Recently, after the Companies (Audit and Auditor) (2nd) Amendment Rules, 2018 some section of media reported that an audit firm shall be criminally liable under the company law for a fraudulent act of an audit partner, while few others have view that there is some new position of law regarding criminal liability of audit firms. Both of these are slightly wrong interpretations.
Rule 9 of the Companies (Audit and Auditors) Rules, 2018 before its omission, read as under:
In case of criminal liability of any audit firm, the liability other than fine shall devolve only on the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud.
Yes, in plain reading seems to be against the wishes of all-powerful audit firms. However, the law is not subject to plain reading.
After the Companies (Amendment) Act, 2017 read with Notification S.O. 630(E) dated 9th February 2018 inserted a proviso to Section 147(5), now omitted Rule 9 of the Companies (Audit and Auditors) Rules, 2014 become redundant.
Subsection 147(5) of the Companies Act, 2013 after said amendment read as under:
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.
Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.
In view of the statutory provision, audit firms are liable for civil liabilities and criminal liabilities punishable with fine. In total, there is no change in the position of law on the ground.
The change is cosmetic in nature where a law made by subordinated legislation is promoted to parliamentary legislation.
Please note, an audit firm being an incorporated person (LLP) or unincorporated entity (partnership) cannot be criminally liable other than fine – that is imprisonment.