Expectations from the auditor and the Companies Bill 2008
November, 24th 2008
The Companies Bill 2008, now pending with Parliament has initiated certain significant steps towards accountability, transparency and rationalisation of measures relating to audit and accounts. Some significant measures have been addressed by the Companies Bill 2008. Its heartening to see that some of these are broadly in line with similar international requirements.
The Bill has notified a list of services as prohibited services that an auditor of a company can never provide. Further, the provision of prohibited services or deficiency in conducting the audit would expose an auditor to a hefty penalty and knowing or wilful contravention can additionally attract imprisonment for one year. Such a conviction would additionally require the auditor to refund all remuneration received by him to the company and become liable to make good the loss arising out of his incorrect / misleading report to any other affected person.
I believe this clause itself in the near future would perhaps lead to a great shake up within the profession. In addition, for listed companies, a framework for internal control is required to be mandated by the board and an audit certification of such internal control is separately required. By definition, every annual financial statement must be accompanied by a report of the Committee on Directors Remuneration. Thus, payment to directors would come under focus.
The Bill envisages that a Chartered Accountant (CA) audit firm may also have partners, who will not themselves be CAs. This seems in line with the ICAI movement towards enabling multi-disciplinary partnerships. In a very welcome move, the government has dropped Schedule VI from the Bill and consolidation of accounts has been mandated.
These have been long awaited reform. Family-owned / closely-held businesses with complicated structuring, may find living in a regime of mandatory consolidation quite challenging. While this has been a significant initiative by the Ministry of Company Affairs, there are certain matters of detail and certain prima facie lapses in drafting of the Bill. To cite an example, contrary to international norms and existing Indian law, an auditor can now hold securities, up to prescribed levels, in the company he would audit. This appears to be a step backwards. There was a lot of disquiet on the existing law prohibiting the auditors indebtedness in excess of Rs 1000. Inexplicably, instead of relaxing this guideline, the threshold has been removed and any indebtedness at all has been prohibited. This would make it practically very difficult for firms to be appointed auditors of telecom, electricity and other utility companies, since normal monthly consumer bills would render an auditor ineligible. However, on a contrary note, the Bill states that an auditor can provide a guarantee or security for indebtedness of a third party and even have a business relationship with his audit clients up to prescribed limits.
The Bill requires the auditor to report whether financial statements comply with auditing standards. This is a clear error since financial statements are drawn up as per accounting standards and have nothing to do with auditing standards. There is a responsibility cast by the Bill on the auditor to provide in his report, any qualification or adverse remark relating to the maintenance of accounts and any other matters connected therewith.
Now, the last bit of this clause is too openly worded specially for a situation where a wrong auditors report would lead to severe penal consequences. Continuing a previous drafting error, the Bill requires the auditors to report the observations or comments of the Auditors, which have any adverse effect on the functioning of the Company. It is extremely unlikely that observations of Auditors will have an adverse effect on the functioning of the Company! Perhaps, the intention is to report upon those observations of Auditors, which pertain to matters having adverse effect on the Company.
It is high time this particular mistake is rectified before the Bill is enacted as Law. The Bill stops short of making the bold requirement that audit reports should not be qualified and for any proposed qualification, the management should go back and recast their accounts.
There are various disclosure requirements and provisions in the Bill which makes an auditors task very onerous. The basic tone throughout the Bill is one of investor friendliness and protection and the Audit profession has been called upon to assume far greater responsibilities, the downside being far greater consequences for failure. It is important to iron out the obvious minor flaws so that the broader vision laid down can be realised. I do hope the profession in our country would also prove equal to the task.