Accounting and Financial Reporting in New Environment


By

Manish Madan
Research Scholar
University of Rajasthan
 


Abstract:

The existing Companies Act was enacted in 1956 with the object to consolidate the law relating to corporate sector and to regulate its activities. This Act is in force for the last over 56 years and has been amended several times. In view of changes in national and international economic environment and growth of our economy, the Government has decided to replace the Companies Act, 1956, by a new legislation.

Section 129 talks about Financial Statements. The Financial Statements must be True & Fair & shall comply with Accounting Standards issued by Institute of Chartered Accountants of India. The Financial Statements must be in Form or Forms as prescribed in Schedule III. The Schedule III is same as Schedule VI of Companies Act 1956. The Schedule III contains Format for Balance sheet & Profit & Loss Account, General Instructions on how to treat items in Financial Statements. The Financial Statements shall also contain Auditors Report, Report of Board of Directors & Directors Responsibility Statement.

According to the new Companies Act 2013, all listed and unlisted companies, having one or more subsidiaries, including associate companies and joint ventures must compulsorily prepare the Consolidated Financial Statements. Section 129 of this Act mandates preparing the cash flow statement in the same structure as the separate financial statements of the holding companies. This will provide the holding companies' stakeholders with transparency about the companies' businesses and market worth. Thus, all private and unlisted companies having subsidiaries, which have previously never prepared the cash flow statement, must prepare their Consolidated Financial Statements in adherence with this mandate.

In accordance with the 2013 Act, the board of each company covered under the CSR requirement needs to ensure that the Company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy. The Securities Exchange Board of India (SEBI), vide its circular dated 17 April 2013, has issued certain amendments to Clause 49 (revised Clause 49) of the Listing Agreement. These amendments follow the overhaul in the corporate governance norms under the Companies Act, 2013, and aim to align the SEBI requirements with the provisions of the Act and adopt best practices on corporate governance. The Act requires that the board of each company covered under the CSR requirement needs to ensure that the Company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy. Under the 2013 Act, an auditor is allowed to provide only such non-audit services to the company as are approved by its board or audit committee. The provision for appointment, rotation, qualification of auditor also amended in the present act. At present financial accounting & Reporting in new environment is challenging which is pleasures and panic.

Overview of Companies Act:

The existing Companies Act was enacted in 1956 with the object to consolidate the law relating to corporate sector and to regulate its activities. This Act is in force for the last over 56 years and has been amended several times. In view of changes in national and international economic environment and growth of our economy, the Government has decided to replace the Companies Act, 1956, by a new legislation. 

According to the new Companies Act 2013, all listed and unlisted companies, having one or more subsidiaries, including associate companies and joint ventures must compulsorily prepare the Consolidated Financial Statements. Section 129 of this Act mandates preparing the cash flow statement in the same structure as the separate financial statements of the holding companies. This will provide the holding companies' stakeholders with transparency about the companies' businesses and market worth. Thus, all private and unlisted companies having subsidiaries, which have previously never prepared the cash flow statement, must prepare their Consolidated Financial Statements in adherence with this mandate.

Definition of Companies: One-person company: The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a 'one-person company' (OPC). An OPC means a company with only one person as its member [section 3(1) of 2013 Act]. Private company: The 2013 Act introduces a change in the definition for a private company, inter-alia, the new requirement increases the limit of the number of members from 50 to 200. [ Section 2(68) of 2013 Act]. Small company: A small company has been defined as a company, other than a public company the Paid-up share capital of which does not exceed 50 lakh Rs or such higher amount as may be prescribed which shall not be more than five crore Rs and Turnover of which as per its last profit-and-loss account does not exceed two crore Rs or such higher amount as may be prescribed which shall not be more than 20 crore. But this section not applies to a  A holding company or a subsidiary company or A company registered under section 8 or A company or body corporate governed by any special Act [section 2(85) of 2013 Act].Dormant company: The 2013 Act states that a company can be classified as dormant when it is formed and registered under this 2013 Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Such a company or an inactive one may apply to the ROC in such manner as may be prescribed for obtaining the status of a dormant company. [Section 455 of 2013 Act]

Composition of board of director:

Both under the 2013 Act and RC49, directors are categorized into two classes, viz., executive directors (ED) and non- executive directors. Non-executive directors are further sub- categorized into independent directors and others whilst the 2013 Act recognizes the concept of ED, ID and NED, it prescribes minimum requirement only in respect of ID. For the balance composition, a company is free to choose between ED and NED. In contrast, RC49 requires that the board of directors of a listed company should have an optimum combination of executive and non-executive directors. It also requires that minimum 50% of the board should comprise of non-executive directors, which include both IDs and NEDs.

The 2013 Act requires prescribed class of companies to have at least one woman director on the board. In accordance with the Act, existing companies meeting the prescribed criteria need to comply with the requirement within one-year.  If the company is unlisted and paid up share capital of Rs 100 Crore or more or its turnover 300 crore or more shall appoint woman director. But this rule applied to all listed companies irrespective of turnover or paid up capital.

The 2013 Act states that every listed company will have at least one-third of total number of directors as independent directors, with any fraction to be rounded off as one. In addition, the 2013 Act empowers the Central Government to prescribe minimum number of independent directors for other class of public companies. In accordance with the Gazette Copy of the 2013 Act; existing companies meeting the prescribed criteria need to comply with the requirement within one-year5.

Financial Statement

The Provisions relating to Books of Accounts & Financial Statements are pretty much similar to Companies Act 1956. Section 129 talks about Financial Statements. The Financial Statements must be True & Fair & shall comply with Accounting Standards issued by Institute of Chartered Accountants of India. The Financial Statements must be in Form or Forms as prescribed in Schedule III. The Schedule III is same as Schedule VI of Companies Act 1956. The Schedule III contains Format for Balance sheet & Profit & Loss Account, General Instructions on how to treat items in Financial Statements. The Financial Statements shall also contain Auditors Report, Report of Board of Directors & Directors Responsibility Statement as per Section 2(40) of the companies act 2013 "financial statement" in relation to a company, includes:

* A balance sheet as at the end of the financial year
* A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year
* Cash flow statement for the financial year
* A statement of changes in equity, if applicable; and
* Any explanatory statement.

Companies Act has given legal sanctity to keeping of Books of Accounts under Electronic mode. The Backup of Books of Account shall be kept in servers which are located in India only. The Company shall intimate the Registrar on an Annual Basis the name of Service Provider, IP address of Service Provider, location of Service provider etc. The Report of Board shall contain Information like Conservation of Energy, Technology absorption, Foreign exchange earning & outgo, financial summary, change in nature of Business, Details of key managerial personnel, details relating to deposits etc.

Directors Responsibility Statement shall contain the matters like whether Accounting Standards have been followed, Accounting policies are applied consistently. It should also state that whether Financial Statements are prepared on going concern basis etc. Filing of Financial Statement with Registrar: The Financial Statements shall be laid before the Board & after its approval the same shall be filed with Registrar within 30 days of Annual general meeting. Failure of non filing would attract a fine of Rs 1000 per day limited to Rs 10 lakh. The Form to file Financial Statement with Registrar is Form AOC-4.In case of Listed Companies & public companies having Net worth of 1 crore or more & turnover of 10 crore or more the financial Statement can be circulated in electronic mode.

A Company has no option to reopen its Books of Accounts. In only following cases the Company can reopen or recast its financial statement where Accounts were prepared in fraudulent manner or affairs of company are mismanaged. The Books of Account shall be maintained for a period of 8 years.

Consolidated Financial Statement

Sub-Section (3) of Section 129 of the CA, 2013 provides that where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-Section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-Section (2) provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed. The Central Government may provide for the consolidation of accounts of the companies in such manner as may be prescribed. An Explanation to the sub-Section provides that for the purposes of this sub-Section, the word "subsidiary" shall include associate company and joint venture.

Sub-Section (4) of Section 129 provides that the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-Section (3).

Proper Books of Accounts

Section 128(1) of CA,2013 requires every company to prepare and keep at its registered office, books of account and other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and to keep such books on accrual basis and according to the double entry system of accounting. Section 2 (12) of the CA, 2013 defines "book and paper" and "book or paper" to include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form. Whereas, Section 2 (8) of the CA, 1956 defines "book and paper" and "book or paper" to include accounts, deeds, vouchers, writings, and documents. So, 'minutes and registers' are now part of 'Book and Paper'. Section 128(1) of the CA, 2013 requires every company to prepare and keep at its registered office other relevant books and papers along with books of account, whereas in the CA, 1956, Books and Papers have a reference only in Section 209A which deals with inspection of companies.

Section 209(3) of the CA, 1956 provided that proper books of account would not be deemed to be kept with respect to the matters specified therein if (a) there are not such books kept as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions or (b) such books are not kept on accrual basis and according to the double entry system of accounting.

Maintenance of Books of Accounts in Electronic Mode

Second proviso to Section 128 of the CA, 2013 permits the company to keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed. Rule 3 of the Companies (Accounts) Rules, 2014 prescribes the manner of books of account to be kept in an electronic mode.

As per the Rule:

* The books of account and other relevant books and papers maintained in an electronic mode shall remain accessible in India so as to be usable for subsequent reference.
* The books of account and other relevant books and papers referred to in sub-Rule (1) shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.
* The information received from the branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches.
* The information in the electronic record of the document shall be capable of being displayed in a legible form.
* There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law, provided that the backup of the books of account and other books and papers of the company maintained in an electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis. 

Revision of Accounts

In the companies act, 2013, Section 130 provides that a company shall not re-open its books of account and not recast its financial statements, unless an application in this regard is made by the Central Government, the Income-tax authorities, the Securities and Exchange Board, any other statutory regulatory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that:

* The relevant earlier accounts were prepared in a fraudulent manner;  or 
* The affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements. Sub-Section (2) provides that without prejudice to the provisions contained in this Act the accounts so revised or recast under sub-Section (1) shall be final.

Another Section 131 of the CA, 2013 provides that, 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 provisions of Section 129 (The financial statements do not give a true and fair view of the state of affairs of the company or companies, or do not comply with the accounting standards notified under Section 133 or are not in the form or forms as may be  provided for different class or classes of companies in Schedule III) or Section 134 (financial statements not properly signed or auditor's report is not attached or Directors' Report containing required disclosures is not attached), they may prepare a revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining the approval of the Tribunal on an application made by the company in such form and manner as may be prescribed. The Tribunal shall give notice to the Central Government and the Income tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section. This revision of account shall be subject to the conditions that such a revised financial statement or report shall not be prepared or filed more than once in a financial year and the detailed reasons for the revision of such financial statement or report shall also be disclosed in the Board's report in the relevant financial year in which such revision is being made.

Under the Companies Act, 1956, there was no specific provision permitting revision of account. Neither was there any provision prohibiting the revision of accounts once they were adopted.

Filing of Accounts

Section 137 of the companies act, 2013 requires that a copy of the financial statements, including the consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly adopted at the annual general meeting of the company, to be filed with the Registrar within 30 days of the date of the annual general meeting in such manner, with such fees or additional fees as may be prescribed within the time specified under Section 403.

The Section also provides that if the financial statements are not adopted at the annual general meeting or adjourned annual general meeting, such un adopted financial statements along with the required documents under sub-Section (1) shall be filed with the Registrar within 30 days of the date of the annual general meeting and the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned annual general meeting for that purpose.

It further provides that a One Person Company shall file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial statements, within 180 days from the closure of the financial year.

The Section further provides that where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under sub- Section (1), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within 30 days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed within the time specified, under Section 403.

Section 220 (1) of the CA, 1956 provided that after the balance sheet and the profit and loss account have been laid before a company at an annual general meeting as aforesaid, these would be filed with the Registrar within 30 days from the date on which the balance sheet and the profit and loss account were so laid, or where the annual general meeting of a company for any year has not been held, there shall be filed with the Registrar within thirty days from the latest day on or before which that meeting should have been held in accordance with the provisions of this Act provided that in the case of a private company, a copy of the balance sheet and copy of the profit and loss account shall be filed with the Registrar separately .

Inspection of the Books of Account

Section 209A of the Companies Act, 1956 provided that the books of account and other books and papers of every company shall be open to inspection during business hours by the Registrar or by such officer of the Government as may be authorized by the Central Government in its behalf or by such officers of the Securities and Exchange Board of India as may be authorized by it. Such inspection could have been made without giving any previous notice to the company or any officer thereof. In the Companies Act, 2013, such provisions are contained in Sections 206 to 209 under Chapter XIV – Inspection, Enquiry and Investigation. Section 206 of the Act provides the power to call for information, inspect books and conduct inquiries. Sub-Section (3) of Section 206 provides that if no information or explanation is furnished to the Registrar within the time specified under sub-section (1) or if the Registrar on an examination of the documents  furnished is of the opinion that the information or explanation furnished is inadequate or if the Registrar is satisfied on a scrutiny of the documents furnished that an unsatisfactory state of affairs exists in the company and does not disclose a full and fair statement of the information required, he may, by another written notice, call on the company to produce for his inspection such further books of account, books, papers and explanations as he may require at such place and at such time as he may specify in the notice: Provided that before any notice is served under this sub-Section, the Registrar shall record his reasons in writing for issuing such notice.

Section 128(6) of the companies act, 2013 provides that the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this Section, contravenes such provisions, such person of the company shall be punishable with imprisonment for a term which may extend to one year or with a fine which shall not be less than R 50,000 but which may extend to R 5 lakh or with both. Section 209(6) and (7) of CA, 1956 made the following persons responsible to maintain books of account, Where the company has a managing director or manager, such managing director or manager and all officers and other employees of company or Where the company has neither a managing director nor a manager, every director of the company or Any person having been charged by the managing director, manager or Board of directors, as the case may be, with the duty of Seeing that the requirements of this Section are complied with.

Section 209(5) of CA, 1956 provided that, if any of the persons referred to in sub-Section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this Section, or has  by his own willful act been the cause of any default by the company there under, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with a fine which may extend to R 10,000, or with both provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

Authentication & circulation of Accounts

Section 134 (1) of the CA,2013 requires that the financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorized by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.

Section 134(7) of CA, 2013 requires a signed copy of every financial statement, including the consolidated financial statement, if any, to be issued, circulated or published along with a copy each of (a) any notes annexed to or forming part of such financial statement, (b) the auditor's report and (c) the Board's report referred to in sub-Section (3). 

Accounting & Auditing Standards

Section 129 of the CA, 2013 requires that the financial statements shall comply with the accounting standards notified under Section 133 and Section 133 provides that the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. 

Rule 7 of the Companies (Accounts) Rules, 2014 provides that as a transition provision, the standards of accounting as specified under the Companies Act, 1956 (i.e. the Companies (Accounting Standards) Rules, 2006) shall be deemed to be the accounting standards until accounting standards are specified by the Central Government under Section 133. 

Section 129 of the CA, 2013 requires that the financial statements shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.

Sub-Section (6) of Section 129 provides that the Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this Section or the Rules made there under, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification. 

Schedule III to the CA, 2013 provides that the disclosure requirements specified in this Schedule are in addition to and not in substitution of the disclosure requirements specified in the Accounting Standards prescribed under the Companies Act, 2013. Additional disclosures specified in the Accounting Standards shall be made in the notes to accounts or by way of additional statements 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 the requirements set out in this Schedule. Such provisions were also there in Section 211 and Schedule VI of the Companies Act, 1956. 

New Section 132 provides for constitution of National Financial Reporting Authority (NFRA) , its functions and powers. Briefly stated these provisions are as under.

* The Central Government will constitute NFRA consisting of a chair person, who shall be a person of eminence and having expertise in accounting, auditing, finance or law and such other full-time or part-time members, not exceeding 15, as may be prescribed.
* Terms and conditions and the manner of appointment of chairperson and members of NFRA and other related matters shall also be prescribed.

Accounting Standard on revenue recognition

The International Accounting Standards Board (IASB), in a joint project with Financial Accounting Standards Board (FASB), has issued a new standard, IFRS 15, Revenue from Contracts with Customers. The joint standard is aimed at enhancing quality and increasing global comparability and is the culmination of a long ongoing project by the IASB and the FASB to overhaul the existing revenue recognition guidance and introduce a more principles-based approach. IFRS 15 requires the following five-step framework to be followed for revenue recognition:

* Identification of the contracts with the customer
* Identification of the performance obligations in the contract
* Determination of the transaction price
* Allocation of the transaction price to the performance obligations in the contract
* Recognition of revenue when the entity satisfies a performance obligation

Further, IFRS 15 requires extensive disclosures including allocation of total revenue, information about performance obligations, changes in contract asset and liability and significant judgments and estimates.

IFRS 15 replaces the previous revenue standards viz. IAS 18, Revenue, and IAS 11, Construction Contracts, and the related interpretations viz. IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers and SIC 31, Revenue—Barter Transactions Involving Advertising Services. IFRS 15 becomes effective for annual periods beginning on or after 1 January 2017; early adoption is permitted. IFRS 15 needs to be applied in full for the current period, including retrospective application to all contracts that are incomplete at the beginning of that period. In respect of prior periods, the transition guidance allows entities an option to either apply IFRS 15 in full to prior periods or to record a cumulative adjustment to the opening balance of equity as at the beginning of current reporting period.

Depreciation on Fixed Assets

The Companies Act, 2013 (2013 Act) has brought in significant changes on various aspects relating to the financial statements, including depreciation. The main charter on depreciation—Schedule XIV to the Companies Act, 1956 (1956 Act) has been replaced by Schedule II (as amended) to the 2013 Act. Schedule II has come into force with effect from 1 April 2014 and has made sweeping changes vis-à-vis the erstwhile Schedule XIV.

Under the new requirements, Indian companies will observe sea changes from the past practice. Following commentary focuses on the amended provisions of the 2013 Act with respect to useful life of assets, depreciation thereon and its impact analysis.

The erstwhile Schedule XIV provided minimum prescribed rates for charging depreciation under two categories viz. (I) Straight Line Method and (ii) Written down Value method. Unlike the 1956 Act, in place of rates of depreciation, now the useful lives of the asset have been prescribed the base for computing depreciation.

There is no requirement for companies to change the existing method of charging depreciation from WDV to SLM, or vice versa, simply by virtue of Schedule II. However, the effective rates of these would consequently get changed to match with the revised useful lives of the assets. Any voluntary change from WDV to SLM, or vice versa, would continue to be governed by Para 19 of AS 6, 'Depreciation Accounting' and would be accounted for as a change in accounting policy.

The erstwhile Schedule XIV only prescribed for a disclosure in cases where different depreciation rates are considered than those specified in the Schedule. However, under Schedule II, while a company may still choose to have different useful life for the purpose of preparing financial statements, than that specified, the company will now have to additionally also provide justification for the same in the financial statements. Also, for dividend purposes, the company will have to mandatorily consider Schedule II.

Schedule II now formalizes the concept of component accounting when the useful life of a component is different from that of its principal asset which may result in a significant difference from past practices under the Act 1956. Although, the erstwhile Schedule XIV did not include this concept, this approach was already permitted, but not required, as per existing AS 10, 'Accounting for Fixed Assets'.

Further, the useful lives of the assets working on shift basis have been specified in Schedule II of the Act 2013, based on their single shift working, which is different from that of Schedule XIV. Also, the requirement for providing 100% depreciation on assets which costs up to Rs.5, 000 does not exist under the new guidance.

Audit and auditors Guidelines:

Internal Audit

The 2013 Act requires such class or classes of companies, as may be prescribed, to appoint an internal auditor to conduct internal audit of the functions and activities of the company. The draft as well Accounts Rules require all listed companies to appoint internal auditor. In the Accounts Rules, the threshold for appointment of internal auditor by non-listed public companies has changed. Under the Accounts Rules, private companies meeting prescribed criteria are also required to appoint internal auditor. The Private companies to appoint internal auditor if its turnover Rs 200 crores or more or outstanding loan Rs 100 crores or more during the previous financial year. But listed companies to appoint internal auditor irrespective of turnover or outstanding loan.

The Accounts Rules also require the below:

* An existing company, which meets the prescribed criteria, will comply with the requirements within six months from the commencement of this section.
* The Audit Committee or the Board, in consultation with the internal auditor, will formulate the scope, functioning, periodicity and methodology for conducting internal audit.

Appointment of auditor

Like the draft rules, the Audit rules also require the Audit Committee to recommend auditors for appointment. The draft rules required that if the board does not agree with the Audit Committee recommendation and decides to eventually propose its own nominee at the AGM, the board will explain the reasons for not accepting the Audit Committee recommendation in the board report.

In the Audit Rules, the language has changed and it is stated that the board will record reasons for its disagreement with the Audit Committee and send its own recommendation to the AGM. Though the Audit Rules do not specifically require disclosure in the board report, section 177(8) of the 2013 Act requires that if the board has not accepted any recommendation of the Audit Committee, the same will be disclosed in the board report with reasons. Hence, the position as mentioned in the draft rules will continue.

In the Audit Rules, it has been clarified that the Audit Committee or the Board, as the case may be, needs to consider only order or pending proceeding relating to professional matters of conduct against the proposed auditor. In our view, this change represents a significant improvement vis-à-vis the draft rules.

To help the audit committee/board evaluate pending proceedings against the proposed auditor, the Audit Rules require the proposed auditor to submit a list of proceedings against the auditor or audit firm or any partner of the firm with respect to professional matters of conduct.

Under the 2013 Act, an auditor is appointed for a term of 5 years. However, the appointment needs to be ratified each year at the AGM. The Audit Rules clarify that "if the appointment is not ratified by the members of the company, the board of directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act."

Rotation of auditor

In accordance with the 2013 Act, listed companies and companies belonging to the prescribed class cannot appoint or re-appoint the auditor for: (a) More than two terms of five consecutive years, if the auditor is an audit firm; (b) More than one term of five consecutive years if the auditor is an individual. Under the draft rules, the prescribed class included all companies excluding one-person companies and small companies. This is changed in the Audit Rules. Under the Audit Rules, auditor rotation applies to the following classes of companies excluding one person companies and small companies:

* All listed companies
* All non-listed public companies having either :
(i) Paid-up share capital of `10 crore or more, or
ii) Public borrowings from financial institutions, banks or public deposits of `50 crores or more
* All private limited companies having either
(i) Paid-up share capital of `20 crore or more, or
(ii) Public borrowings from financial institutions, banks or public deposits of `50 crores or more

The auditor, who has completed his term, will not be eligible for re-appointment as auditor in the same company for five years from completion of the term. The same restriction applies to the audit firm which has common partner(s) with the outgoing audit firm at the time of appointment.

Incoming auditor/audit firm is also not eligible for appointment if they are part of the same network as the outgoing auditor. If a partner in the outgoing audit firm, who is in charge of the firm and also certifies financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm will also not be eligible to be appointed as auditor for a period of five years.

For auditor rotation, paid-up share capital includes paid-up equity share capital and paid-up preference share capital, whether convertible or not. Also, it appears that paid-up share capital includes only amount received toward face value of shares. Amount received toward securities premium is not included in the paid-up share capital. Also, the share application money pending allotment is not included in the paid-up share capital.

Eligibility, qualification & disqualification:

Under the 1956 Act read with the ICAI rules, a person/partner cannot audit more than 30 companies, including private companies, per year. Out of this, maximum 20 companies can be public companies. The 2013 Act has reduced the maximum limit to 20 companies (including private companies) with immediate effect from 1 April 2014. The auditors/audit firms with more than 20 audits (individually/per partner) stand disqualified from being appointed/ reappointed as auditor of excess companies. This is likely to result in casual vacancy in the office of the auditor, requiring companies to search for a replacement auditor immediately.

Financial interest and indebtedness, guarantee or security

A person is not eligible for appointment as auditor if he himself, his relative or partner:

* Holds any security or interest in a company, or its subsidiary, holding or associate company or subsidiary of such holding company. However, the relative is allowed to hold security or interest in the company having face value not exceeding `1 lac. The Audit Rules state that if any security or interest is acquired by a relative above the prescribed threshold, corrective action needs to be taken within 60 days of such acquisition or interest.

* Is indebted to the company, its subsidiary, holding or associate company or subsidiary of such holding company, in excess of `5 lac.

* Has given any guarantee or provided any security in connection with indebtedness of any third person to the company, or its subsidiary, holding or associate company or subsidiary of such holding company, in excess of `1 lac

Business relationship

Under the 2013 Act, a person or an audit firm are not eligible for appointment as auditor, if it, directly or indirectly, has business relationship with the company, its subsidiary, its holding, or associate company or subsidiary of such holding company or associate company. The draft rules explained the term "Business relationship" to mean any transaction entered into for a commercial purpose except professional services permitted to be rendered by an auditor.

Hence, there was a concern that an auditor cannot purchase/ avail goods/services from the audited company, its subsidiary, its holding, or associate company or subsidiary of such holding company or associate company. This was likely to pose serious practical problems not only to the auditors but also to the companies they audit. In the Audit Rules, exemption regarding professional services permitted to be rendered by an auditor has been retained.

Limit on maximum number of audits

In accordance with the 2013 Act, a person or a partner of a firm will not be eligible for appointment, if such persons or partner at the date of appointment/reappointment holds appointment as auditor of more than 20 companies. Private companies are also included in the maximum limit of 20 companies.

Conviction by the Court

In accordance with the 2013 Act, a person is not eligible for appointment as auditor, if that person has been convicted by a court of an offence involving fraud and period of ten years has not elapsed since such conviction.
A proviso to section 141(1) states that a firm whose majority of partners practicing in India are qualified for appointment as auditor may be appointed by its firm name to be auditor of a company.

Independent and prohibited services:

Under the 2013 Act, an auditor is allowed to provide only such non-audit services to the company as are approved by its board or audit committee. However, the auditor is not allowed to render the following services either directly or indirectly to the company, its holding or subsidiary company:

* Accounting and book keeping services
* Internal audit
* Design and implementation of any financial information system
* Actuarial services
* Investment advisory services
* Investment banking services
* Rendering of outsourced financial services
* Management services
* Any other kind of services as may be prescribed

From an audit firm's perspective, the term 'directly or indirectly' includes rendering of services by the firm itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity in which the firm or any partner of the firm has significance influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.

Under the 2013 Act, an auditor is not allowed to render, among other services, "management service" to the company, its holding or subsidiary company. However, this term is not defined either in the 2013 Act or in the Audit Rules. In the absence of clear definition, one may argue that guidance can be taken from the IESBA Code.

The IESBA code provides the following guidance on "management responsibilities":

Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would generally be considered a management responsibility include:

* Setting policies and strategic direction
* Directing and taking responsibility for the actions of the entity's employees
* Authorizing transactions
* Deciding which recommendations of the firm or other third parties to implement
* Taking responsibility for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and
* Taking responsibility for designing, implementing and maintaining internal control."

Since the definition of "management service" is not clear and may be subject to varying interpretations, ICAI should provide guidance.

Reporting responsibility:

Fraud reporting

In the Audit Rules, distinction between material and immaterial frauds has been removed. The auditor is required to report all frauds to the Central Government irrespective of materiality. The Audit Rules state that if an auditor has sufficient reason to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, the auditor will report the matter to the Central Government immediately but not later than sixty days of his knowledge. The Audit Rules prescribe the following procedure for fraud reporting:

* The auditor will forward his report to the board or the Audit Committee, as the case may be, immediately after a fraud comes to his knowledge, seeking their reply or observations within 45 days.
* On receipt of reply/observations, the auditor will forward his report, reply received and his comments on the reply to the Central Government within 15 days.
* If the auditor fails to get any reply/observations within 45 days, he will forward his report to the Central Government along with a note explaining the fact.

The provision will also apply, mutatis mutandis, to a cost auditor and a secretarial auditor. Non-compliance with this requirement knowingly and willfully is punishable with a fine of minimum `1 lac which may extend to `25 lac. To report the fraud related matters to the Central Government, the Audit Rules have prescribed Form ADT-4.

CARO reporting

The 2013 Act requires that if an auditor, in the course the performance of his duties as auditor, has reasons to believe that an offence involving fraud is being or has been committed against the company by its officers or employees; he will immediately report the matter to the Central Government within the prescribed time and manner. Under the draft rules, reporting to the Central Government was required only for material frauds.

Material frauds were defined as

* Fraud happening frequently, or
* Fraud where the amount involved or likely to be involved is not less than 5% of net profit or 2% of turnover of the company for the preceding financial year. For immaterial frauds, the auditor was required to report only to the Audit Committee/Board.

Under the 1956 Act, the Central Government issued the CARO 2003. CARO 2003 contains various matters on which the auditors of companies (except exempted companies) have to make a statement in their audit report. The Audit Rules issued under the 2013 Act do not contain a similar order. Rather, the Audit Rules require an auditor to comment on the following three additional matters:

* Whether the company has disclosed the impact, if any, of pending litigations on its financial position in the financial statements
* Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long-term contracts including derivative contracts whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund (IEPF) by the company.

Both the 2013 Act and the Audit Rules require the Central Government reporting only in cases where an offence involving fraud is being or has been committed against the company by its officers or employees.

Penalty on auditors:

Section 147(5) of the 2013 Act states that "where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally."

The Audit Rules have clarified the position only with respect to the criminal liability but not the civil liability. Hence, one may argue that for civil liability, joint and several liabilities of the partners and the firm can be enforced even if all the partners have not colluded in committing the fraud.

Strengthening corporate governance: Amendment of Clause 49 of Listing Agreement

The Securities Exchange Board of India (SEBI), vide its circular dated 17 April 2013, has issued certain amendments to Clause 49 (revised Clause 49) of the Listing Agreement. These amendments follow the overhaul in the corporate governance norms under the Companies Act, 2013, and aim to align the SEBI requirements with the provisions of the Act and adopt best practices on corporate governance.

The revised Clause 49 would be applicable to all listed companies with effect from 1 October 2014 except as specifically stated otherwise in the circular. For listed entities, which are not companies but body corporate, or are subject to regulations under other statutes (e.g. banks, financial institutions, insurance companies etc.), the revised Clause 49 shall apply only to the extent it does not violate the respective statutes and guidelines or directives issued by the relevant regulatory authorities. The revised Clause 49 is not applicable to Mutual Funds. To implement the corporate governance framework effectively, the SEBI circular providing for the amendments also requires that the monitoring cell of the stock exchanges shall also monitor the compliance with the provisions of the revised Clause 49 on corporate governance for all listed companies. The monitoring cell shall ascertain the adequacy and accuracy of disclosures in the quarterly compliance reports received from the companies and shall submit a consolidated quarterly compliance report to SEBI.

Corporate social responsibility:

The 2013 Act requires that every company with net worth of`500 crore or more, or turnover of `1,000 crore or more or a net profit of `5 crore or more during any financial year will constitute a CSR committee. The 2013 Act requires a company, which meets the CSR applicability criteria, to constitute a CSR committee comprising three or more directors. The 2013 Act also states that out of these three directors, at least one director should be an independent director. The CSR Rules state that a non-listed public company or a private company, which is not required to appoint an independent director as per the 2013 Act/ Directors' Appointment Rules, can have its CSR Committee without an independent director. Also, a private company having only two directors on its board can constitute the CSR Committee with the two directors.

In accordance with the 2013 Act, the board of each company covered under the CSR requirement needs to ensure that the Company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy. Neither the 2013 Act nor the CSR Rules prescribe any specific penal provision if a company fails to spend the 2% amount. However, the board, in its report, needs to specify the reasons for not spending the specified amount.

Role of Serious Fraud Investigation Office (SFIO):

The Government of India has set up the Serious Fraud Investigation Office (SFIO) in the Ministry of Company Affairs (MCA) with effect from July 1, 2003 with an objective to undertake the investigations under the provisions of the Companies Act, 1956 for corporate frauds.

The magnitude and the complexity are the key aspects involved in any corporate frauds. If such frauds are not dealt or investigated with relevant expertise may have serious ramifications on the economy nationally & globally in general and the stake holders in particular. Keeping this aspect in mind, Serious Fraud Investigation Office (SFIO) has been authorized to draw up the services of experts and expertise in various fields including accountancy, forensic auditing, taxation, information technology, capital markets, financial transactions, etc with a view to fulfilling the assigned task.

The new act has empowered SFIO to carry out arrests, raids and seizure in respect of certain offences of the act which attract the punishment for fraud.

Conclusion

The existing Companies Act was enacted in 1956 with the object to consolidate the law relating to corporate sector and to regulate its activities. This Act is in force for the last over 56 years and has been amended several times. In view of changes in national and international economic environment and growth of our economy, the Government has decided to replace the Companies Act, 1956, by a new legislation. 

According to the new Companies Act 2013, all listed and unlisted companies, having one or more subsidiaries, including associate companies and joint ventures must compulsorily prepare the Consolidated Financial Statements. Section 129 of this Act mandates preparing the cash flow statement in the same structure as the separate financial statements of the holding companies. This will provide the holding companies' stakeholders with transparency about the companies' businesses and market worth. Thus, all private and unlisted companies having subsidiaries, which have previously never prepared the cash flow statement, must prepare their Consolidated Financial Statements in adherence with this mandate.

In accordance with the 2013 Act, the board of each company covered under the CSR requirement needs to ensure that the Company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy. The Securities Exchange Board of India (SEBI), vide its circular dated 17 April 2013, has issued certain amendments to Clause 49 (revised Clause 49) of the Listing Agreement. These amendments follow the overhaul in the corporate governance norms under the Companies Act, 2013, and aim to align the SEBI requirements with the provisions of the Act and adopt best practices on corporate governance. The Act requires that the board of each company covered under the CSR requirement needs to ensure that the Company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of CSR policy. Under the 2013 Act, an auditor is allowed to provide only such non-audit services to the company as are approved by its board or audit committee. The provision for appointment, rotation, qualification of auditor also amended in the present act. At present financial accounting & Reporting in new environment is challenging which is pleasures and panic.

References:

1  Accounting and auditing update, feb.2014,kpmg and sept 2013
2  www.Ey. Com
3  Companies Act, 2013 Key highlights and analysis, PWC
4  Countdown to Companies Act, 2013 Impact on Transactions and Corporate restructuring, august ,2013
5  GAAP Reporter, Quarterly bulletin on accounting, auditing & related updates July 2014, Grant thornton
6  Companies Act, 2013
7  www.mca.gov.in/MinistryV2/companiesact.html
 

                                                                                                                                                                               

   Published on IndianFaculty.com: 02/02/2017

 Source: E-mail 01/02/2017

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