The 2013 Act has introduced certain significant amendments in this chapter. It has also introduced several additional requirements such as preparation of consolidated financial statements, additional reporting requirements for the directors in their report such as the development and implementation of the risk management policy, disclosures in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates, etc., in comparison with the requirements of the 1956 Act.
1. Books of accounts
Every company, similar to the requirement of the existing 1956 Act, is required to maintain books of accounts at its registered office. [section 128(1) of the 2013 Act]. ‘Books of accounts’ are required to show (a) all money received and spent and details thereof, (b) sales and purchases of goods, (c) assets and liabilities and (d) items of cost as may be prescribed. The books of accounts of a company essentially provide the complete financial information of a company. Further, with respect to branches, while the existing 1956 Act provides that where the company has a branch office(s) proper summarized returns, made up to date at an interval of not more than three months was supposed to be sent by the branch to the company at its registered office or another place, etc., such a requirement has now been done away with and only returns are to be periodically sent by the branch to the registered office [section 128(2) of 2013 Act]. Also, in keeping with the times, books of accounts and relevant papers can now be maintained in electronic mode [section 128(1) of 2013 Act].
2. COGNISANCE OF ACCOUNTING STANDARDS
In several instances across the new companies 2013 Act, there are provisions that are also covered within the accounting standards currently notified under section 211(3C) of the 1956 Act and the Companies (accounting standards) Rules, 2006 thereunder. There are certain differences in the manner in which a few terms have been defined under the 1956 Act. While the differences in some of these terms may not have any adverse impact, in certain cases, these differences may create implementation issues. Differences in definitions exist in the following cases:
3. CONSOLIDATED FINANCIAL STATEMENTS
The 2013 Act now mandates CFS for any company having a subsidiary, associate, or a joint venture [section 129(3)]. The manner of consolidation is required to be in line with the requirements of AS 21 as per the draft rules.* Further, the 2013 Act requires adoption and audit of CFS in the same manner as standalone financial statements of the holding company [section 129(4)]. Apart from CFS, the 2013 Act also requires a separate statement, containing the salient features of financial statements of its subsidiary (ies) in a form as prescribed in the draft rules* [First proviso to section 129 (3)]. Further, section 137(1), also requires an entity to file accounts of subsidiaries outside of India, along with the financial statements (including CFS). While section 129 of the 2013 Act, requires all companies to file a statement containing salient features of the subsidiaries financial statements, in addition to the CFS, section 137 of the 2013 Act further requires entities with foreign subsidiaries to submit individual financial statements of such foreign subsidiaries along with its own standalone and consolidated financial statements. There seems to be a significant amount of overlap and additional burden on companies with respect to these compliances. To illustrate this point, in order to comply with these requirements, a company which has a global presence, with subsidiaries both within as well as outside India will need to comply with the following:
4. Re-opening of accounts and voluntary revision of financial statements or the board’s report
A company would be able to re-open its books of accounts and recast its financial statements after making an application in this regard to the central government, the income tax authorities, the SEBI, or any other statutory regulatory body or authority or any other person concerned, and an order is made by a court of competent jurisdiction or the Tribunal under the following circumstances (section 130 of the 2013 Act):
5. Financial year
The 2013 Act has introduced a significant difference in the definition of the term, ‘financial year’, which has been defined in section 2(41) of the 2013 Act to mean April to March. There are several reasons for a company to use a year-end which is different from April to March. These include companies which are subsidiaries of foreign companies that follow a different year-end or entities which have significant subsidiaries outside India which need to follow a different year-end, etc. Accordingly, it would not be appropriate to mandate a single year-end for all companies. Since the 2013 Act does not mandate any specific rules or requirements on the basis of a specific year, as in the case of tax laws, the reason for requiring a uniform year-end under the 2013 Act, seems to be unclear. Further, recent notifications or circulars of the Ministry seem to indicate relaxation in the norms for requiring approvals from the Tribunal or the central government, etc for matters which are administrative or procedural in nature. Accordingly, the option available with companies to seek an exemption from the Tribunal will create additional administrative and procedural roadblocks, with no benefits to the companies. Rather, they will need to expend additional costs as well as time either by way of seeking an exemption or preparing multiple sets of financial statements.
Audit and auditors
Audit and auditors
The 2013 Act features extensive changes within the area of audit and auditors with a view to enhancing audit effectiveness and accountability of the auditors. These changes undoubtedly have a considerable impact on the audit profession. However, it needs to be noted that these changes will also have a considerable impact on the company in terms of time, efforts and expectations involved. Apart from introducing new concepts such as rotation of audit firms and class action suits, the 2013 Act also increases the auditor’s liability substantially in comparison with the 1956 Act.
1. Appointment of auditors
Unlike the appointment process at each annual general meeting under the 1956 Act, the auditor will now be appointed for a period of five years, with a requirement to ratify such an appointment at each annual general meeting [section 139(1) of 2013 Act]. Further, the 2013 Act provides that in respect of appointment of a firm as the auditor of a company, the firm shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008 [Explanation to section 139(4) of 2013 Act]. Also, the 2013 Act specifies that where a firm, including a limited liability partnership, is appointed as an auditor of a company, only those partners who are chartered accountants shall be authorized to act and sign on behalf of the firm [section 141 of 2013 Act]. Section 141 of the 2013 Act further prescribes an additional list of disqualifications and extends the disqualification to also include relatives. The Section of the 2013 Act states that a person who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company of face value exceeding one thousand rupees or such sum as may be prescribed; is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of Rs.1,00,000*; or has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for Rs.1,00,000*, will not be eligible to be appointed as an auditor. Additionally, a person or a firm who, whether directly or indirectly, has a business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed, will be disqualified from being appointed as an auditor. The ineligibility also extends to a person or a partner of a firm who holds an appointment as an auditor in more than twenty companies as well as a person who is in full-time employment elsewhere. [section 141 (3)(g) of the 2013 Act]. The definition of a relative does not give cognizance to the Code of Ethics prescribed by the Institute of Chartered Accountants( ICAI) and thus, there are likely to be interpretational issues. Also, the 2013 Act does not specify what would constitute as indirect interest and thus in absence of guidance it would be difficult to assess the extent of implication on the audit profession.
2. Mandatory firm rotation
The 2013 Act has introduced the concept of rotation of auditors as well as audit firms. It states that in the case of listed companies (and other class(es) of companies as may be prescribed) it would be mandatory to rotate auditors every five years in case of the appointment of an individual as an auditor and every 10 years in case of the appointment of an audit firm with a uniform cooling-off period of five years in both the cases. Further, firms with common partners in the outgoing audit firm will also be ineligible for appointment as an auditor during the cooling-off period. The 2013 Act has allowed a transition period of three years for complying with the requirements of the rotation of auditors [section 139(2) of the 2013 Act]. Further, the 2013 Act also grants an option to shareholders to further require rotation of the audit partner and staff at such intervals as they may choose [section 139(3) of the 2013 Act]. Currently, while the 1956 Act does not have any requirements relating to the auditor or audit firm rotation, the Code of Ethics issued by the ICAI has a requirement to rotate audit partners, in case of listed companies, after every seven years with a cooling-off period of two years.
3. Non-audit services to audit clients
The 2013 Act states that any service to be rendered by the auditor needs to be approved by the board of directors or the audit committee. Additionally, the auditor is restricted from providing specific services, which include the following:
5. Auditors liability
The scope and extent of the auditor’s liability have been substantially enhanced under the 2013 Act. Now, the auditor is not only exposed to various new forms of liabilities, however, but these liabilities prescribed in the existing 1956 Act have also been made more stringent. The auditor is now subject to oversight by multiple regulators apart from the ICAI such as The National Financial Reporting Authority (NFRA, and the body replacing the NACAS) is now authorized to investigate matters involving professional or other misconduct of the auditors. The penalty provisions and other repercussions that an auditor may now be subject to as per the 2013 Act include monetary penalties, imprisonment, debarring of the auditor and the firm, and in case of fraud, can even be subject to class action suits.
6. Additional responsibilities of the auditor
The 2013 Act requires certain new aspects that need to be covered in an auditors’ report. These include the following:
