Companies Act, 2013 –Accounts and Audit

1. Companies Act, 2013 –Accounts and Audit Anand Banka

2. What is Company? • Latin word • Com = with or together • Pains = bread • OPC?

3. Salient Features

4. Status as of now… • Companies Act, 2013 issued and finalised • Effective in phased manner • 98 sections already applicable from 12 September 2013 • No corresponding rules!!! • 2 phases of rules issued • 16 Chapters • 8 Chapters

5. Accounts

6. Financial Statement • Balance sheet • Profit and loss account/ income and expenditure account • Cash flow statement (except one person company, small company and dormant company) • Statement of change in equity, if applicable • Notes

7. Issues • Companies (AS) Rules, 2006 • Accounting Standards issued by ICAI

8. SMC Vs. Small Company

9. Financial Year • March 31 • In-line with Income Tax Act • If company formed on or after 1st Jan, the March 31 of next year • Existing companies to re-align within 2 years • Application to be made if different financial year to be followed

10. Issues • Holding/ subsidiary outside India having a different financial year • Approval from Tribunal

11. What’s new! • Compulsory consolidation of accounts • Holding Company • Subsidiaries • Joint Venture and • Associates

12. Consolidation • Mandated by clause 32 of listing agreement • AS 21 applicable only if a subsidiary • Argument 1: AS says only if u have subsidiary, else AS 21 not applicable. Hence, same will prevail • Argument 2: Prepare CFS even if no subsidiary • Applicable to PVT LTD COMPANY also (incl. OPC) • If OPC is allowed to have a subsidiary!!

13. Issues • Companies preparing CFS as per IFRS basis option in listing agreement • Definition of ‘Control’ • Control over more than one-half of total share capital • Includes Preference Shares? • Control of more than 50% total shares but holding of equity less than 50%... Then how to consolidate?

14. What’s new! • Re-opening or re-casting of book of accounts of the Company • By order of the court • Voluntary – by consent of the Tribunal

15. Re-opening on Court’s or Tribunal’s Orders • Relevant earlier accounts were prepared in fraudulent manner • The affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements

16. Voluntary Revision • If it appears to the directors of the Company that the financial statement of the Company or the reports of the Board do not comply with the provisions of section 129 or section 134, the company can make an application to the Tribunal • The order copy passed by the Tribunal shall be filed with the Registrar • Such revised financial statement or report shall not be prepared or filed more than once in a financial year.

17. Voluntary Revision • Max once in a year • 3 years limit for Voluntary revision • Reopening of previous to previous year’s may impact opening balances, mandating revision of previous year

18. Issues • Recently, the SEBI has issued a Circular, which empowers it to require revision of financial statements, if the audit report is qualified • In Amalgamation/ Merger scheme approved by the court back-dated, it might help • Revision in one Subsidiary affects CFS

19. Depreciation • Schedule II • Useful life of assets given • 3 class of companies • Ind-AS: Permitted to adopt different rates, if disclosed justification • Where authorities prescribe rates • Others: not longer than that given in Schedule II • Rs. 5000 criteria removed

20. Issues • No separate rate mentioned for intangible assets (rebuttable 10 yrs as per AS 26) • Useful life is reduced in Sch II as compared to SchXIV for many assets • Remaining useful life = 0 • Carrying amount adjust with retained earnings • Remaining useful life = 1 • Carrying amount taken to P/L

21. Issues • Identify significant components separately with different useful life • In case of revaluation, depreciation to be charged on revalued amount

22. Audit

23. Appointment of Auditor • Appointment of auditors for 5 years • No requirement for annual appointment/ re-appointment • Automatic re-appointment if no other auditor appointed at AGM • CG approval for removal of auditor before term • Limited Liability Partnerships may be appointed as auditors • Majority partners practicing in India should be qualified for appointment (old Act – All partners)

24. Rotation of Auditors • Compulsory rotation - for Listed Companies and other prescribed class of companies (Still under consideration) • 5 years (individual) • 10 years (firm) • Cooling period = 5 years • Auditor who has COMPLETED his term – not eligible for reappointment • Global companies having single auditor • Whether disqualified across globe!!

25. Rotation of Auditors • MCA voluntary code – 5 years • An analysis of 286 listed companies reveals that 25% have had the same auditor for more than ten years. • This includes 56% of the SENSEX companies and 40% of the NIFTY companies. • Infactonly 131 companies, comprising mostly of banks, are found to conform to the MCA guidelines.

26. Rotation – clarifications • “Existing companies have to comply with the requirements within 3 years from the date of commencement of the Act” • Retrospective • RBI and IRDA requirement overrides – 4 years

27. Disqualification • Not holding any security of company/subsidiary/holding/ associate/ fellow subsidiary. • Relative may hold securities of FV uptoRs. 1 LAKH • Not indebted to same category of companies for Rs. 1 LAKH • Not provided guarantee/ security to same category of companies – Rs. 1 LAKH • No direct/ indirect business relationship (i.e. any transaction for a commercial purpose) • A person who is a partner or who is in the employment of an officer or employee of the company • No Court Conviction in last 10 years

28. Relative? • Spouse • Father/ Mother (incl. step) • Grandfather/ Grandmother (Father’s side and mother’s side) • Son / Daughter (incl. step) • Son’s wife, Son’s son, Son’s daughter • Daughter’s husband • Brother/ Sister (incl. step)

29. Disqualification • Maximum number of companies in which a person may be appointed as auditor - 20 companies (incl. Pvt Companies?) • Rotation of auditing partner and his team (in case of an audit firm) can be imposed by the company • Resignation of auditors • statement in prescribed form to be filed with company as well as ROC • indicating reasons and other facts as may be relevant • failure to attract fine

30. Disqualification • Restrictions on Auditor to provide either directly or indirectly following services • accounting and book keeping, • Internal audit • design and implementation of any financial information system, • management services, • investment advisory services, • investment banking services, • rendering of outsourced financial services to the company, its holding company and subsidiary company. • What happens to global companies?

31. Disqualification • Restriction on Common Partner Firms • Part of same group / network • Same address • Common relative • Disqualified for providing other services to Subsidiary/ Holding/ Associate, etc. • Also during holiday/ cool – off period

32. Disqualification • Tribunal may direct company to change auditors • if satisfied that auditor acted in fraudulent manner or • abetted or colluded in any fraud by or in relation to company or its directors or officers • The Charge of disciplinary committee has been handed over to NFRA • Previously with ICAI

33. Miscellaneous • Auditing and cost auditing standards made mandatory • In case of fraud • Auditor/secretarial auditor/cost auditor to report to Central Government • Internal Audit mandatory for • Listed company • Public company with Share capital >= 10 Crs • Public company with loans/ deposits >= 25 Crs

34. Miscellaneous • Cost audit to be mandatory • Mandatory Secretarial audit

35. Structure of Auditing Standards SQC 1-99 Other assurance engagements e.g. Projections Related services e.g. Accounting Historical financial statements e.g. Stat Audit Review 2000-2699 4000-4699 Audit 100-1999 Subject Specific 3400-3699 General 3000-3399

36. Formulation of Auditing Standards Companies Act, 1956 Companies Act, 2013 SA’s Formulation – ICAI NACAS- Ratify NFRA – Formulation (in consultation with ICAI)

37. Audit Report • Whether the company has disclosed the effect, if any, of pending litigations on its financial position in its financial statement • Whether the company has made provision for foreseeable losses, if any, on long term contracts including derivative contracts • Whether there has been delay in depositing money into the Investor Education and Protection Fund by the company

38. Liability of Auditors • Contravention of certain provisions – fine (Rs. 25,000 to Rs. 5 Lakhs) • Knowingly or willful contravention with the intent to deceive company, shareholders, creditors, tax authorities – imprisonment and fine (1 Lakh-25 Lakhs) • Convicted for offence – liable to refund remuneration and pay damages for loss arising out of incorrect or misleading statements in audit report • In case of audit firm – if proved that audit partner/s have acted in fraudulent manner or abetted or colluded in any fraud, the liability, civil or criminal, would be of audit partner/s concerned as well as of the firm jointly and severally

39. Prosecution by NFRA • Suomoto or on a reference made to it by CG • Professional or other misconduct • Penalty • Individuals – 1 lakh to 5 x fees • Firm – 10 lakh to 10 x fees • Debar the member/ firm – 6 months to 10 years

40. Class Action • Members/ Depositors • Claim damages/ compensation from auditor/ audit firm • Improper/ misleading statement made in audit report or for any misconduct • Liability will be joint and several • Will benefit of LLP be available in such scenario??

41. ThanQ? Anand Banka Partner, Talati & Talati Chartered Accountants Email: anand.banka@talatiandtalati.com Mob: 98673 53743