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Appointment of Auditors:-
a) An Auditor can be appointed for a period of 5 years in an AGM, i.e., if appointed in 1st AGM then he shall hold office till conclusion of 6th AGM.
b) But, his appointment can be put to ratification at every AGM.
c) If no auditor is appointed/reappointed at AGM the existing auditor shall stand re-appointed.
Rotation of Auditors:-
Listed companies and companies belonging to prescribed class of companies will not appoint or re-appoint the auditor for:
a) More than two terms of 5 years in case of firm appointed as auditors.
b) More than one term of 5 years in case of individual appointed as auditors.
The auditor shall not be eligible for appointment for 5 years period.
Existing companies which fall under this category shall comply within 3 years from date of commencement of the Act.
Prohibited Services:-
Under the Companies Act 13, an auditor will be allowed to provide only such other 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:
i) Accounting and book keeping services
ii) Internal audit
iii) Design and Implementation of any Financial information system
iv) Actuarial services
v) Investment advisory services
vi) Investment banking services
vii) Rendering of Outsourced financial services
viii) Management services
ix) Any other kind of services as may be prescribed
In case of Audit firm the above Restrictions also apply to
i) Audit Firm
ii) All Partners of the Firm
iii) Its Parents, Subsidiaries and Associate entity
iv) Any other entity in which the firm or any of its partners have significant control, influence.
Removal Of Auditors:-
i) A company can remove the auditor before expiry of his Term (i.e. 5 years) only by passing Special Resolution at an AGM after obtaining prior approval from the Central.
ii) If an auditor resigns from the company, it will file within a period of 30 days from the date of resignation, a statement with the company and the registrar, indicating reasons and other facts regarding resignation.
iii) The Tribunal is likely to direct a company to change its auditors, if it is satisfied that the auditors has, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud. The Tribunal may pass such order either suo motu or on an application made to it by the Central Government or by any person concerned.
Qualifications And Disqualifications Of an Auditor:-
Qualifications:-
i) An Individual, Firm (If Majority of the partners practicing in India are qualified) or LLP (if it meets the criteria of a firm) are eligible to be appointed as auditors (other qualifications similar to that of Companies Act, 1956).
Disqualifications:-i) A body Corporate, an officer or employee of the company, a person who is a partner, who is the officer or employee of the company.
ii) A person will not be eligible for appointment if he himself, his relatives or partner holds any security or interest in the company, its subsidiary, holding or associate company or subsidiary of such holding company. However, the relative may be allowed to hold security or interest in the company with face value not exceeding 1,000/- or the amount as may be prescribed.
iii) A person will not be eligible for appointment if he himself, his relative or partner is indebted to the company, its subsidiary, holding or associate company or subsidiary of such holding company, in excess of such amount as may be prescribed. A similar disqualification has also been provided in case of guarantee given or security provided in connection with indebtedness of third person.
iv) A person or firm is not eligible for appointment if it directly or indirectly, has business relationship (of such nature as may be prescribed) with the company, its subsidiary, its holding, or associate company or subsidiary of such holding company or associate company.
v) A person, who’s relative is a director or is in the employment of the company as a director or key managerial personnel (KMP), will not be eligible for appointment.
vi) A person who is in full time employment elsewhere is not eligible for appointment.
vii) A person or a partner of a firm will not be eligible for appointment/reappointment, if such person or partner at the date of appointment holds appointment as auditor of more than 20 companies. Private companies are included in the maximum cap of 20 companies.
viii) A person will not be eligible for appointment, if he has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.
ix) Person or firm involved in prohibited services as discussed above.
x) In addition, the Companies Act contains a general requirement that a person will not qualify for appointment as auditor of a company if he is disqualified by virtue of any or more disqualifications, for appointment as auditor of any Body corporate which is that company’s subsidiary or holding company, or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate was a company.
Reporting Responsibilities:-
i) Considering specific requirements to prepare and audit CFS, the Companies Bill requires that the auditor of a holding company will have the right of access to the records of all its subsidiaries in so far as it relates to consolidation.
ii) The auditor’s report will include the following key additional matters (compared to current reporting requirements):
a) Observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company. Also, such observations/comments will be read in the AGM and can be inspected by any member. Currently, the Companies Act requires the observations or comments of the auditors with any adverse effect on the functioning of the company to be given in bold/italic in the audit report.
b) Whether the company has adequate internal financial controls in place, and operating effectiveness of such controls. Currently, the requirement under the CARO to report on internal control matters is limited. It requires an auditor to comment on whether the company has an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services.
iii) In the existing Companies Act, auditors are required to report on fraud in the CARO report. The Bill also requires that if the auditor, in the course of audit, has reasons to believe that an offence involving fraud is being or has been committed against the company by the officers or employees. He will immediately report the matter to the Central Government within such time and manner as may be prescribed.
iv) The requirement of confidentiality by auditors in respect to clients matter does not apply to reporting matters under any regulations.
v) Currently, the Companies Act entitles but does not require an auditor to attend AGM. Under the Companies Bill, it will be mandatory for the auditor or its authorized representative who is also qualified to be appointed as an auditor, to attend the AGM, unless exempted by the company.
Penalties to Auditors:-i) If an auditor of a company contravenes any of the requirements concerning appointment/ rotation, powers and duties, prohibited services or signing of audit report, the auditor will be punished with a fine of not less than `25 thousand but may extend to `5 lakh.
ii) If an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he will be punishable with imprisonment for a term, which may extend to 1year and fine not less than `1 lakh but which may extend to `25 lakh.
iii) Where an auditor has been convicted under point no 2 above, he will be liable to:
a) Refund the remuneration received by him to the company, and
b) Pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.
iv) Where, in case of audit of a company being conducted by audit firm, it has been proved that the partner or partners of the audit firm has or have acted in 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 Bill or in any other law for the time being in force, for such act will be of the partner or partners concerned of the audit firm and of the firm jointly or severally.
v) NFRA may investigate either suo moto or on a reference made to it by the Central Government on matters of professional or other misconduct by any member/firm of chartered accountants. If professional or other misconduct is proved, NFRA has the power to make order for:
a) Imposing penalty of :
i) Not less than `1 lakh but which may extend to five times of fee received, in case of individuals, and
ii) Not less than `10 lakh but which may extend to ten times of fee received, in case of firms.
b) Debarring the member or firm from engaging himself or itself from practice as member of the ICAI for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the NFRA.
vi) Members or depositors or any class of them may claim damages or compensation or demand any other suitable action from or against the auditor including audit firm of the company for any improper or misleading statement made in his audit report or for any fraudulent, unlawful or wrongful act or conduct. Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability will be of the firm as well as of each Partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.
vii) In case of limited liability partnership, The CA Act has been amended to allow CA firms to practice under limited liability Partnership Style/Form. Under the companies Act, if it is proved that the partner 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 audit firm is held responsible jointly and severally with the erring partners. Based on these limited provisions, benefit of LLP form of partnership is not likely to be available to audit professionals in the case of a fraud or fraudulent behavior
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