Role and Responsibilities of Auditors appointed under The Companies Act, 2013

Mr. Naveen Kumar Gupta, C.A., Senior Manager, S. Ramanand Aiyar & Co., in his address to the students, focused on Chapter X of the 2013 Act, that specifically deals with the roles, responsibilities and liabilities of auditors.

Section 144 of the 2013 Act specifies the services that an auditor must not render, such as accounts and book keeping, internal audit, investment banking, design and implementation of any financial system etc. This is considered a welcome move as the restrictions imposed would ensure the auditor’s independence and would improve the credibility of audit results. The scope and powers of the National Financial Reporting Authority (NFRA), constituted under Section 132 of the 2013 Act promotes adherence to professional conduct. Mr. Gupta also discussed the powers of the National Company Law Tribunal under Section 447 of the 2013 Act, such as the power to investigate fraud and order the change of auditors. The 2013 Act includes various penalty provisions (including imprisonment and fines) for wilful or other contravention with the 2013 Act by auditors (including contraventions such as misleading statements in the auditor’s report). The 2013 Act also imposes criminal liability on auditors in cases where a prospectus is found to be issued fraudulently. Additionally, Section 143 of the 2013 Act casts certain other responsibilities on auditor, such as, duty to report any fraud to the Central Government, responsibility to make observations and comments on the financial transactions or matters that have an adverse effect on the functioning of a company, responsibility to state any qualifications, reservations or adverse remarks relating to the maintenance of accounts and responsibility to note whether the company has adequate internal financial controls in place.

The new provisions have broadened the scope of audit with the reporting responsibility on the existence of fraud. However, according to Mr. Gupta, fraud detections are the ambit of investigators and require an approach that is inherently different from the approach required for audits. The 2013 Act does not state any materiality limits for fraud reporting. Further, the requirement of reporting on “financial transactions or matters” needs to be clearer, i.e. whether the 2013 Act requires the auditor to report on the propriety of business and management decisions or not.

The problem of multiple regulators created through the 2013 Act is of some interest as well. Currently auditors are subject to peer review by the Institute of Chartered Accountants of India (ICAI), the Financial Reporting Review Board (established by the ICAI) and the Quality Review Board (established under The Chartered Accountants Act, 1949). The constitution of the NFRA will result in additional review burdens and may deter firms from taking up auditing activities. Finally, the different and rather severe penalty provisions in the 2013 Act might also demotivate firms from taking up additional auditing assignments.

Note: This post is part of the report on a conference titled 'Reflections on The Companies Act, 2013' organised by the Michigan-Jindal Centre for Global Corporate and Financial Law and Policy on the 24th of October, 2013