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New Companies Act 'draconian', feel auditors; officials if found guilty of fraud then liable to pay 3 times of amount involved

May, 02nd 2014
The new companies law has key managerial professionals (KMPs) and auditors worried as its terms are much more stringent than the old legislation, with some even calling it 'draconian'. While the previous law allowed professionals to get away with a fine for most offences, Companies Act, 2013 stipulates jail terms of up to 10 years for KMPs, auditors or company experts. In cases of fraud, if proven guilty, the liability of key company officials will be three times the amount involved. People in key managerial positions and auditors told ET that the law was more "intimidating" than a deterrent to fraud, and argued for the need to tone down the harsher provisions. "There has been a 360 degree turn on penalties, which in the new Companies Act have gone up by almost 20-30% when compared with the Act of 1956," said a consultant at one of the Big Four auditing firms. For example, under 'Repayment of Deposits' in the new Companies Act, any failure to repay a deposit is punishable with a fine of not less than Rs 1 crore extending up to Rs 10 crore. Moreover, every officer of the company that's in default can be punished with imprisonment extending up to seven years. The earlier law called for a maximum jail term of five years for the inability to repay deposits. The new Act goes beyond professional liability for fraud and extends to personal liability if a company fails to repay debt. "These steep penalties are a bit unfair to the profession," said N Venkatraman, managing partner, audit, Deloitte, Haskins & Sells. Venkatraman said that under Section 143 of the Companies Act, 2013, if an auditor does not act in good faith in reporting a fraud, he will be fined Rs 25 lakh. If an auditor has sufficient reason to believe that there has been fraud and the audit committee rejects that, it still has to be reported to the central government. If, in such an instance, the stock price witnesses a crash because of the initial suspicions, would the auditor be held at fault? Venkatraman asked. One of the KMPs ET spoke to said that there was no country in the world where the auditor's liabilities are so high, except maybe Malaysia. He said his firm had written to the ministry to relax liabilities under Section 447 of the 2013 Act. "The new Act is a deterrent as there has to be a benefit for the KMPs to do business," said Jamil Khatri, global head, accounting advisory services at KPMG India.