Choosing Auditors for your Company: Handle with Care!

The role of auditors in the new Companies Bill is wider. The controls and quality checks on auditors have increased too. Let’s take a look at these provisions and the reasons why they are in the new Bill.

A normal shareholder of a company will not be able to understand financial statements. To protect the investments of such a shareholder an audit of account has been made compulsory. An auditor thus acts as a useful agency between the shareholders and the management. The Companies bill seeks to ensure the independence of the auditors by making necessary changes to the Companies Act, 1956.

Appointment of an auditor

Every company shall, at the 1st annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6th annual general meeting and thereafter till the conclusion of every 6th meeting.

It shall be subject to ratification by members of the company at every annual general meeting.

New grounds for disqualification

• A person or a firm who, whether directly or indirectly, has business relationship with the company, or its Subsidiary, or its Holding or associate Company or a Subsidiary of such holding company or associate company, of such nature as may be prescribed;
• A person whose relative is a director or is in the employment of the Company as a director or key managerial personnel;
• A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
• Person is also not eligible for appointment if its subsidiary or its associate or any other form of entity is engaged in consulting and specified services as provided in Clause 144 on the date of appointment;

Internal Audit

Internal audits in the old regime were conducted, the grapevine goes, by the companies own employees!

Now, with the new Bill such class or classes of companies as may be prescribed, shall be required to appoint an internal auditor, who shall either be a:

• Chartered Accountant; or
• Cost Accountant; or
• Such other professional as may be decided by the Board; to conduct internal audit of the functions and activities of the Company.

The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

Mandatory rotation of Auditors

Under the Companies Act, 1956 there is no provision for compulsory rotation of Auditors. As a result, auditors in some companies continue for a very very long time.

To remove this glitch, Companies bill has provided for rotation of auditors after specific time to ensure auditor independence and strengthen diligence in their role and conduct. The feasibility of this provision is being debated upon since long.

Secretarial Audit

The bill provides for compulsory secretarial audit by a certain class of Companies and annexing of audit report with the board report, which is circulated to all shareholders.

The Board of Directors, in their report shall explain in full any qualification or observation or other remarks made by the Company Secretary in Practice in his report.

If a company or any officer of the company or the CS in practice defaults, the company, every officer of the company or the CS in Practice shall be punishable with fine (1-5 lakh rupees)

Non-Audit Services

To ensure independence and accountability of auditor an auditor cannot provide following services "directly or indirectly" to the company or its holding company or subsidiary company, namely:

• accounting and book-keeping services;
• internal audit;
• design and implementation of any financial information system;
• actuarial services;
• investment advisory services;
• investment banking services;
• rendering of outsourced financial services;
• management services; and
• services prescribed under the Rules

Conclusion

The intention of the Companies Bill seems to be good: transparency is the mandate.

At the same time, some of the provisions might not be conducive to the clan of auditors as a whole.

For entrepreneurs and businessmen the news is clear: for the good health for your business and for your own peace of mind, it makes sense to take the appointment of Auditors seriously. 

- By Anushree S Pathak and Tanuj Kalia