COMPANIES ACT, 2013 ACCOUNTS AND AUDIT 1 CA RAJEEV SOGANI

Satyam case Corporate Frauds Effectiveness of Audit Function Role of ICAI 2 ReebokNSEL COMPANIES ACT RE-INCARNATION AFTER 57 YEARS COMPANIES ACT RE-INCARNATION AFTER 57 YEARS

3  Books of accounts and other relevant papers may be kept in electronic mode: Accessible and usable in India Information to be complete and unaltered Shall be in legible form Proper system of storage and use Back up of records Intimation of service provider to Registrar. MAINTENANCE OF BOOKS OF ACCOUNTS IN E-FORM (S. 128) MAINTENANCE OF BOOKS OF ACCOUNTS IN E-FORM (S. 128) Continued..

4 CFO also liable for default. -Imprisonment - Max. 1 year, or -Fine – Rs. 50,000 – Rs. 5,00,000 CFO also liable for default. -Imprisonment - Max. 1 year, or -Fine – Rs. 50,000 – Rs. 5,00,000 MAINTENANCE OF BOOKS OF ACCOUNTS (S. 128)

5 Schedule VISchedule III NO CHANGE F ORMAT OF BALANCE SHEET AND P & L

R EOPENING AND R ECAST OF A CCOUNTS ON C OURT ’ S OR T RIBUNAL ’ S ORDER (S.130 )  Grounds:-  Accounts prepared fraudulent manner, or  Affairs of the company mismanaged/ doubt on the reliability of financial statements.  On application to tribunal/ court by CG or SEBI or IT Authorities or other authority or any other person concerned  Analysis:-  Opportunity to Company of being heard not given.  Time limit for reopening or recast not specified. 6

V OLUNTARY R EVISION OF F INANCIAL S TATEMENTS OR B OARD ’ S R EPORT (S. 131)  Directors may revise:  If Financial Statements not in accordance with S. 129 or Board Report with S  For any of the 3 previous F.Y.  After obtaining approval of Tribunal.  Revision can be made only once for a particular financial year.  Disclosure in the Board’s report 7

 CG to constitute NFRA, which shall : a) Make recommendations to the C.G. - Formulation and laying down of accounting and auditing policies and standards. b) Monitor & enforce compliance with accounting & auditing standards. c) Oversee the quality of professional services of auditors. N ATIONAL F INANCIAL R EPORTING A UTHORITY (S.132 ) Continued.. 8

 Notwithstanding anything contained in any other law NFRA shall  NFRA either suo moto or reference made by CG, investigate - Professional or other misconduct of any member or firm of chartered accountants  NFRA has powers of civil court to conduct an investigation.  No other institute or body shall initiate or continue any proceeding in such matter of misconduct. NFRA 9 Continued..

 Where professional or other misconduct is proved: Minimum Penalty and Maximum Penalty  On Individual - 1 lakh - 5 times of fees and  On Firm - 10 lakhs - 10 times of fees received. Debarring member or firm min. 6 months max. 10 years  Aggrieved member or firm - Appeal before the Appellate Authority. NFRA 10

11 PRESCRIPTION OF ACCOUNTING AND AUDITING STANDARDS Central Government to prescribe Standards of Auditing S. 143(10) Accounting Standards S. 133

12 T HE C HARTERED ACCOUNTANTS ACT, 1949 T HE INSTITUTE OF C HARTERED A CCOUNTANTS R EGULATION OF THE PROFESSION OF C HARTERED A CCOUNTANTS

INSPECTION OF STATEMENT OF PROFIT AND LOSS OF THE PRIVATE COMPANIES Earlier As Per Companies Act, 1956 As per S 220, only Members can inspect the Statement of Profit and Loss Companies Act, 2013 As per S. 137, exemption given to private companies withdrawn 13

14 INTERNAL AUDIT NOW MANDATORY BY LAW (S. 138) INTERNAL AUDIT NOW MANDATORY BY LAW (S. 138) Listed Company Listed Company Unlisted Public Company Private Company Particulars Unlisted Public Com. Private Com. Paid up Share Capital> 50 Crores N.A. Turnover> 200 Crores O/S loans or borrowings> 100 Crores O/S Deposit> 25 CroresN.A. Requirement as per CARO, 2003 Paid up capital + reserves exceeds Rs 50L or average turnover of 3 consecutive F.Y exceeds 5 crore

15 Companies Act, 2013  F.Y. must end on 31 st March.  F.Y. period = 12 months Companies Act, 1956  No such provision.  F.Y. period = Max. 15 months U NIFORM FINANCIAL YEAR S. 2(41) U NIFORM FINANCIAL YEAR S. 2(41) Incorporation on or after 1 st Jan = F.Y. ends 31 st March of following year (15 months).

16 APPOINTMENT OF AUDITORS (S.139) Auditor to be appointed – For 5 years. Ratification at every AGM (ordinary resolution) Appointment Expiry If not ratified: Removal of auditor New auditor to be appointed Special resolution & CG approval is required If not ratified: Removal of auditor New auditor to be appointed Special resolution & CG approval is required Continued…

17 INDEPENDENCE OF AUDITORS Enhanced Independence  Auditor to be appointed for a tenure of 5 years  Stringent provisions for removal of auditor before 5 years : Special resolution CG approval

18 NEW LAYER INTRODUCED AUDIT COMMITTEE Evaluation of auditors’ competence by Audit Committee Recommendation to Board Evaluation of experience and qualification Pending proceedings : professional misconduct

19 ROTATION OF AUDITORS - NEW CONCEPT S. 139(2) ROTATION OF AUDITORS - NEW CONCEPT S. 139(2) Tenure of Auditor Individual Firm Consecutive years Transition period: Company to comply with this provision within 3 years of commencement of this Act

20 Applicability Listed Companies Unlisted Companies (Rule 5) Public Companies having share capital ≥ 10 Crore Private Companies having share capital ≥ 20 crore All Companies having borrowing ≥ 50 crore Continued..

21 RETROSPECTIVE APPLICABILITY- TRANSITION PERIOD 30 th September, 2017: Appointment of new auditor 31 st March, 2017: Expiry of three years 1 st April, 2014 : Commencement of Companies Act, 2014 Auditor since 2004

22 Resignation (with reasons) ROC Company CAG (In case of Govt. Companies) RESIGNATION BY AUDITOR S. 140(2) RESIGNATION BY AUDITOR S. 140(2)  Penalty : 50,000 to 5,00,000 Impact: o Back dated resignation o Reasons

23 Tribunal Either Suo moto Application by CG Application by person concerned Satisfied that auditor of a Company has acted in fraudulent manner directly or indirectly REMOVAL OF AUDITOR NEW THREAT (S. 140(5)) REMOVAL OF AUDITOR NEW THREAT (S. 140(5)) Action against the auditor  Not eligible for appointment in any Company for 5 years  Liable u/s 447 (Punishment for fraud)

 Auditor needs to report : 1. Adequacy and effectiveness of Internal Financial Control 2. If fraud is being or has been committed against the Company by its own officers or employees, report to CG. 3. Effect of pending litigation, foreseeable losses for long term contracts and derivatives 24 I NCREASE IN A UDITORS ’ R ESPONSIBILITY

INTERNAL CONTROL 25 As per Clause 4 of CARO, 2003 : Is there an adequate internal control procedure 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. Whether there is a continuing failure to correct major weaknesses in internal control. As per Section 143(3)(i) of Companies Act, 2013: Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.

REPORTING ABOUT FRAUD As per Section 143(12)– Companies Act, 2013: If an auditor of the Company in the course of performance of its duties as auditors has reason to believe that an offence involving fraud is being or has been committed against the Company by officers or employees of the Company, he shall immediately report the matter to the Central Government 26 As per Clause 21 of CARO, 2003: Whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.

FRAUD Section 447 – Companies Act, 2013 defines “Fraud” as “any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with the intent to deceive, to gain undue advantage from, or to injure the interests of, the Company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.” SA 240 – Auditor’s responsibility relating to fraud defines “Fraud” as “an intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage.” 27

A UDITOR, NOT TO RENDER CERTAIN SERVICES DIRECTLY / INDIRECTLY ( S. 144)  Accounting and book keeping services  Internal audit  Actuarial services  Design and implementation of any financial information system  Investment advisory services  Investment banking services  Rendering of outsourced financial services  Management services 28 Continued..

29 MANAGEMENT SERVICES Definition provided by ICAI Management Services does not include Tax related services Definition provided by ICAI Management Services does not include Tax related services Not defined in Companies Act, 2013

SERVICES STILL CAN BE RENDERED 30 Income Tax Sales Tax Company Law Service Tax

31 Relative is director or key managerial person Auditor > 20 Companies (including Private Companies) Convicted by court - Fraud Providing specified services – Section 144 Business relationship not on arm’s length price Person or his partner or relative: Holds any security or interest Indebted > 5 lakhs Guarantee/ Security (Third person) > 1 lakh NEW DISQUALIFICATIONS (S.141)

32 CLASS ACTION (S. 245) CLASS ACTION (S. 245) Who can file? Members Depositor s Against whom? Audito r Reason? Improper/ Misleading statement in audit report Fraudulent or unlawful act

Same as Financial Year As per General Circular No. 08/2014 dated 4 th April provisions related to: Financial Statement Board’s Report Auditor’s Report Applicable from Financial Year AUDIT FOR FINANCIAL YEAR

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