Companies Act, 2013 Provisions relating to Accounts and Audit

Introduction

Enactment

• 29th August, 2013 would be remembered as a historic day for corporate India. On this very day, the Hon’ble President of India gave his assent to the much awaited Companies Act, 2013.

• It was notified in the Gazette of India on 30th August, 2013 and replaces the Companies Act, 1956

• Rules are yet to be notified

Need

• Transformed national and international economic environment

• Lessons from bad corporate government

• Changes in stakeholders’ expectations

• Manifold increase in number of companies (from about 30,000 in 1956 to approx 11,00,000 in 2013)

The Journey

2008 2009 2010 2011 2012 2013

Companies Bill, 2008 introduced on 23.10.2008

Report on SCF on Companies Bill, 2009 was introduced in Lok Sabha

on 31.08.2010

Companies Bill, 2012 as amended was approved

by Lok Sabha on 18.12.2012

Lapsed due to dissolution of Lok Sabha; reintroduced on 03.08.2009

as Companies Bill, 2009. Bill referred to SCF

Companies Bill, 2011 introduced in

Lok Sabha on 14.12.2011

Passed by Rajya Sabha on 08.08.2013 President’s assent on

29.08.2013

SCF = Standing Committee on Finance

The Framework

Companies Act, 1956

Companies Act, 2013

Parts – 13 Sections – 658 Schedules – 15 Definitions - 67

Chapters – 29 Sections – 470 Schedules – 7

Definitions - 95

The Companies Act, 2013 gives substantial powers to the Government & major prescriptions would be in the form of Rules to be notified separately

Important Definitions

Financial statement

• 2(40) – financial statement includes:

• A balance sheet

• A profit and loss account / income and expenditure account

• Cash flow statement (other than for OPC, small company & dormant company)

• Statement of changes in equity

• Explanatory notes relating to above

Financial year

• 2(41) – financial year

• Period ending on 31st March every year

• If incorporated on or after 1st January, 31st March of following year

• If company is holding or subsidiary of a company incorporated outside India which is required to follow a different financial year for consolidation outside India, the Tribunal may, on an application made, allow any period as financial year

• Companies to align its financial year as per this clause within a period of 2 years

Accounts of Companies (Chapter IX)

Books of accounts (Sec 128)

• Books of account to be kept at registered office

• Shall be kept on accrual basis and according to double entry system of accounting

• Books can be kept in electronic mode

• Books of account shall be kept open for inspection

• To be kept for minimum 8 financial years (excluding current financial year) including vouchers…unless investigation has been ordered

Financial statement (Sec 129)

• Shall give a true and fair view which shall be in accordance with the accounting standards

• To be laid at every AGM

• Consolidated financial statements mandatory and also to be laid at AGM

• Statement containing salient features of subsidiary to be attached to financial statement

• Subsidiary shall include associate company and joint venture

• Disclosure of deviations from accounting standards alongwith reasons and financial effect

Re-opening of accounts (Sec 130)

• Re-opening and recasting of financial statements only upon an application being made

• Application made by CG, IT, SEBI or any other statutory regulatory body

• Order to be made by Tribunal to the effect that –

• earlier accounts were prepared in fraudulent manner

• company’s affairs were mismanaged, casting a doubt on reliability of financial statements

Voluntary revision of financial statements (Sec 131)

• Board of directors can revise financial statements or Board’s report

• After obtaining approval from Tribunal

• Tribunal to issue notices to CG & IT and consider their representations

• For any of three preceding financial years

• Can be done only once in a financial year

• Detailed reasons for disclosure to be made in Board’s report

Constitution of National Financial Reporting Authority (Sec 132)

• CG to constitute NFRA to

• Make recommendations to CG on accounting & auditing policies and standards

• Monitor & enforce compliance of such standards

• Oversee quality of services of professionals

• NFRA shall have powers

• To investigate, either suo moto or on reference by CG into matters of professional misconduct

• As are vested in a civil court under Code of Civil Procedure

Constitution of National Financial Reporting Authority (Sec 132)

• NFRA can make order for imposing penalty

• in case of individuals

• Minimum ` 1 lac – maximum 5 times of fees received

• In case of firms

• Minimum ` 10 lacs – maximum 10 times of fees received

• Debarring a member of firm from practice for minimum 6 months subject to maximum of 10 years

Central Government to prescribe accounting standards (Sec 133)

• CG to prescribe Accounting Standards as recommended by ICAI, in consultation with and after examination by NFRA

Financial statement, Board’s report (Sec 134)

• FS to be signed by chairperson of the company or by 2 directors (MD and CEO, if director), CFO and CS

• Board’s report shall also now include • Extract of annual return • Number of meetings of Board • Statement on declaration given by independent

directors • Policy on directors’ appointment and remuneration

including criteria for qualifications, attributes, independence, etc.

• Explanation / comment on CS secretarial audit report • Particulars of loans, guarantees or investments • Contracts with related parties • Statement on risk management policy • CSR policy developed & implemented

Financial statement, Board’s report (Sec 134)

• Directors’ Responsibility Statement - additional statement

• The directors, in case of listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively

• The directors had devised proper systems to ensure compliance with the provision of all applicable laws and that such systems were adequate and operating effectively

• Report to be signed by chairperson of the company or by 2 directors (including MD)

Corporate Social Responsibility (Sec 135)

• CSR committee to be constituted by Companies having, in any financial year

• Net worth => ` 500 crores

• Turnover => ` 1000 crores

• Net profit => ` 5 crores

• CSRC to consist of 3 or more directors with at least 1 independent director

• CSRC shall

• Formulate & recommend CSR policy

• Recommend amount of expenditure on CSR activities

• Monitor CSR policy

Corporate Social Responsibility (Sec 135)

• Board to ensure CSR activities are undertaken

• Company should spend, in every financial year, 2% of average net profits of 3 immediately preceding years

• Preference to be given to local area and areas around which it operates for spending towards CSR

• Reasons for not spending amount to be mentioned in Board’s Report

Rights of members to financial statements (Sec 136)

• Copy of financial statements (including CFS) to be sent to members at least 21 days before AGM

• Listed companies can keep documents available for inspection and send prescribed statement to members

• Listed companies to place FS on website

• Every company having subsidiary shall place audited FS of each subsidiary on website & also provide a copy to shareholder who asks for it

Financial statement to be filed with Registrar (Sec 137)

• Copy of financial statements (including CFS) to be filed with Registrar within 30 days of AGM

• Unadopted financial statements, if any, shall be also filed which will be considered provisional till adopted are filed

• FS of subsidiaries incorporated outside India not having established place of business in India also to be filed

• If AGM not held in any year, FS alongwith statement of facts and reasons to be filed

Internal Audit (Sec 138)

• Prescribed classes of companies to appoint internal auditor being a CA or ICWA or any other professional to be decided by the Board

• Rules to be prescribed for the manner and periodicity for internal audit to be conducted and reported to the Board

Audit and Auditors (Chapter X)

Appointment of Auditors (Sec 139)

• Appointment at 1st AGM – to hold office as auditor till the conclusion of 6th AGM and every 6th AGM thereafter

• Manner and selection of auditors to be prescribed

• Written consent and certificate to be obtained from auditor

• Company shall inform auditor & Registrar of appointment within 15 days of meeting

• Listed & prescribed classes of companies not to reappoint auditor for more than 5 consecutive years (individual) and 10 consecutive years (firm)

• No reappointment for 5 years from completion of term

Appointment of Auditors (Sec 139)

• No audit firm having common partners to other firm (tenure expired) shall be appointed for 5 years

• Companies to comply with the provisions within 3 years from the date of commencement of this Act

• Though appointed for 5 years, auditors can be removed or can resign

• Members can resolve that audit partners and audit team shall be rotated at specified intervals or audit can be conducted by more than 1 auditor

• C&AG to appoint auditor within 180 days from commencement of financial year

Appointment of Auditors (Sec 139)

• 1st auditor (non-government company) to be appointed by Board within 30 days of registration, failing which members to appoint at EoGM within 90 days

• 1st auditor (government company) to be appointed by C&AG within 60 days of registration, failing which Board to appoint within next 30 days, failing which members to appoint at EoGM within 60 days

• Casual vacancy (non-government company) to be filled by Board within 30 days. If vacancy due to resignation, approval of members at EoGM within 3 months of Board’s recommendation

• Casual vacancy (government company) to be filled by C&AG within 30 days, failing which by Board within next 30 days

Appointment of Auditors (Sec 139)

• Retiring auditor to be reappointed if he is not disqualified, not expressed his unwillingness to continue and no special resolution has been passed appointing another auditor or expressly providing that he shall not be appointed

• In any AGM if no auditor is appointed / reappointed, existing auditor shall continue

• In case company has Audit Committee, recommendation of AC to be considered for all appointments (including filling of casual vacancy)

Removal, resignation of Auditor (Sec 140)

• Auditor can be removed only by special resolution after obtaining previous approval of CG. Auditor to be given reasonable opportunity of being heard.

• Resigning auditor to file within 30 days statement with the Registrar and Company / C&AG indicating reasons and other relevant facts

• Special notice required at AGM to appoint auditor other than retiring auditor (not required if change is upon completion of 5/10 year term)

• Special notice to be sent to auditor who can make representation in writing to be circulated to every member or read out at the meeting

Removal, resignation of Auditor (Sec 140)

• Tribunal either suo moto or on application made by CG, direct change of auditor if it is satisfied that the auditor, directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud in relation to the company, its directors or officers

• Tribunal to make order within 15 days of application

• Such auditor shall not be eligible to be appointed as auditor of any company for 5 years and liable to punishment for fraud with imprisonment of 6 months (3 years in case of public interest fraud) upto 10 years and fine of 100% - 300% of amount involved

Qualifications & disqualifications of Auditor (Sec 141)

• Should be a Chartered Accountant

• Firm where majority of partners practicing in India are CA, firm can be appointed as auditor and only CA partners are authorised to act and sign on behalf of firm

• Following are ineligible: • Body corporate other than LLP • Officer/employee of company • Partner/in employment of officer/employee of company • Person or his relative or partner:

• Holding security / interest (not exceeding ` 1,000) or is indebted or has given guarantee in/to company / subsidiary / holding / associate / subsidiary of holding

Qualifications & disqualifications of Auditor (Sec 141)

• Following are ineligible: • Person or firm has direct or indirect business

relationship with company / subsidiary / holding / associate / subsidiary of holding

• Person whose relative is a director or in employment of company as director or KMP

• Person in full employment elsewhere or person / partner is auditor of more than 20 companies

• Who is convicted for fraud (till 10 years from conviction) • Whose subsidiary / associate company is engaged in

consulting and specialised services • Auditor to vacate his office upon disqualification after

appointment resulting in casual vacancy

Remuneration of Auditor (Sec 142)

• To be fixed in general meeting or as may be determined therein

• Board to fix remuneration of first auditor

• Out of pocket expenses and fees for other services to be in addition to remuneration

Powers and duties of auditor & auditing standards (Sec 143)

• Right of access at all times to books of account and vouchers

• Inquire into the following matters whether: • L&A made on the basis of security are properly secured

and whether terms are prejudicial • Transactions merely by book entries are prejudicial • Shares, debentures & other securities have been sold at

less then purchase price • L&A have been shown as deposits • Personal expenses have been charged to revenue

account • Cash has actually been received for shares allotted for

cash, otherwise position stated in books and balance sheet is correct

Powers and duties of auditor & auditing standards (Sec 143)

• To make report to members of company that the financial statements give a true & fair view

• Report to also state whether • He has obtained all information & explanations which

were necessary for the purpose of audit • Proper books of account have been kept • Report of branch audit has been sent to him and the

manner in which he has dealt with it • Balance sheet & P&L account are in agreement with

books of account • Financial statement comply with AS • Observations / comments on financial transactions

which may have adverse effect on functioning of company

Powers and duties of auditor & auditing standards (Sec 143)

• Report to also state whether • Any director is disqualified u/s 164(2) • Any qualification, reservation or adverse remark relating

to maintenance of account or other matters connected therewith

• Company has adequate internal financial control system and operating effectiveness of controls

• Any other matter as prescribed

• Reasons to be provided for any negative remark or qualification

• C&AG to direct upon manner is which accounts are to be audited and report to be submitted to C&AG

Powers and duties of auditor & auditing standards (Sec 143)

• C&AG shall within 60 days conduct supplementary audit and comment upon / supplement audit report

• Branch to be audited by statutory auditor or branch auditor, in case of foreign branch auditor to be appointed as per laws of that country

• Auditor to comply with Auditing Standards to be prescribed by CG as recommended by ICAI in consultation with NFRA

• CG in consultation with NFRA order that the auditor’s report shall include a statement on prescribed matters

Powers and duties of auditor & auditing standards (Sec 143)

• Auditor to report immediately to CG (within prescribed time and manner) if, in course of performing his duties, he has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of company (sub-section 12)

• This section shall apply to Cost Accountants (cost audit) and Company Secretaries (secretarial audit) in practice

• If any CA, ICWA or CS in practice do not comply with sub-section 12, he shall be punishable with fine of ` 1 lac upto ` 25 lacs

Auditor not to render certain services (Sec 144)

• Following services not to be rendered to company / holding / subsidiary:

• Accounting & book keeping • Internal audit • Design & implementation of any financial information

system • Actuarial services • investment advisory services • Investment banking services • Rendering of outsourced financial services • Management services; and • Any other prescribed services

Auditor not to render certain services (Sec 145)

• To comply with this section before close of first financial year from date of commencement

• Services not to be provided by:

Individual Firm

Himself or his relative Firm or its partners

Any other associated or connected person

Parent, subsidiary or associate entity

Any other entity, in which such individual has significant influence or control

Any other entity, in which firm or partner has significant influence or control

Whose trade name or brand name is used by such individual

Whose trade name or brand name is used by firm or its partners

Auditor to sign audit reports (Sec 145)

• The person appointed as auditor shall sign audit report and any other document required to be signed or certified as auditor

• Qualifications, observations or comments on financial transactions or matters which has adverse effect on functioning of company shall be read at AGM and shall be open to inspection by any member

Auditor to attend general meeting (Sec 146)

• All notices and other communication relating to general meeting shall be forwarded to auditor

• Auditor or his authorised representative shall attend any general meeting and shall have a right to being heard at such meeting on any business which concerns him as auditor

Punishment for contravention (Sec 147)

• Fine on company from ` 25,000 to ` 5 lacs and every officer in default with imprisonment upto 1 year or with fine from ` 10,000 upto ` 1 lac or both

• Fine on auditor from ` 25,000 to ` 5 lacs

• If auditor has contravened provisions knowingly or wilfully to deceive company, shareholders, creditors or tax authorities, imprisonment upto 1 year and with fine from ` 1 lac upto ` 25 lac

• He shall also be liable to refund the remuneration received and pay for damages to the company, statutory bodies or authorities for loss arising out of incorrect or misleading statement made in his audit report

Punishment for contravention (Sec 147)

• In case of firm being an auditor, if it is proved that partner or partners have acted in a fraudulent manner or abetted or colluded in any fraud, by the company or its directors or officers, the liability, whether civil or criminal shall be of the partner or partners concerned and of the firm jointly and severally

Cost audit (Sec 148)

• CG to order class of companies engaged in production or rendering of services to include in books of account particulars relating to utilisation of material or labour

• Cost audit to be conducted for companies having prescribed net worth or turnover

• Cost audit to be conducted by a Cost Accountant in practice

• Cost Auditor to be appointed by Board

• Cost Auditor to comply with Cost Auditing Standards prescribed by Institute of Cost Accountants of India

• All qualifications, disqualifications, rights, duties and obligations shall apply to cost auditor also

Cost audit (Sec 148)

• Cost Audit report to be submitted to Board of Directors

• Copy of report to be furnished by company to CG within 30 days alongwith information and explanation on every reservation or qualification

• CG may seek further information or explanation from company

• Provisions of punishment for contravention apply to cost audit / auditor also

Depreciation (Schedule II)

Depreciation

• Systematic allocation of depreciable amount over its useful life

• Depreciable amount = cost – residual value

• Useful life and residual value of tangible assets specified in Part C of Schedule II

• Useful life shall not be different / longer than and residual value shall not be different / higher than specified

• AS 26 to apply for intangible assets

• Useful life notified by any other regulatory authority shall be applied for such specified assets

Depreciation

• Residual value – not more than 5% of the original cost

• Disclosure – depreciation methods used and useful lives considered if they are different from those specified

• If any part of asset significant to total cost has a different useful life, useful life of such part shall be determined separately

• Useful life specified is for single shift; depreciation will increase by 50% for that period in case of double shift and 100% for triple shift

• Transitional provisions – carrying amount to be • depreciated over remaining useful life • recognised in opening balance of retained earnings if

remaining useful life is NIL

Depreciation

NATURE OF ASSETS Schedule XIV Schedule II

W.D.V (%)

S.L.M (%)

Useful Life

Useful Life

Buildings (other than factory buildings) 5.00 1.63 58 30/60 Factory Building 10.00 3.34 28 30 Motor-cars 25.89 9.5 10 6 Furniture & Fitting 18.10 6.33 15 10 Data Processing Machines including computers 40.00 16.21 6 3

Plant and Machinery; other than continuous process plant for which no special rate has been prescribed

13.91 4.75 20 15

Plant and Machinery; continuous process plant, other than those for which no special rate has been prescribed

15.33 5.28 18 8