revision can be made only once in a financial year The board shall give the detailed reasons for revision to the membersand send revised copies to members and RoC. The revised financialstatements shall be approved by members in general meetingApril 3, 2013 24The Companies Bill, 2012Audit & Auditors
  25. 25. CA Kamlesh S. VikamseyREOPENING OF ACCOUNTS…. CONT’DPotential impact and some key issues:Recently, SEBI has issued one circular, pertaining to qualifications inaccounts of listed Companies – which may require such companies torevise or restate their FSMCA circular allows a company to reopen and revise its accounts aftertheir adoption at AGM in some circumstancesNo time-limit prescribed for reopening and revising the accounts orFS consequent to Court or tribunal orderFor voluntary revision, BoD will seek approval from the tribunal, andtribunal shall give notice to the Government and the Income taxDepartment and invite their comments. What about SEBI, RBI, IRDAetc..??April 3, 2013 25The Companies Bill, 2012Audit & Auditors
  26. 26. CA Kamlesh S. VikamseyCONSOLIDATED FINANCIAL STATEMENTS(CFS)What does the Companies Act, 1956 say ? No ProvisionWhat does the Listing Agreement say ? (Clause no. 41) : Holding Co. may submit quarterly and year to date consolidatedfinancial results to the stock exchanges. It is mandatory for the Holding Co. to submit annual auditedconsolidated financial results to the stock exchanges .What does the Companies Bill, 2012 say ? (Clause no. 129) : Holding Co. to prepare Consolidated Financial Statement in additionto Stand alone financials. (i.e. Earlier such requirement for only listedcompany, now it is applicable to all (private or public) if they have anysubsidiary company Subsidiary to include associate company and joint ventureApril 3, 2013 26The Companies Bill, 2012Audit & Auditors
  27. 27. CA Kamlesh S. Vikamsey Consolidated Financial Statement to be prepared by the Holding the same form and manner, as that of its own. Consolidated Financial Statement shall also be laid before A.G.M. ofthe Holding Co. Therefore, Auditor’s report on CFS will have to beaddressed to members Holding Co. to attach with its financial statement, a separatestatement containing the salient features of the financial statementof its subsidiaries, in to be prescribed form. (Presently Sec. 212) Schedule III (earlier Sch VI) contains a statement of particulars to begiven as part of CFSApril 3, 2013 27CFS….CONT’DThe Companies Bill, 2012Audit & Auditors
  28. 28. CA Kamlesh S. VikamseyName of theEntity in theNet Assets i.e. total assets minus total liabilities Share in profit or lossAs % of Consolidated netassetsAmount As % of Consolidatedprofit or lossAmountParentSubsidiariesIndianForeignMinority Interest in all SubsidiariesAssociates (Investment as per the equity method)IndianForeignJoint Venture (as per proportionate consolidation/ investment as per the equity method)IndianForeignApril 3, 2013 28In Consolidated Financial Statements, the following shall be disclosed by way ofadditional information:CFS….CONT’DThe Companies Bill, 2012Audit & Auditors
  29. 29. CA Kamlesh S. VikamseyPotential impact and some key issues:For the first time, Consolidated Financial Statements (CFS) areaccorded recognition under Corporate Law; in fact, where a companyhas subsidiary and/or joint venture and/or an associate, the Billprovides for mandatory preparation of CFSThe CFS are also required to be circulated to members and laid beforeAGM for approval. Currently clause 32 of Listing Agreement requiredlisted companies to prepare and publish CFS but same was not requiredto be laid before AGM for approvalIf company has only associate or JV & no subsidiary, provision seemsto make CFS mandatory even for such cases; which is not required hadthe provisions of AS-21 been followedApril 3, 2013 29CFS….CONT’DThe Companies Bill, 2012Audit & Auditors
  30. 30. CA Kamlesh S. VikamseyPotential impact and some key issues:The Bill does not contain any provision which corresponds to provisionsof Section 212 of the Act and it appears that details required to be givenin respect of subsidiary companies u/s 212 are dispensed withThe impact of all the proposal is that all the Companies (whether listedor unlisted and whether public or private) having subsidiary or Associateor JV would have to prepare and present CFS.It is often noted that in some businesses (like Builders & Developers) –associate or JV is there. In addition to CFS, the statement of detailscontained in Schedule III and statement of salient features of FS ofsubsidiaries is also to be prepared and presented. The management andauditors of such Companies need to gear up to meet this requirements ofCFSApril 3, 2013 30CFS….CONT’DThe Companies Bill, 2012Audit & Auditors
  31. 31. AUDIT & AUDITORSApril 3, 2013The Companies Bill, 2012Audit & Auditors31CA Kamlesh S. Vikamsey
  32. 32. CA Kamlesh S. VikamseyMAJOR NEW DEFINITIONS Auditing Standards [Clause 2(7)] : means the standards of auditing orany addendum thereto for companies or class of companies referredto in Clause 143 (10);(Clause 143(10) - The Central Government may prescribe the standardsof auditing or any addendum thereto, as recommended by the ICAI, inconsultation with and after examination of the recommendationsmade by the National Financial Reporting Authority )The Standards on Auditing (SA) formulated by ICAI are in sync withInternational Standards on Auditing (ISA) with minor differences. TheSA to be formed or recommended by NFRA may also need to be onthe lines of best international practicesApril 3, 2013 32The Companies Bill, 2012Audit & Auditors
  33. 33. CA Kamlesh S. VikamseyAPPOINTMENT OF AUDITORSWhat does the Companies Act, 1956 say ? (Section 224) :Every Company to appoint auditor or auditors at each A.G.M. to hold office until theconclusion of the next A.G.M.What does the Companies Bill, 2012 say ? (Clause no. 139) :Every Company, to appoint an individual or a firm as an auditor, at the first A.G.M. ofthe Company. [139(1)]Auditor to hold office from the conclusion of that meeting till the conclusion of its sixthA.G.M. and thereafter till the conclusion of every sixth A.G.M. Provided that thecompany shall place the matter relating to such appointment for ratification by membersat every annual general meeting.Where at AGM, no auditor is appointed/re-appointed, the existing auditor shallcontinue to be the auditor of Company [139(10)]Members of a Company may resolve to rotate audit partners and audit team at suchintervals as may be resolved by members or audit to be conducted by more than oneauditor [139(3)]Where a company is required to constitute an Audit Committee under section 177, allappointments, including the filling of a casual vacancy of an auditor under this sectionshall be made after taking into account the recommendations of such committee.April 3, 2013 33The Companies Bill, 2012Audit & Auditors
  34. 34. CA Kamlesh S. VikamseyAPPOINTMENT OF AUDITORS … CONT’DPotential Impact and some key issues:Presently, BOD of newly incorporated company is required to appointstatutory auditor within 30 days of incorporation which is continued but it isalso provided that at first AGM an auditor shall be appointed for term of fiveyearsThe term of auditor would be that of five years in case of all companies otherthan first year. It is not clear whether ‘ratification’ by members every year –would amount to re-appointment OR not ratifying would tantamount toremovalPresently, in cases where no auditor is appointed/re-appointed at AGM, CGhas the power to make such an appointment but Bill provides that in such cases– the existing auditor shall continue. The clarity about term of auditor androtation etc seems lackingThe rotation of audit partner is presently regulated by mandatory SQC-1. Nowa right is proposed to be given to members of appointing company to providefor such rotationApril 3, 2013 34The Companies Bill, 2012Audit & Auditors
  35. 35. CA Kamlesh S. VikamseyROTATION OF AUDITORSWhat does the Companies Act, 1956 say ? No provision relating to rotation of auditorsWhat does the Companies Bill, 2012 say ? (Clause no. 139)Listed company or such class or classes of companies as may be prescribed,not to appoint or re-appoint —a) an individual as auditor for more than one term of five consecutiveyears; andb)an audit firm as auditor for more than two terms of five consecutive years.Provided that—(i) an individual auditor who has completed his term of 5 years, not be re-appointed as auditor in the same company for five years from the completionof his term;(ii) an audit firm which has completed its 2 terms of 5 years, not to be re-appointed as auditor in the same company for five years from the completion ofsuch termApril 3, 2013 35The Companies Bill, 2012Audit & Auditors
  36. 36. CA Kamlesh S. VikamseyROTATION OF AUDITORS….CONT’DProvided further that as on the date of appointment no audit firm:(a)having a common partner or partners to the other audit firm;(b)whose tenure has expired in a company in the immediately preceding thefinancial year;(c)shall not be appointed as auditor of the same company for a period offive years.Existing companies have to comply with the requirements within 3 yearsfrom the date of commencement of the ActApril 3, 2013 36The Companies Bill, 2012Audit & Auditors
  37. 37. CA Kamlesh S. VikamseyROTATION OF AUDITORS….CONT’DPotential Impact and some key issues :Whether rotation requirement is prospectively or retrospectively?If retrospective – the existing auditors (even if completed term of 5 or10 years) can continue up to 3 years from the date of commencement ofthe new ActIf prospective – whether time of 3 years (plus 5 years or 10 years) isgiven to the existing auditor?RBI & IRDA requirement concerning rotation are more stringent and willcontinue to override the provisions of BIllRBI/IRDA requirements for joint auditors of insurance companies are morestringent and may continue to applyThe widespread rotation of auditors would have impact on time/efforts of theauditors in first year of the engagement as new auditor would take bit moretime in assessing the prevalent systems and controlsOne has to wait for the Rules pertaining to Rotation [139(4)]April 3, 2013 37The Companies Bill, 2012Audit & Auditors
  38. 38. CA Kamlesh S. VikamseyQUALIFICATIONS OF AUDITORSWhat does the Companies Act, 1956 say ? (Section 226) :A person shall be CA or firm of CA (Multi Disciplinary Professional Firm)The person shall not be a Body Corporate, an officer or employee of the company, aperson who is a partner, or who is in the employment, of an officer or employee of thecompany, a person who is indebted to the company for an amount exceeding onethousand rupees, or who has given any guarantee or provided any security in connectionwith the indebtedness of any third person to the company for an amount exceedingRs.1,000 and a person holding any security of that companyWhat does the Companies Bill, 2012 say ? (Clause no. 141) :Following modifications and additions are made to the qualificationsBody corporate doesn’t include LLP (to facilitate LLP’s being appointed as auditors)A person is not eligible for appointment if he or his relative or his partner(a) holds any security or interest in the company, its subsidiary, its holding orassociate company or subsidiary of such holding company. This will not apply if thesecurity or interest is less than Rs.1,000 held by his relative(b) is indebted to or who has given guarantee for any debt in relation thecompany, its subsidiary, its holding or associate company or subsidiary of such holdingcompany of such amount as may be prescribedApril 3, 2013 38The Companies Bill, 2012Audit & Auditors
  39. 39. CA Kamlesh S. VikamseyQUALIFICATIONS OF AUDITORS….CONT’D A person is not eligible for appointment if he has direct or indirectbusiness relationship with the company, its subsidiary, its holding orassociate company or subsidiary of such holding company A person is not eligible for appointment if he/she is in full timeemployment elsewhere. A person is not eligible for appointment if he is relative of a directoror is in the employment of the company as a director or KMP A person is not eligible for appointment if he has been convicted by acourt of an offence involving fraud and a period of ten years has notelapsed from the date of such conviction A person is also not eligible for appointment if its subsidiary or itsassociate or any other form of entity is engaged in consulting andspecified services as provided in Clause 144 on the date ofappointmentApril 3, 2013 39The Companies Bill, 2012Audit & Auditors
  40. 40. CA Kamlesh S. VikamseyQUALIFICATIONS OF AUDITORS….CONT’DPotential Impact and some key issues: The Bill requires a firm in which majority of partners (instead of allPartners) are practicing CA’s can also be appointed; such a provision isput keeping in mind the multi-disciplinary firms (in which professionalsfrom variety of fields can be partners, like CA, Costing, Secretary orLegal etc.) Presently – relative holding securities would not disqualify theappointment of an auditor; it is hoped that definition of ‘relative’ forthis clause is confined only to such relatives who are financialdependant on auditor The condition of disqualification pertaining to holding of securities ofan ‘Associate Company’ is newly insertedApril 3, 2013 40The Companies Bill, 2012Audit & Auditors
  41. 41. CA Kamlesh S. VikamseyQUALIFICATIONS OF AUDITORS….CONT’DPotential Impact and some key issues: The amount of indebtedness of auditor, relative, partner to Companyor holding or subsidiary should not exceed the sum as may beprescribed One of the restrictions refers to entering into Business Relationshipwith the Company by the person or Firm. This restriction does notappear to apply to relative of person proposed to be appointed asauditor. Moreover, it is to be seen as to which business relationshipsare prescribed by the Government under this provisionsApril 3, 2013 41The Companies Bill, 2012Audit & Auditors
  42. 42. CA Kamlesh S. VikamseyUPPER LIMIT ON NUMBER OF AUDITSWhat does the Companies Act, 1956 say ? [Section 224 (1B)] Ceiling on audit is as under :(a) in the case of a person or firm holding appointment as auditor of anumber of companies each of which has a paid-up share capital of lessthan rupees 25 lakhs, 20 such companies;(b) in any other case, 20 companies, out of which not more than 10 shallbe companies each of which has a paid-up share capital of Rs 25 lakhsor more In computing the Specified number of audits for the purpose of Section224(1B), the following audit shall not be taken into consideration :1. Audit of Private Company2. Audit of Guarantee Companies not having Share Capital3. Special Audits4. Audit of Foreign Companies5. Branch AuditApril 3, 2013 42The Companies Bill, 2012Audit & Auditors
  43. 43. CA Kamlesh S. VikamseyUPPER LIMIT ON NUMBER OF AUDITS…..CONT’DWhat does the Companies Bill, 2012 say ? (Clause no. 141) A person or a partner of a firm holding appointment as auditor ofcompany, will not be eligible for appointment, if such persons or partneris at the date of such appointment or reappointment holdingappointment as auditor of more than 20 companies No exclusion permitted in Bill while calculating the number of 20Company AuditsAs per ICAI Code of Ethics, a person can be appointed as an auditor onlyfor 30 entities. Provided that the number of audit assignments of publiccompanies each of which has a paid-up share capital of Rs. 25 lakhs ormore, shall not exceed 10The upper limit as per Bill being more stringent, the same will applyApril 3, 2013 43The Companies Bill, 2012Audit & Auditors
  44. 44. CA Kamlesh S. VikamseyRIGHTS OF AUDITORWhat does the Companies Act, 1956 say ? (Section 227) :Every auditor of a company shall have a right of access at all times to thebooks of account and vouchers of the companyWhat does the Companies Bill, 2012 say ? (Clause no. 143) :Every auditor of a company shall have a right of access at all times to thebooks of account and vouchers of the company; further if he is an auditorof a holding company, shall also have right to access to the records of all itssubsidiaries in so far as it relates to the consolidation of its financialstatements with that of its subsidiariesProvisions of SA 600 compared to ISA 600 may be noted in this respect vis avis right of Parent Company auditor with respect to books & records ofComponent;April 3, 2013 44The Companies Bill, 2012Audit & Auditors
  45. 45. CA Kamlesh S. VikamseyDUTIES OF AUDITOR – INTERNAL CONTROL &FRAUDWhat does the Companies Act, 1956 say ? (Section 227) :CARO required to report on internal control matter relating to the inventory,fixed assets and sale of goods and servicesCARO required to report of any fraud on or by the company has beennoticed or reported during the yearWhat does the Companies Bill, 2012 say ? (Clause no. 143) : (only changes)Auditor shall report that company has adequate internal financial controlssystem in place and the operating effectiveness of such controls.If an auditor of a company, in the course of the performance of his duties asauditor, has reason to believe that an offence involving fraud is being or hasbeen committed against the company by officers or employees of thecompany, he shall immediately report the matter to the CG within such timeand in such manner as may be prescribedWhether had auditor has sought the information/explanations which heconsidered necessary and receivedApril 3, 2013 45The Companies Bill, 2012Audit & Auditors
  46. 46. CA Kamlesh S. VikamseyDUTIES OF AUDITOR – INTERNAL CONTROL &FRAUD… CONT’DPotential Impact and some key issues:SA 265 requires auditor to assess the Internal control and tocommunicate the deficiency therein to TCWG but proactive statementpertaining to adequacy of internal financial control system is newrequirement in the main audit reportAuditors duty relating to intimation of possible or actual fraud by oragainst the Company is new requirement; it would have been better if thisrequirement had been made applicable only to material/significant items.Appropriate guidance from ICAI on this reporting requirement would be ofhelp to comply with this new requirementApril 3, 2013 46The Companies Bill, 2012Audit & Auditors
  47. 47. CA Kamlesh S. VikamseyAUDITORS ATTENDANCE AT GENERALMEETINGWhat does the Companies Act, 1956 say ? (Section 231) : All notices and other communications relating to general meeting shallbe sent to the auditor and auditor has right to attend any generalmeeting and be heard on matters which concerns him as an auditorWhat does the Companies Bill, 2012 say ? (Clause no. 146) : The auditor, unless exempted by the company, is required to attendany general meeting by himself or through his authorisedrepresentative who is qualified to be an auditor.It would have been appropriate if Auditors attendance was madeapplicable only at AGM or at such EGM where agenda items includematters pertaining to finance and accountsApril 3, 2013 47The Companies Bill, 2012Audit & Auditors
  48. 48. CA Kamlesh S. VikamseyPROHIBITION ON OTHER SERVICESWhat does the Companies Act, 1956 say ? No specific provisionWhat does the Companies Bill, 2012 say ? (Clause no. 144): Auditor not to render, directly or indirectly, following services to the Company or itsHolding Company or Subsidiary Company or Associate Company: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;g)Any other financial services;h)Management services; andi)any other kind of services as may be prescribed.Provided that an auditor or audit firm who or which has been performing any non auditservices on or before the commencement of this Act shall comply with the provisions ofthis section before the closure of the first financial year after the date of suchcommencementApril 3, 2013 48The Companies Bill, 2012Audit & Auditors
  49. 49. CA Kamlesh S. VikamseyOTHER SERVICES….CONT’DPotential Impact an some key issues:The CoE of ICAI also presently prohibit such services by auditor whichwould create conflict with independenceTerms such as investment advisory services, outsourced financial serviceand management services are not defined; Management consultancyservices are described in CoE of ICAI. Definition‘Directly or Indirectly’ in clause 144 shall include rendering of services:Either by auditor himself or through relative or other associated personor entity over which he has significant influence or control or whose name,trademark or brand is used by himIn case of Firm, either by itself or through its parent, subsidiary, associateor any entity over which firm has significant influence or control or whosename, trademark or brand is used by it or any of its partnersApril 3, 2013 49The Companies Bill, 2012Audit & Auditors
  50. 50. CA Kamlesh S. VikamseyOTHER SERVICES….CONT’DPotential Impact and some key issues:Questions as to whether tax representation, tax consultancy services,assisting management in compliance of several laws (like TDS review,Input Service Tax booking methodology etc.) would get covered underprohibited services or not, need to be carefully considered by theCompanies and the AuditorsThe restrictive provisions, as drafted, do not contain any thresholdeither of the Companies or of the transactions or services that areproposed to be covered. As such, the restrictive provisions are applicableto all companies – small or big, private or public and listed or unlistedApril 3, 2013 50The Companies Bill, 2012Audit & Auditors
  51. 51. CA Kamlesh S. VikamseyCASUAL VACANCYWhat does the Companies Act 1956 say? [Section 224 (6)] :Casual vacancy may be filled by the BoD, provided where such vacancyis caused because of resignation of an auditor it shall only be filled by thecompany in general meetingWhat does the Companies Bill, 2012 say (Clause no. 139) :Casual vacancy to be filled by the BoD within 30 days, if such vacancyarises because of resignation of an auditor then it can be filled by BoD,but within three months thereafter ratification from members at generalmeeting should be obtainedApril 3, 2013 51The Companies Bill, 2012Audit & Auditors
  52. 52. CA Kamlesh S. VikamseyREMOVAL OF AUDITORSWhat does the Companies Act 1956 say? [Section 224 (5)] :At a general meeting company can remove the auditors by passing aspecial resolution and after obtaining approval from the centralgovernmentWhat does the Companies Bill, 2012 say ( Clause no. 140) :Central government approval and Special resolution required toremove auditor before his termPotential impact and some key issues:Removal of duly appointed Auditor is continued to be difficult in theBill. A company can remove the auditor before expiry of his five yearterm only by passing a special resolution at General Meeting and afterobtaining prior approval from the central governmentApril 3, 2013 52The Companies Bill, 2012Audit & Auditors
  53. 53. CA Kamlesh S. VikamseyRESIGNATION OF AUDITORSWhat does the Companies Act, 1956 say ? No provision of filling any document with ROC on resignationWhat does the Companies Bill, 2012 say ? (Clause no. 140) :The auditor who has resigned from the company shall file within aperiod of 30 days from the date of resignation, a statement in theprescribed form with the company and the Registrar, and in case ofGovernment companies and Government controlled companies, theauditor shall also file such statement with the C&AG, indicating thereasons and other facts as may be relevant with regard to his resignationIf the auditor does not comply with the above requirement, he or itshall be punishable with fine which shall not be less than Rs.50,000 butwhich may extend to Rs.5,00,000April 3, 2013 53The Companies Bill, 2012Audit & Auditors
  54. 54. CA Kamlesh S. VikamseyPENAL PROVISIONS FOR AUDITORSWhat does the Companies Bill, 2012 say? (Clause no. 140) : The Clause gives very wide powers to the tribunal to take action againstthe auditor or the audit firm If the Tribunal is satisfied that the auditor of a company has, whetherdirectly or indirectly, acted in a fraudulent manner or abetted or colludedin any fraud by, or in relation to, the company or its directors or officers,it may, by order, direct the company to change its auditors If the application is made by the Central Government and the Tribunal issatisfied that any change of the auditor is required, it shall within 15 daysof receipt of such application, make an order that he shall not function asan auditor and the Central Government may appoint another auditor inhis placeApril 3, 2013 54The Companies Bill, 2012Audit & Auditors
  55. 55. CA Kamlesh S. VikamseyPENAL PROVISIONS FOR AUDITORS….CONT’D The contravention covered may relate to appointment/rotation,powers & duties, providing of prohibited services, reportingrequirements etc. The punishment may include a fine not less than Rs25,000 but which may extend to Rs 5 Lakh. If the contravention isfound to be knowingly and willfully committed with intention todeceit tax authorities, members or creditors, the fine may be at leastRs 1 Lakh and extend up to Rs 25 Lakhs and imprisonment which mayextend up to 1 year. Refund of fees received and paying of damagesto aggrieved parties may also be ordered by authorities in willfuldefault cases The auditor against whom final order has been passed by the Tribunalshall not be eligible to be appointed as an auditor of any company fora period of 5 years from the date of passing of the order and theauditor shall also be liable for action under Clause 447April 3, 2013 55The Companies Bill, 2012Audit & Auditors
  56. 56. CA Kamlesh S. VikamseyINTERNAL AUDITWhat does the Companies Act, 1956 say ? No provision except reference in CAROWhat does the Companies Bill, 2012 say? (Clause no. 138) : Such class or classes of companies as may be prescribed, shall berequired to appoint an internal auditor, who shall either be a –- Chartered Accountant; or- Cost Accountant; or- such other professional as may be decided by the Board;to conduct internal audit of the functions and activities of theCompany.April 3, 2013 56The Companies Bill, 2012Audit & Auditors
  57. 57. CA Kamlesh S. VikamseyINTERNAL AUDIT…. CONT’DPotential impact and some key issues:The Bill seeks to make internal audit mandatory in case of class ofcompanies to be specified. The rules pertaining to this would beprescribed later.Presently there is no such requirement except that under CARO, in caseof some specified companies, statutory auditors are required tocomment upon adequacy and coverage of Internal Audit SystemApril 3, 2013 57The Companies Bill, 2012Audit & Auditors
  58. 58. CA Kamlesh S. VikamseyNATIONAL FINANCIAL REPORTING AUTHORITY(NFRA)What does the Companies Bill, 2012 say? (Clause no. 132, 133 and 143) : NACAS will be re-named as NFRA (Attempted to be on-line of PCAOB) The Government will notify the accounting standards as recommendedby ICAI in consultation with NFRA Similarly, the Government will notify the auditing standards asrecommended by ICAI in consultation with NFRA. This will mean thatthe present authority of ICAI to formulate auditing standards will nowbe taken over by the Government NFRA has been given powers to monitor and ensure compliance withaccounting and auditing standards.April 3, 2013 58The Companies Bill, 2012Audit & Auditors
  59. 59. CA Kamlesh S. VikamseyNFRA….CONT’DApril 3, 2013 59 Oversee the quality of service of the profession with ensuringcompliance with such standards and suggest measures required forimprovement in quality of service NFRA will have powers to investigate, either suo moto, or onreference made to it by central government for such class ofcompanies and other bodies corporate or persons, the matters ofprofessional or other misconduct committed by CA. (It include bothpracticing & non-practicing CA?) It is proposed to grant powers to NFRA equivalent to Civil Court.(i.e.summoning and enforcing attendance of persons & examining themon oath, requiring production of books of account & other records,carrying out inspection of books & other records etc.)The Companies Bill, 2012Audit & Auditors
  60. 60. CA Kamlesh S. VikamseyNFRA….CONT’D Once NFRA starts disciplinary proceedings, the respective Institutes,which are statutory bodies, can’t take any action against member or firm If found guilty the NFRA has power to impose minimum penalty of Rs.1lac which may exceed 5 times for member and Rs.10 lac which mayexceed 10 times for firm and debar from professional practice (Member& Firm) for minimum 6 months and maximum upto 10 years. Appeal against NFRA’s order shall lie to National Financial ReportingAppellate Authority to be constituted under this sectionApril 3, 2013 60The Companies Bill, 2012Audit & Auditors
  61. 61. CA Kamlesh S. VikamseyNFRA….CONT’DPotential Impact and some key issues:Some important powers and duties of ICAI are sought to be granted to NFRAlike auditing standard formulations, overseeing the quality of audit services andpenalizing the errant members etc.It is proposed that till such time any standards on auditing are notified byNFRA, the standards on auditing issued by ICAI shall be considered to be notifiedauditing standards under the provisions of new ActICAI disciplinary committee has power to impose maximum penalty either ofRs 1 Lac or Rs 5 lac depending on the nature of misconduct & debar the name ofthe member either 3 month to life timeApril 3, 2013 61The Companies Bill, 2012Audit & Auditors
  62. 62. CA Kamlesh S. VikamseyNFRA….CONT’D The disciplinary mechanism of ICAI (which is also set up under an Act ofParliament) has several government nominees on its Board and thiscommittee has been working reasonably well considering the fact that manydecisions rendered by it on disciplinary matters have been tested and, byand large, confirmed by High courts. If there were some issues with delay in delivering the decisions of disciplinarymechanism of ICAI, those issues could have been resolved and strength ofthis standing committee of ICAI could have been increased. InsteadGovernment thought it fit to create another regulatory authority – NFRA.April 3, 2013 62The Companies Bill, 2012Audit & Auditors
  63. 63. CA Kamlesh S. VikamseyAUDIT COMMITTEEApplicabilityWhat does the Companies Act, 1956 say ? (Sec 292A) :Every Public Company having paid-up share capital 5 crore or more is requiredto constitute the audit committeeWhat does the listing agreement say ? (Clause no. 49) :All listed CompaniesWhat does the Companies Bill, 2012 say ? (Clause no. 177) :This requirement for listed company or prescribed class of companiesApril 3, 2013 63The Companies Bill, 2012Audit & Auditors
  64. 64. CA Kamlesh S. VikamseyAUDIT COMMITTEE…. CONT’DConstitutionWhat does the Companies Act, 1956 say ? (Sec 292A) :Audit Committee should consist of minimum 3 directors of which 2/3member will be directors, other than managing/WTDWhat does the listing agreement say ? (Clause no. 49) :The audit committee shall have minimum 3 directors as members. 2/3 ofthe members of audit committee shall be independent directors. If chairmanid NED – 1/3 of Board should be ID, otherwise 1/2What does the Companies Bill, 2012 say ? (Clause no. 177) :The Audit Committee shall consist of a minimum of 3 directors withindependent directors forming a majorityApril 3, 2013 64The Companies Bill, 2012Audit & Auditors
  65. 65. CA Kamlesh S. VikamseyAUDIT COMMITTEE…. CONT’DQualificationWhat does the Companies Act, 1956 say ? (Sec 292A) :No such requirementWhat does the listing agreement say ? (Clause no. 49) :All members of audit committee shall be financially literate and at least 1member shall have accounting or related financial management expertiseWhat does the Companies Bill, 2012 say ? (Clause no. 177) :Majority of members of Audit Committee including its Chairperson shall bepersons with ability to read and understand, the financial statementApril 3, 2013 65The Companies Bill, 2012Audit & Auditors
  66. 66. CA Kamlesh S. VikamseyAUDIT COMMITTEE…. CONT’DRole and ResponsibilityWhat does the Companies Act, 1956 say ? (Sec 292A) : Board will determine the term of reference for audit committeeWhat does the listing agreement say ? (Clause no. 49) : Listing agreement prescribed the role and responsibility of the AuditcommitteeWhat does the Companies Bill, 2012 say ? (Clause no. 177) : The bill prescribes certain specific responsibility in addition to the term ofreference prescribe by the board. Some key additional responsibilitiesprescribed in the bill Vs listing agreement are as below: To review and monitor the auditor’s independence and performance, andeffectiveness of audit process Approval or any subsequent modification of transactions of the company withrelated parties Scrutiny of inter-corporate loans and investments Valuation of undertakings or assets of the company, wherever it is necessary Monitoring the end use of funds raised through public offers and related mattersApril 3, 2013 66The Companies Bill, 2012Audit & Auditors
  67. 67. CA Kamlesh S. VikamseyAUDIT COMMITTEE…. CONT’DWhistle Blower Policy (Vigil Mechanism)What does the Companies Act, 1956 say ? (Sec 292A) : No such requirement in the actWhat does the listing agreement say ? (Clause no. 49) : Such requirement is a non-mandatory requirement under the listingagreementWhat does the Companies Bill, 2012 say ? (Clause no. 177) : Every listed company or such class or classes of companies, as may beprescribed, shall establish a vigil mechanism for directors and employees toreport genuine concerns in such manner as may be prescribed. The vigilmechanism shall provide for adequate safeguards against victimisation ofpersons who use such mechanism and make provision for direct access tothe chairperson of the Audit Committee in appropriate or exceptional cases.Further, the details of establishment of such mechanism shall be disclosedby the company on its website, if any, and in the Board’s reportApril 3, 2013 67The Companies Bill, 2012Audit & Auditors
  68. 68. CA Kamlesh S. VikamseyAUDIT COMMITTEE…. CONT’DPotential Impact and some key issues:Prescribed class of companies to be definedPrescribed class of companies, non-listed companies may need to changethe composition of the audit committee formed under provisions of S. 292AAs the definition of independent Director has been made more stringentwith more onerous responsibilities, availability of suitable persons to actindependent director may be challengeApril 3, 2013 68The Companies Bill, 2012Audit & Auditors
  69. 69. CA Kamlesh S. VikamseyCLASS ACTIONWhat does the Companies Act, 1956 say ?No ProvisionWhat does the Companies Bill, 2012 say ? (Clause no. 245) : Application before Tribunal to be filed by the members or depositors of theCompany if they are of the opinion that the management or control of theaffairs of the company are being conducted in a manner prejudicial to theinterests of the company or its members or depositors Application to be filed by :In the case of Members:- in the case of a Company having share capital, not less than 100members of the Company or not less than such % of the total no. of itsmembers as may be prescribed, whichever is less; or- by the members holding not less than such % of the issued share capitalof the Company as may be prescribedApril 3, 2013 69The Companies Bill, 2012Audit & Auditors
  70. 70. CA Kamlesh S. VikamseyCLASS ACTION….CONT’D In the case of Deposits:- not less than 100 depositors of the Company or not less than such % ofthe total no. of depositors as may be prescribed, whichever is less; or- depositors holding such % of the total deposits of the Company as may beprescribed The order passed by the Tribunal shall be binding on:- the company and all its members, depositors; and- auditor including audit firm or expert or consultant or advisor or anyother person associated with the Company Clause 245 (2) –Where the members or depositors seek any damages or compensation ordemand any other suitable action from or against an audit firm, the liabilityshall be of the firm as well as of each partner who was involved in makingany improper or misleading statement of particulars in the audit report orwho acted in a fraudulent, unlawful or wrongful mannerApril 3, 2013 70The Companies Bill, 2012Audit & Auditors
  71. 71. CA Kamlesh S. VikamseyCLASS ACTION….CONT’D Application can be filed to claim damages or compensation or demand anyother suitable action from or against —(i) the auditor including audit firm of the company for any improper ormisleading statement of particulars made in his audit report or for anyfraudulent, unlawful or wrongful act or conduct; or(ii) any expert or advisor or consultant or any other person for any incorrector misleading statement made to the company or for any fraudulent,unlawful or wrongful act or conduct or any likely act or conduct on hispart Stringent imprisonment and fine shall be imposed on the company in case ofdefault An application for class action may also be filed by a person or association ofpersons representing the affected personsApril 3, 2013 71The Companies Bill, 2012Audit & Auditors
  72. 72. ANY QUESTIONS ???????April 3, 2013The Companies Bill, 2012Audit & Auditors72CA Kamlesh S. Vikamsey
  73. 73.