Companies Act: Draft Rules On Auditors & Accounts

As you know the new company law is likely to come into effect sectionwise. For that to happen the accompanying rules need to be finalized. This week the Ministry of Corporate Affairs has put out draft rules for 16 of 29 chapters. Payaswini Upadhyay reports on the changes facing company accounts & auditors. 

India has joined the league of 30 countries that mandate audit firm rotation but to do so with a retrospective effect is perhaps a first. The Companies Act 2013 requires listed companies and other notified classes to rotate their auditor after 5 years in case of an individual auditor and after 2 terms of 5 years each in case of an audit firm. For both, the cooling off period is 5 years. The Ministry has now proposed that the period for which an auditor has been working with a company before the notification be counted in calculation of this period. Also, a network firm cannot take over after the prescribed period is over. Dolphy D'Souza
Partner, EY
"If an auditor has completed 10 years of service, he rotates immediately subject to a transition period of 3 years. The Rules also clarify that you can’t have a network firm rotating in if a network firm is going out. I think these things are good and make rotation applicable in the right spirit. But there are other things that put a black spot. One is if you’re an auditor of a company and your brother or sister is invested in the company for an amount of more than Rs 1 lakh, you're disqualified. Now that’s a big problem because many a time I won’t even know they have invested in a company. And the other thing is the business relationship. An auditor is not supposed to carry out business relation with his clients. So typically if I am an auditor of a telecom company, my firm cannot use the services of that company; which to my mind is very restrictive and doesn't make sense particularly when the transaction is made on an arm’s length basis."
One provision in the draft rules that relates to accounts of companies has baffled the audit community. The Companies Act says that companies will have to report their accounts as per the standards prescribed by the government. The Rules propose that if under these prescribed Accounting Standards, a company is not required to report consolidated accounts because its immediate parent is outside India, it would still have to prepare consolidated statements. Dolphy D'Souza
Partner, EY
"Under IFRS, an intermediate holding company is exempted from preparing consolidated financial statements. Presumably, IFRS will become part of Indian Accounting Standards when they are notified in the Companies Law. Now the Rules are saying that though IFRS permits an exemption, we do not believe that exemption will be provided under the law because we need to control the companies and groups based out of India so that an intermediate holding company that is located in India will still have to prepare consolidated financial statements."
As per the Act, the auditors are expected to report material fraud in a company to the Central government. The Rules propose materiality to include frequent frauds or where the amount involved is not less than 5% of net profit or 2% of turnover for preceding financial year.  On all these aspects, the Ministry has given the industry time up to 8th October to feedback. In Mumbai, Payaswini Upadhyay