[2013] 38 taxmann.com 162 (Article)
CA's dilemma : To be or not to be auditor of a company
SRINIVASAN ANAND G.
CA
The various new provisions introduced by the Companies Act, 2013 have made the position of statutory auditors of companies precarious. These new provisions have been examined below:
(A) WIND UP ENTITIES –SUBSIDIARIES, ASSOCIATES AND OTHER ENTITIES ENGAGED IN CONSULTING AND SPECIALIZED SERVICES AS PROVIDED IN SECTION 144 BEFORE APPOINTMENT AS AUDITOR
A person whose subsidiaries or associate companies or any other form of entity, engaged in consulting and specialized services as on date of appointment shall not be eligible for appointment as auditor of a company - Section 141(3)(i) of the 2013 Act.
(B) AUDITOR CANNOT RENDER SPECIFIED NON-AUDIT SERVICES TO AUDITEE COMPANY
Section 144 of the 2013 Act provides that an auditor appointed under this Act shall not directly or indirectly provide any of the following "other services" (i.e. services other than statutory audit under the 2012 Act) to auditee-company or its holding company or subsidiary company
| (a) | accounting and book keeping services; | |
| (b) | internal audit; | |
| (c) | design and implementation of any financial information system; | |
| (d) | actuarial services; | |
| (e) | investment advisory services; | |
| (f) | investment banking services; | |
| (g) | rendering of outsourced financial services; | |
| (h) | management services; and | |
| (i) | any other kind of services as may be prescribed. |
(C) TRIBUNAL MAY DIRECT THE COMPANY TO CHANGE ITS AUDITORS [SECTION 140(5)]
The provisions regarding Tribunal's powers to direct company's change of auditors are as under:
| ♦ | The Tribunal, may, by order, direct the company to change its auditors. If it is satisfied that the auditor of a company has: |
| • | acted in a fraudulent manner or | |
| • | abetted or colluded in any fraud by, or in relation to, the company or its directors or officers. |
| ♦ | The Tribunal may so direct either suo motu or on an application made to it by the Central Government or by any person concerned. | |
| ♦ | If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place. | |
| ♦ | Such auditor (who has been removed by Tribunal as above) shall also be liable for action under section 447. | |
| ♦ | An auditor (whether individual or firm) against whom an order has been passed by Tribunal under section 140 shall not be eligible to be appointed auditor of any company for 5 years from the date of passing of the order. [Second proviso to section 140(5)] | |
| ♦ | In case of a firm, the liability shall be of the firm of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the company or its directors or officers. |
(D) JURISDICTION OF NFRA OVER PROFESSIONAL/OTHER MISCONDUCT OF CAs/CA FIRMS WHO ARE AUDITORS OF PRESCRIBED CLASSES OF BODIES CORPORATE
Notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants registered under the Chartered Accountants Act, 1949.
No other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section. Thus, it would appear that ICAI is precluded from initiating or continuing proceedings against CAs/CA firms against whom NFRA has initiated proceedings suo motu or on Central Governments' reference. However, it appears that the converse is not true.
Where any disciplinary proceedings is initiated by ICAI against any CA or firm of CA in the matter of any professional/other misconduct in relation to prescribed classes of bodies corporate the case can be transferred to itself by NFRA whereupon ICAI shall not continue action against the CA/CA firm.
The expression 'professional or other misconduct' shall have the same meaning as assigned to it under section 22 of the Chartered Accountants Act, 1949
NFRA shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely :—
| (a) | discovery and production of books of account and other documents, at such place and at such time as may be specified by National Financial Reporting Authority; | |
| (b) | summoning and enforcing the attendance of persons and examining them on oath; | |
| (c) | inspection of any books, registers and other documents of any person referred to in clause (b) at any place; | |
| (d) | issuing commissions for examination of witnesses or documents. |
Where professional or other misconduct is proved, NFRA shall have the power to make order for—
| (a) | imposing penalty of |
| ♦ | not less than Rs. 1,00,000 but which may extend to 5 times of the fees received and | |
| ♦ | not less than Rs. 10,00,000 but which may extend to 10 times the fees received in case of firms; |
| (b) | debarring the member or the firm from engaging himself or itself from practice as member of the Institute for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority. |
(E) CRIMINAL LIABILITY, LIABILITY FOR DAMAGES AND LIABILITY TO REFUND REMUNERATION
Section 147(2) of the 2013 Act provides as under:
| ♦ | Where an auditor of a company contravenes any of the provisions relating to contents of audit report, compliance with auditing standards, rendering prohibited services and signing of audit report, he shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5,00,000. | |
| ♦ | If such contravention by auditor is knowingly or wilfully with intent to deceive the company or it shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000, or with both. |
Section 147(3) of the 2013 Act provides that where an auditor has been convicted of an offence as above, he shall be liable to—
| (i) | refund the remuneration [See section 142(1)] received by him to the company; and | |
| (ii) | pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report. |
Section 147(3), by making the auditors liable to any and every third party who suffers a loss without regard to whether it was legitimate to use the audited financial statements for the purpose for which the third party used, seeks to expose the auditors of companies, to borrow Justice Cardozo's famous words, "to liability in an indeterminate amount for an indeterminate time to an indeterminate class".
(F) CLASS ACTION AGAINST AUDITORS
As if this is not all, section 245(1)(g) of the 2013 Act permits class action by member or members or depositor or depositors satisfying specified criteria against the auditor of the company to claim damages or compensation or demand any other suitable action from or against the auditor including the audit firm of the company for any improper or misleading statement(s) of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct on his part. This remedy will have to be availed by applying to the Tribunal. Unlike section 147(3), here, it does not matter whether improper or misleading audit report is due to auditor's negligence simpliciter or knowing or wilful with intent to deceive.
Regards
Prarthana Jalan
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