Accounts And Audit under Company Act, 2013- An Overview
Accounts And Audit
- Accounts
- Accounts - Importance, Form of Accounting Records etc
- Holding-Subsidiary Accounts and Consolidation
- Preservation of Records by the Companies
- Cash Flow Statement
- Financial Year
- Authentication, Circulation and Revision Of Financial Statements
- Director's Responsibility Statement
- Other Important Matters
- Audit
- Appointment of Auditors
- Remuneration of Auditors
- Rotation of Auditors
- Provision of Non-Audit Services
- Disqualification of Auditors
- Duties and Liabilities of Auditors
- Powers of Auditor of a Holding Company
- Certification of Internal Control by CEO/CFO
- Cost Audit
- Audit of Government Companies
1. Accounts
1. Importance, Form of Accounting Records etc
its disclosure, in a manner that is standardized and understood by stakeholders,
is central to the credibility of the corporates and
soundness of investment decisions by the investors.
The preparation of financial information and its audit, therefore, needs to be regulated through law with stringent penalties for non-observance.
In order to bring about more transparency and uniformity in the maintenance of accounts, the companies shall maintain their books of accounts on accrual basis and double entry method of book keeping.
The form and content of the financial statements and the disclosures required therein specified separately in the Act/Rules. The companies have the option to maintain the records in electronic form capable of conversion into hard copy.
It would however, not be feasible for the law to prescribe all the details guiding the treatment of this subject. This is a technical matter which needs to be gone into by experts keeping in view the requirements of proper disclosures of financial information in the interests of healthy corporate governance. However, once developed, use of such principles such as Accounting Standards are mandated through law.
Accounting Standards serve a vital function in the requirements of proper disclosures of financial information in the interests of healthy corporate governance. There should be integration of Accounting Standards with substantive law.
2. Holding-Subsidiary Accounts and Consolidation
The consolidation of financial statements of subsidiaries with those of holding companies should be mandatory. Here question arises of the manner of maintenance of accounts of entities other than companies but controlled by companies registered under the Act. With the proposed consolidation of accounts by holding companies, there shall be maintenance of proper records by a non-corporate entity which is controlled by a company to which the provisions of the Act apply. Further, the responsibility for proper maintenance of records in such cases should be that of the holding company.
In case the financial statements of a foreign subsidiary are required to be furnished to the shareholders of the holding company, these should be accepted in the same format and currency in which these were prepared as per laws of the relevant country. With implementation of e-governance project, it is also possible to view the records of the companies filed with Registrars through electronic media.
Further, the holding companies are required to maintain records relating to consolidation of financial statements for specified periods. Presentation of consolidated financial statements by the holding company are in addition to the mandatory presentation of individual financial statements of that holding company.
3. Preservation of Records by the Companies
Section 209 (4A) of the Company Act, 2013 requires companies to preserve the books of accounts, together with the vouchers relevant to any entry in such books of account, in good order, relating to a period of not less than 8 years immediately preceding the current year.
4. Cash Flow Statement
World over, the importance of Cash Flow Statement is being specifically recognized. At present, the listed companies are mandated to include a Cash Flow Statement in the Annual Report and the Standards of Accounting prescribed by ICAI also requires in specified cases a Cash Flow Statement to be submitted along with the Balance Sheet and Profit & Loss Account with a view to make Cash Flow Statement mandatory.
5. Financial Year
The first financial year should begin from the date of incorporation and end on the immediately succeeding 31st March and the subsequent Financial Years should also end on 31st March every year.
6. Authentication, Circulation and Revision Of Financial Statements
The CFO is responsible for preparation and submission of financial statements to the Board. The financial statements should also be signed by Managing Director, CEO, CFO, and the Company Secretary wherever such functionaries are mandated, whether or not they are present at the Board meeting at which the accounts are adopted. All the Directors who were present in the meeting which approved the accounts should sign the accounts. If a Director dissents, he should also sign the financial statement with the dissent note.
This revision of accounts after its adoption/approval by the shareholders, is possible only in cases where changes in law necessitate restatement with retrospective effect or for rectifying the errors apparent from the records.
The provisions under the Companies Act relating to circulation of financial statements are provided separately. In the case of listed Companies. Where abridged financial statements are circulated amongst members, the full financial statements should be made available on the web-site and the hard copy thereof should also be made available on request.
7. Director's Responsibility Statement
The Companies Act was amended by inserting section 217 (2AA) by the Companies (Amendment) Act, 2000, which has brought about inclusion of Directors’ Responsibility Statement in the report of the Board of Directors. The requirement in Section 217 (2AA) requiring a Director Responsibility statement indicating that the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act and that the books of accounts comply with the accounting standards and policies. The Responsibility Statement should also include that the related party transactions and have been entered into at arm’s length, and if not, the relationships of the directors in such transactions along with the amounts involved have been disclosed as a part of the Director’s Report along with management justification thereof.
8. Other Important matters
The other miscellaneous matters such as “Derivatives”, “Employees Stock Option”, “Net Worth” etc. and “Transfer of Profit to Reserves” and “Declaration of Dividend out of Reserves” and other matters shall be analyzed with care and diligence.
The Section 205(2)(c) of the Act requiring companies to write off at least 95% of the original cost of the asset to the Company over a specified period.
The measure of depreciation is based on three important parameters viz. depreciable amount, estimated useful life and estimated scrap value. The policy of liberalization of the economy has brought about a public-private co-operation especially in infrastructure projects. Such projects are taken up under BOOT or BOT structure. The general tenure of the agreement in such structures is that the Special Purpose Company (SPC) would be required to ensure construction of the facility and maintenance of the facility to ensure the required quality of service during the concession period. The asset is handed over by the SPC to the Government or its agencies in a physical condition which is similar to the condition at the start of the project. It is therefore necessary that the method of providing for depreciation by the SPC should be administered in a different manner.
2. AUDIT
1. Appointment of Auditors
This is function of the Audit Committee wherever such Committees were mandated, in recommending the appointment of the Auditors to the Board in general. The existing provisions relating to appointment of first Auditor to be made by the Board, failing which by the shareholders and the power of the Central Government to appoint the Auditors whenever the Board/shareholders fail to appoint them were necessary and should continue. The Company should also be required to send intimation to the Registrar of Companies regarding appointment of First Auditors, within 15 days of such appointment.
Subsequent to the appointment of First Auditors, the appointment of Auditors should be done on AGM to AGM basis with a power to the Board to fill any casual vacancy. There should not be any situation where the company is without duly appointed Auditors. Such appointment of Auditors should be made by the shareholders taking into account the recommendations of the Board, which, in turn should be arrived at after obtaining the recommendations of the Audit Committee, where such a Committee is mandated or is in existence. In case any of the shareholders wish to propose any other Auditor in place of retiring Auditors, this process should also necessarily seek the views of the Audit Committee. There should be an obligation to intimate appointment of Auditor to Registrar of Companies by the Company within 15 days.
2. Remuneration of Auditors
The provisions relating to the payment of remuneration to the Auditors and that should be subject to decision by shareholders and that the provisions in the existing law provided a suitable framework for the purpose. However, the basic remuneration to be termed as ‘Audit Fee’ should be distinguished from reimbursement of expenses. Reimbursement of expenses to Auditors should not form part of remuneration but should be disclosed separately in the Financial Statements along with the Auditor’s fees.
3. Rotation of Auditors
The rotation of Audit partner should take place every five years in the case of all listed Companies.
4. Provision of Non-Audit Services
An Audit firm is prohibited from rendering the non audit services to its audit client and its subsidiaries: · Accounting and book keeping services relating to accounting records. · Internal Audit · Design and implementation of financial information systems including services related IT systems for preparing financial or management accounts and information flows of a company. · Actuarial services · Investment Advisory or Investment banking services · Rendering of outsourced financial services. · Management function including provision of temporary staff to audit clients.
5. Disqualification of Auditors
The Auditors’ position and responsibilities involved access to sensitive market information particularly relating to the profits of the company. There was a possibility of misuse of such information. The indebtedness/guarantee of the Auditors should also be extended to cover indebtedness/guarantee to the Directors and all entities whose financial statements are required to be consolidated under the Act. · The disqualification envisaged under the Act/Rules should be applicable not only to the Auditors but also to his relatives, (the term relatives being defined under the Companies Act) any of the associates of the auditor and any entity in which the Auditor has a substantial interest. · The Auditor should disclose holdings in the securities of the company, if any, at the time of appointment. However, that the Auditor would be privy to insight financial information of the company and there could be possibility of making wrongful gain by the Auditors by mis-utilizing such information. The work of the Auditor should be credible and free from conflict of interests.
6. Duties and Liabilities of Auditors
Auditors have the general duty of discharging their statutory functions with care and diligence. Many stakeholders would rely on the auditor’s reports for accessing the financial picture of the company. However, there cannot be any specific prescription of negligence keeping in view the expectations of all the stakeholders. However, auditors are required to carry out their work within the discipline of the legal provisions and the standards of accounting/Accounting Standards (where notified). There is a necessity that the work of the auditors should uphold the highest standards of excellence and independence. Non-compliance with such standards invites stringent penalties.
7. Powers of Auditor of a Holding Company
That the Auditor signing the consolidated financial statement should be empowered to access the books, records and documents of the entities whose accounts are consolidated. By virtue of the limitations of his appointment in the holding company, adequate records stating the basis for consolidation of accounts should be made available to him.
8. Certification of Internal Control by CEO/CFO
The Stakeholders felt the need for a high quality of financial reporting, a strengthened corporate governance mechanism, an independent audit and fearless expression of opinion by the Auditors. The internal controls in any organization constitute the pillar on which the entire edifice of Audit stands. For this purpose, the public listed companies be required to have a regime of internal financial controls for their own observance. Active interest of the shareholders’ association in improving the quality of financial reporting, investor education for better understanding of the financial statements combined with presence of internal controls would provide for effective financial reporting.
In sum :- · Internal controls as mandated by the company with the approval of the Audit Committee, if any, should be certified by the CEO and CFO of the Company and in the Directors report through a separate statement on the assessment. · The investors be educated and imparted with better understanding and appreciation of the financial statements.
While considering issues relating to management and governance structures in a company, it is recommended to set up a committee of the Board on accounting and financial matters to be termed as the Audit Committee.
All matters relating to appointment of auditors, examination of the auditor’s report along with financial statements prior to consideration and approval by the Board, related party transactions, valuations and other matters involving conflicts of interest should also be referred to the Board through the Audit Committee.
9. Cost Audit
maintenance of Cost Records under section 209 (1) (d) and
Cost Audit under section 233B of the Companies Act in respect of specified industries.
The present corporate scenario also included a sizeable component of Government owned enterprises or companies operating under administered price mechanism or a regime of subsidies. It would be relevant for the Government or the regulators concerned with non-competitive situations to seek costing data.
10. Audit of Government Companies
In respect of audit of Government companies however, Companies Act provide a special regime. Pursuant to Section 19(1) of Comptroller and Auditor-General’s Duties, Powers and Conditions of Service Act, 1971, audit of the accounts of Government companies is conducted by the Comptroller and Auditor General (C&AG) in accordance with the provisions of the Companies Act, 1956, the Auditor (Chartered Accountant) of a Government Company is appointed or re-appointed by the C&AG. It is further stipulated that C&AG shall have the power to
(b) give instructions on any matter relating to the performance of his functions,
(c) conduct himself a supplementary or test audit of the company’s accounts and
(d) comment upon or supplement the audit report in such manner as he (C&AG) thinks fit. The comments of C&AG are to be placed before AGM along with Auditor’s Report.
Further, where any directions are given by the C&AG to the Statutory Auditor not in accordance with the Accounting Standards, the Statutory Auditor may be required to mention the same in the notes on accounts.
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