Category Archives: Chapter X – CA2013

AUDIT AND AUDITORS

APPLICABILITY FORM NFRA – 1


To file or not to file NFRA – 1 still a puzzle. It seems thumb rule, if you as body corporate file Form ADT-1, do not file NFRA – 1. We will try to understand the NFRA Rules, 2018, NFRA FAQs and the Form NFRA – 1.

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CHALLENGES TO BE FACED BY NEW COUNCILS


My fellow members of the Institute of Company Secretaries of India (ICSI) may be going to a booth for voting while reading this post. Similarly, members of the Institute of Chartered Accountants of India (ICAI) just concluded their voting last week. These two elections are crucial for the future for these two eminent professions in India, which impact most on financial and non-financial reporting, disclosures and transparency in the working of Corporate India.  Admit or not, these two institutes are facing a crucial issue of survival.

National Financial Reporting Authority – NFRA is already here to oversee accounting standards, auditing standards and quality of services provided by Chartered Accountants. The law establishing the National Financial Reporting Authority – NFRA was incorporate in the statute by Man Mohan Singh Government. Soon thereafter, Chartered Accountants communities made its hue and cry about this law.  There was news of some success for them. Soon after demonetization, Prime Minister Narendra Modi raised a question on quality of services, ethics and values of Chartered Accountants in a much-hyped program organized by ICAI itself. Demonetization failure made it clear that Modi Government will enforce provisions given in the statute for the establishment of NFRA. Finally, it is enforced recently in a slight tone down version. This tone down is, unfortunately, not a face-saving for the Institute of Chartered Accountants of India. There is a reasonable apprehension that, irrespective of the party in power, there may be some efforts to extend the application of these provisions to other auditors like company secretaries. Soon to be elected councils of both institutes will certainly draw a plan to take on such an eventuality.

The second challenge for government and to some extent for these self-regulatory statutory institutes is to create completion in regulations and quality standards. The Insolvency and Bankruptcy Code, 2016 created a super insolvency regulator the Insolvency and Bankruptcy Board of India with three professional regulators competing with each other. There are suggestions to create such competing professional regulators for auditing bodies – Institute of Chartered Accountants of India, Institute of Cost Accountants of India and Institute of Company Secretaries of India. Will NFRA be the super audit regulator or these three professional bodies be super-regulator for their specific domain? How will they deal with the challenge? Do their members care?

Another challenge is a proposal for a council with representation from all stakeholders (appointed by Government not just elected representatives of regulated professionals). Recently, the Medical Council of India saw drastic changes. Unfortunately, all self-regulatory statutory bodies BCI, MCI, ICAI, ICAI (CMA), ICSI and others have a poor record for their professional duty to regulate their respective profession. Their image is not of statutory regulatory bodies but of a trade union. This is at sharp contrast with other statutory regulatory bodies like Securities and Exchange Board of India (SEBI) which regulates brokers, advisors and many other market professionals; Insurance Regulatory and Development Authority (IRDA) which regulates Actuaries, Undertakers and other insurance professionals; and Reserve Bank of India (RBI) which regulators bankers and other financial advisors. The difference lies in their top management – their council or governing board. Will self-regulatory statutory bodies like ICAI and ICSI develop themselves as true professional regulators or be remain downgraded to be a trade union?

Recently, we saw these self-regulatory statutory bodies took advice from big and powerful advisory firms and companies. Some of these firms and companies have a multinational and national presence. Unfortunately, their powerhouses directly and indirectly influence councils of these self regulatory statutory bodies. This need urgent attention and introduction of organizational governance akin to corporate governance and independency norms.

Our major challenges are from inside but one growing challenge is to regulate multinational firms coming to India. India cannot stop them from coming under WTO regulation. We have one clue to govern them from IBBI regulations. We can ask foreign professional to be part of some firms which are governed under Indian regulations. I should clearly say Big – 4 should be governed by these self regulatory statutory bodies. If not, these self regulatory statutory bodies may be scrapped, sooner than later.

Is India prepared?

National Financial Reporting Authority (NFRA) and its Powers


Section 132 of the Companies Act, 2013 is the point of debate and hope for corporate governance. It paves way for constitution of National Financial Reporting Authority – a super-regulator for statutory auditors – Chartered Accountants. Optimists see it as predecessor of a future super-regulator for self regulatory statutory professional organizations – Institute of Chartered Accountants of India regulating chartered accountants and statutory auditors, Institute of Cost Accountants of India (earlier Institute of Cost and Works Accountants of India) regulating cost and management accountants and cost auditors, and Institute of Company Secretaries of India regulating company secretaries and secretarial auditors. We earlier discussed the provision of Section 132 earlier here.

In this post, we will discuss Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13th November 2018.

In an earlier post here, we discussed Duties of NFRA under Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13th November 2018. In this post, we will discuss powers of NFRA to investigate and disciplinary proceeding as on 13th November 2018.

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National Financial Reporting Authority (NFRA) and its Duties


Section 132 of the Companies Act, 2013 is the point of debate and hope for corporate governance. It paves way for constitution of National Financial Reporting Authority – a super-regulatory for statutory auditors – Chartered Accountants. Optimists see it as predecessor of a future super-regulator for self regulatory statutory professional organizations – Institute of Chartered Accountants of India regulating chartered accountants and statutory auditors, Institute of Cost Accountants of India (earlier Institute of Cost and Works Accountants of India) regulating cost and management accountants and cost auditors, and Institute of Company Secretaries of India regulating company secretaries and secretarial auditors. We earlier discussed the provision of original Section 132 earlier here.

In this post, we will discuss Duties of NFRA under Section 132 and the National Financial Reporting Authority Rules, 2018 as on 13th November 2018. Powers of NFRA to investigate and disciplinary proceeding shall be discussed in next post.

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Ratification of auditor in 2018


One of the frequently asked questions these days is, should a company need to ratify the appointment of an auditor in the Annual General Meeting 2018. Should I explain my affirmative reply?

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Ratification of Auditor –Bye Bye


Effect of non – ratification of the appointment of the auditor was one of the wonders of the Companies Act, 2013. There were so many queries regarding effects of non – ratification of auditor and removal of an auditor. Now, all these long discussions came to end. The Companies Amendment Act, 2017 read with Notification S.O. 1833(E) dated 7th May 2018 deletes provision of annual ratification of the appointment of auditor.

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Criminal Liability in case of Audit Firm


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.

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Out of Sahara Blues


Finally government tries to come out of Sahara Blues. Government earlier was in pressure to put corporate governance in place among private companies and tried well. Thereafter, industry lobby (read as vested interests among “promoters” and “professionals”) started pleaded mercy for all “otherwise honest players”.

Government initiated it journey with exemption notifications and now bring this amendment rules.

The Companies (Audit and Auditors) Second Amendment Rules, 2017 is interesting in more than one way. Statistically, this exemption will benefit only selected big players among private companies in India and their auditors.

Section 139(2) of the Companies Act, 2013 reads, “No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint—

(a) an individual as auditor for more than one term of five consecutive years; and

(b) an audit firm as auditor for more than two terms of five consecutive years.”

Rule 5 of the Companies (Audit and Auditors) Rules 2014 before present amendments reads, “for the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes of companies excluding one person companies and small companies:-

(a) all unlisted public companies having paid up share capital of rupees ten crore or more;

(b) all private limited companies having paid up share capital of rupees twenty crore or more;

(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.”

Now, the Companies (Audit and Auditors) Second Amendment Rules, 2017, amend clause (b) of rule 5. The amendment rules reads, “in the Companies (Audit and Auditors) Rules, 2014, in rule 5, in clause (b), for the word “twenty”, the word “fifty” shall be substituted.

This amendment rules increase threshold limit for rotation of auditors for private companies by a good 150%.

As number of companies and auditors is not much, it may not affect stakeholders significantly but our commitment towards corporate governance.

 

Specified Banks Notes – Amendment in Companies Law


Ministry of corporate affairs inserted a clause (d) in rule 11 of the Companies (Audit and Auditors) Rules, 2014. The Companies (Audit and Auditors) Amendment Rules, 2017 was published in official gazette on 30th March 2017 and came into force from that date.

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Removal of Auditor Appointment Difficulty


Government of India has removed a dozen difficulties from the Companies Act, 2013. Yes, the Companies (Removal of Difficulties) Third Order, 2016 is twelfth order in Removal of difficulties series of Orders in these three years.

In this post we will discuss this Removal of Difficulties Order.

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CARO 2016


The Companies (Auditor’s Report) Order, 2016 is notified on 29th March 2016 in supersession of the Companies (Auditor’s Report) Order, 2015 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number S.O. 990 (E), dated the 10th April, 2015, except as respects things done or omitted to be done before such supersession.
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SEBI Debars Auditor


In an order dated 17th February 2016 Whole Time Member of Securities and Exchange Board of India, debars an auditor (Chartered Accountant is this case) from issuing any certificate. SEBI held that the Auditors had aided and abetted the Company in committing the alleged fraud.
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REPORTING OF FRAUD


Ministry of corporate Affairs issued a notification dated 14th December 2015 and published here in the Gazette of India dated 15th December 2015 regarding amendment in the Companies (Audit and Auditors) Rules, 2014.

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Remaining Part of Companies Amendment Act became Effective


A gazette notification posted here on official website of the Gazette of India and posted on website of Ministry of Corporate Affairs says that Section 13 and Section 14 of the Companies (Amendment) Act, 2015 came into force with effect from 14th December 2015. The official language of notification read, “The Central Government hereby appoints the 14th day of December, 2015 as the date on which the provisions of section 13 and 14 of the said Act shall come into force.”

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That Audit Report


Indian corporate world was shocked and corporate governance became a question when on 20th October 2014, M/s. R. H. Modi  & Co., Chartered

Public Notice by Auditors

Public Notice by Auditors

Accountants, auditor of C. Mahendra Exports Limited published a public notice in newspaper. It was alleged that the company “in a complete illegal and malafide manner filed, uploaded and circulated the Annual Report with the financial results of the company for financial year 2014 – 15 and the auditor report dated 7th September 2015 purported that the financial statements have been audited and Auditors Report signed by us (M/s. R. H. Modi  & Co., Chartered Accountants).

The auditor in this public notice claimed that these financial statements have not been finalised and audited by them. The auditor claimed that despite their strong objection to the passing of company’s account in their present form, the same have been passed by the shareholders of the company in annual general meeting held on 26th September 2015.

The company filed its clarification before stock exchanges, which is available in site of Bombay Stock Exchange here and site of National Stock Exchange here. The company not only stated facts from their side but also raised several questions on point of law.

According to facts mentioned by the company, Managing Director and Statutory Auditors did not sign the financial statements and Auditors Report. The company presented following interesting queries:

  1. Can the auditor refuse to sign the auditor’s report due to dispute between the promoters?
  2. Can the Auditor not sign the Audit Report if the MD does not sign the accounts?

Fully clarification written by the company is worth academic reading.

This blog does not want to discuss on the matter which may soon go to inquiry by relevant professional bodies and regulators. However, development on this matter may be of academic interests.

Reply by Company P.1

Reply by Company P.1

Reply by Company P.2

Reply by Company P.2

Reply by Company P.3

Reply by Company P.3

Counter Puzzle of Auditor Appointment


No doubt the Companies Act, 2013 is not a law but collection of legal puzzle. Compliance of its provisions became hell. This is not just because of poor drafting of law but poor reading of law. We student of the Companies Act, 2013 need to unlearn the Companies Act, 1956 first and finally. We need to know, learn, understand and educate ourselves that the Companies Act, 1956 is now only for reference purpose only.

In last post, we discussed puzzle of ADT – 1 here but every coin have second side also. In that post we start reading form the charging sub – section and in this post we will start reading form the compliance required by the Ministry i.e. ADT – 1 itself.

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Puzzle of Auditor Appointment (ADT – 1)


No doubt the Companies Act, 2013 is not a law but collection of legal puzzle. Compliance of its provisions became hell. This is not just because of poor drafting of law but poor reading of law. We student of the Companies Act, 2013 need to unlearn the Companies Act, 1956 first and finally. We need to know, learn, understand and educate ourselves that the Companies Act, 1956 is now only for reference purpose only.

In this post we will try to solve puzzle of ADT – 1, Rule 4 and Section 139.

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CARO 2015


Even though, Companies (Auditor’s Report) Order, 2015 is placed along with Removal of difficulty orders, both are complete of different genre.

Companies (Auditor’s Report) Order, 2015 is issued in exercise of powers conferred by Section 143(11). The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein. National Financial Reporting Authority under Section 132 is not yet constituted and this order is issued after consultation with the Institute of chartered Accountants of India. [I am not commenting on Legal status of the Order. However, it may be enough if a Removal of Difficulty order issued simultaneously.]

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Part of Companies Amendment Act became Effective


A draft notification posted here on website of Ministry of Corporate Affairs says that Section 1 to 12 and Section 15 to 23 of the Companies (Amendment) Act, 2015 came into force with effect from 29th May 2015. The official language of notification read, “the Central Government hereby appoints the 296 May, 2015 as the date on which the provisions of sections 1 to 12 and 15 to 23 of the said Act shall come into force.” The Amendment Act was got presidential assent and notified by Ministry of Law and Justice as such on 26th May 2015 in official gazette.

Two sections not notified yet deals with Fraud Reporting Procedure [Section 13 amending Section 143 of Principal Act] and Related Party Transactions [Section 14 amending Section 177 of Principal Act]. This is understood that Rules related to these sections are in drafting process.

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COST AUDIT after Amendment Rules 2014


We have discussed applicability of the Companies (Cost Record and Audit) Rules 2014 as amended by the Companies (Cost Record and Audit) Amendment Rules 2014. Certain companies shall maintain cost record as discussed earlier here. Earlier we have discussed Cost Audit under original Rules before these amendment here.

Applicability of Cost Audit [Rule 4]:

Ever company specified in ITEM (A) of Rule 3, shall get its cost record audited if –

the overall turnover of the company from its products and services during preceding financial year is rupees fifty crore or more, or

the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under [item (a) of] Rule 3 is rupees twenty five crore or more. [Rule 4(1)]

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