Role of Auditor in Companies: An Interesting area of study

An auditor is an independent professional person qualified to perform an audit. In accounting, an auditor is someone who is responsible for evaluating the validity and reliability of a company or organization’s financial statements. The term is sometimes synonymous with “comptroller”. Sections 138 to 148 of the Companies Act dealing with accounts, audit, and auditors. These provisions will have far-reaching implications for the audit profession. In this article some important provisions contained in the companies act, 2013 are discussed.

Sections 138 to 148 of the Companies Act dealing with accounts, audit, and role of auditors. These provisions will have far-reaching implications for the audit profession. In this article some important provisions contained in the companies act, 2013 are discussed. An auditor is an independent professional person qualified to perform an audit. In accounting, an auditor is someone who is responsible for evaluating the validity and reliability of a company or organization’s financial statements. The term is sometimes synonymous with “comptroller”.

Internal Audit (Sec-138)

As per section [1], a certain class of companies is required to appoint Internal Auditors

Appointment of Auditor (Sec-139)

As per section [2], it is a prime requirement that every company shall at the first annual general meeting appoint an auditor who can either be an individual or a firm. Appointment includes reappointment.

The manner and procedure of selection of auditors by the members of the company will be such as may be prescribed. It is a mandatory condition that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him stating that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.

Eligibility, Qualifications, and Disqualifications of Auditors (Sec-141)

A person will be qualified to be appointed as an auditor of a company only if he is a chartered accountant. Where a firm is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm. A person will be disqualified if he is falling under the following: an officer or employee of the company.

Removal, Resignation of Auditor and Giving of Special Notice and Change of Auditor (Sec-140)

Special resolution

The auditor appointed may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner.

Resignation

The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of Government company with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation. In case of non-compliance, he shall be punishable with a fine ranging from INR 50,000 to 5 lakh.

Tribunal

The Tribunal either suo moto or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner in relation to the company or its directors or officers, it may, by order, direct the company to change its auditors.

In the case of such an application by the Central Government for a change of Auditors, the Tribunal can, within 15 days, pass an order that the auditor shall not function as such and the Central Government will be able to appoint another auditor.

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Consequences

The role of auditor who is removed by the Tribunal cannot be appointed as an auditor of that company for 5 years.

Punishment with imprisonment for a minimum term of six months which may extend to 10 years and shall also be liable to pay a minimum fine of an amount involved in the fraud which may extend to 3 times the said amount.

If the fraud involves public interest the minimum period of imprisonment will be 3 years.

Powers and role of Auditors and Auditing Standards Powers (Sec-143(1))

Right to access

Every auditor of a company shall have the right to access at all time to book of accounts and vouchers of the company. The Auditor [3] shall be entitled to require from officers of the company such information and explanation as he may consider necessary for the performance of his duties.

There is an inclusive list of matter for which an auditor shall seek information and explanation. This role of auditor is to take special care on serious issues. The list includes issues related to:

Proper security for Loan and advances,

Transaction by book entries

Loan and advances made shown as deposits,

Personal expenses charged to revenue account

The case received for share allotted for cash

The auditor of holding company also has the same rights.

Auditor to sign Audit Reports (Sec-145)

The auditor of the company shall sign the auditor’s report [4] or sign or certify any other document of the company and financial transactions or matters, which have an adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

Role of Auditor in General Meeting (Sec-146)

It is a prime requirement under section [5], that the company must send all notices and communication to the auditor, relating to any general meeting, and he shall attend the meeting either through himself or through his representative, who shall also be in a role of auditor. Such an auditor must be given a reasonable opportunity to speak at the meeting on any part of the business which concerns him as the auditor.

As per section [6], notice of the general meeting must be given before 21 days either in writing or through electronic mode to the auditor in such manner as may be prescribed. Every notice of a meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting.

Right to Remuneration (Sec-142)     

The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein. It must include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.

Consent of auditor

As per section 26, the company must mention in their prospectus the name, address, and consent of the auditors of the company.

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The Composition of the Audit Committee (Sec-177)

The composition of the Audit Committee [7]: The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. The majority of members of the Audit Committee including its Chairperson shall be persons with the ability to read and understand the financial statement. The auditors and KMP(Key Managerial Person) have a right to be heard in the meetings when it considers the auditor’s report, but have no right to vote.

SEBI[8]: The audit committee shall have minimum 3 directors as members of which 2/3rd of the members of the committee shall be independent directors. All members of the audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

Auditor not render certain services (Sec-144).

An Auditor appointed under this act shall provide to the company other service approved by Board of directors or the Audit Committee, but which shall not be included in any of the following services.

Accounting and bookkeeping services

Internal audit

Punishment for Contravention (Sec-147)

If any provision from section-139 to section-146 is contravened,  the company shall be punishable with fine, not less than twenty-five thousand rupees but may extend to five lakh rupees and every officer of the company for a term of 1 year and fine of not less than ten thousand but may extend to one lakh rupees.

If an auditor of a company contravenes any provision then he shall be punishable with fine, not less twenty-five thousand rupees which may extend to five lakh rupees.

If the auditor contravenes any provision willfully or knowingly to deceive the company then he shall be punishable with imprisonment for a term which may extend to 1 year and a fine of not less than one lakh rupees which may extend to twenty-five lakh rupees.

If the auditor has been convicted under this section then he shall be liable to:

Refund the remuneration received by him.

Pay for damage to the company.

Cost Audit (Sec-148)

Where the Central Govt (CG) is of the opinion that the cost records of such class of companies engaged in the production of such goods and providing such services as may be prescribed, is required to be audited, then the CG on consultation with the regulatory body can demand cost audit to be conducted.

Appointment of Cost Auditor

Cost auditor is to be appointed by the Board. A cost Accountant in practice or a firm of cost accountants can be appointed as a cost auditor.

Case Laws

Toshiba – a case of internal audit failure [9]

Toshiba, a 140-year-old pillar of Japan Inc, is caught up in the country’s biggest accounting scandal since 2011. In 2011, Olympus Corp was embroiled in a scandal. In July 2015, Toshiba Corp president Hisao Tanaka and his two predecessors quit after investigators found that the company inflated earnings by at least $1.2 billion during the period 2009-2014. Toshiba is one of the early adopters of the corporate governance reforms initiated in Japan. The observations of the committee give the impression that the fault of the internal audit in Toshiba was that it focused on consultation service rather than assurance service.. It was not the fault of the internal audit that it provided consultation service. The fault was that it did not pay attention to accounting audit. In Toshiba, the audit committee was neither capable nor independent. The three external members of the audit committee had no knowledge of finance and accounting. An ex-Chief Financial Officer (CFO), who was the CFO during the timeframe when accounting irregularities occurred, was the only whole time member of the audit committee. Therefore, the internal audit was not independent of the management. Earnings management had the tacit approval of the top management. Therefore, it is not surprising that accounting audit was excluded from the scope of an internal audit. It is incorrect to infer that the accounting audit did not receive the attention of the internal audit because its focus was on providing consultation service. Therefore, internal audit failure leads to corporate governance failure.

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Corporate Accounting Scandal at Satyam Computer Services Limited

Price Waterhouse auditors “intentionally” failed to apply certain audit standards to Satyam Computer Services Ltd[10], enabling the firm’s founder B. Ramalinga Raju and others to perpetuate India’s largest accounting fraud. In its, CBI said that while the same Price Waterhouse auditors, in an effort to ascertain the authenticity of sales invoices raised by Infotech Enterprises, had collected the live invoice samples directly from the relevant computer systems while conducting the statutory audit, they had not done so in the case of Satyam. In the Satyam case, CBI said, the auditors “relied upon forged bank confirmation letters supplied by the other accused while conducting the statutory audit“ and also failed to verify the company’s current account balances online. The “blatant deviations” adopted by the auditors auditing Satyam accounts, CBI added, showed their “underlying conspiracy” with the other key accused in the accounting fraud.

The role of auditor, the agency said, had written directly to the debtors and vendors while conducting the audit at Infotech Enterprises but “failed to adopt similar protocol” while auditing Satyam.

Conclusion

The role of an audit committee and the role of auditor in the current scenario become very crucial. Stakeholders expect loyalty and trust from auditor and this is the role of auditor and auditing committee while resolving financial facts and exposing at all fraud and fault in an organization. The audit committee member’s experience, relevant exposures, qualification background and in-depth knowledge need to be highlighted and confirmed because if directors are experts, experienced, qualified, financial wizards, then they can have vision and foresightedness to protect stakeholders. If a company has an active and strong audit committee then the independent role of auditors working will be supported. Further, the system of selection and appointment of the auditor on their quality and experience need to be explored. Over and above laws and regulations, being responsible professionals and representatives of shareholders and investing community, Auditing Committee, and the role of auditor should be to perform their role diligently and ethically to secure the interest of not only company and investors but all stakeholders. This is possible when independent directors will have their own weight and right to ask questions of management, which in turn will give strength to an auditor to be ethical.

[1] Sec-138 of Indian Companies Act 2013 read with Rule 13 Of Companies (Accounts) Rules, 2014.

[2] Sec-139,Companies Act,2013.

[3]Supra at pg.6.

[4] Sec-145,Companies Act,2013.

[5] Sec-146,Companies Act,2013.

[6] Sec-101,Companies Act,2013.

[7] Sec-177,Companies Act,2013.

[8] SEBI (LODR) Regulations, 2015.

[9] Read more at, http://www.business-standard.com/article/opinion/toshiba-a-case-of-internal-audit-failure-115080900760_1.html.

[10] Read more at, http://www.livemint.com/Home-Page/jS33BnPzXSMnwbx9cFtplN/Auditors-in-on-Satyam-fraud-CBI.html.