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2
Satyam case
Corporate Frauds Effectiveness of Audit
Function Role of ICAI
Reebok NSEL
COMPANIES ACT
RE-INCARNATION AFTER 57 YEARS
3
Books of accounts and other relevant
papers may be kept in electronic mode:
Accessible and usable in India
Information to be complete and unaltered
Shall be in legible form
Proper system of storage and use
Back up of records
Intimation of service provider to Registrar .
MAINTENANCE OF BOOKS OF ACCOUNTS IN E-FORM
(S. 128)
Continued..
4
CFO also liable for default.
- Imprisonment - Max. 1 year, or- Fine – Rs. 50,000 – Rs. 5,00,000
MAINTENANCE OF BOOKS OF ACCOUNTS (S.
128)
6
REOPENING AND RECAST OF ACCOUNTS
ON COURT’S OR TRIBUNAL’S ORDER (S .130 )
Grounds:- Accounts prepared fraudulent manner, or Affairs of the company mismanaged/
doubt on the reliability of financial statements.
On application to tribunal/ court by
CG or SEBI or IT Authorities or other authority or any other person concerned
Analysis:-
Opportunity to Company of being heard not given. Time limit for reopening or recast not specified.
Not
Notified
7
VOLUNTARY REVISION OF FINANCIAL STATEMENTS
OR BOARD’S REPORT (S. 131)
Directors may revise:
If Financial Statements not in accordance with S. 129 or Board Report with S. 134.
For any of the 3 previous F.Y.
After obtaining approval of Tribunal.
Revision can be made only once for a particular financial year.
Disclosure in the Board’s report
Not
Notified
8
CG to constitute NFRA, which shall :
a) Make recommendations to the C.G. - Formulation and laying down of accounting and auditing policies and standards.
b) Monitor & enforce compliance with accounting & auditing standards.
c) Oversee the quality of professional services of auditors.
NATIONAL FINANCIAL REPORTING AUTHORITY
(S.132)
Continued..
Not
Notified
9
Notwithstanding anything contained in any other law NFRA shall
NFRA either suo moto or reference made by CG, investigate - Professional or other misconduct of any member or firm of chartered accountants
NFRA has powers of civil court to conduct an investigation.
No other institute or body shall initiate or continue any proceeding in such matter of misconduct.
NFRA
Continued..
10
Where professional or other misconduct is proved:
Minimum Penalty and Maximum Penalty
On Individual - 1 lakh - 5 times of fees and
On Firm - 10 lakhs - 10 times of fees received.
Debarring member or firm min. 6 months max. 10 years
Aggrieved member or firm - Appeal before the Appellate Authority .
NFRA
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PRESCRIPTION OF ACCOUNTING AND AUDITING STANDARDS
Central Government to prescribe
Standards of Auditing
S. 143(10)
Accounting Standards
S. 133
ASSA
12
THE CHARTERED ACCOUNTANTS ACT, 1949
THE INSTITUTE OF CHARTERED ACCOUNTANTS
REGULATION OF THE PROFESSION OF CHARTERED ACCOUNTANTS
13
INSPECTION OF STATEMENT OF PROFIT AND LOSS OF THE PRIVATE COMPANIES
Earlier As Per Companies Act,
1956
As per S 220, only Members can inspect the
Statement of Profit and Loss
Companies Act , 2013
As per S. 137, exemption given
to private companies withdrawn
14
INTERNAL AUDIT NOW MANDATORY BY LAW
(S. 138)
ListedCompany
Unlisted Public
Company
Private Company
Particulars Unlisted Public Com.
Private Com.
Paid up Share Capital > 50 Crores
N.A.
Turnover > 200 Crores > 200 Crores
O/S loans or borrowings
> 100 Crores
> 100 Crores
O/S Deposit > 25 Crores N.A.
Requirement as per CARO, 2003
Paid up capital + reserves exceeds Rs 50L or average turnover of 3 consecutive F.Y exceeds 5 crore
15
Companies Act, 2013
F.Y. must end on 31st March.
F.Y. period = 12 months
Companies Act, 1956
No such provision.
F.Y. period = Max. 15 months
UNIFORM FINANCIAL YEAR
S. 2(41)
Incorporation on or after 1st Jan = F.Y. ends 31st March of following year (15 months).
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APPOINTMENT OF AUDITORS (S.139)
• Auditor to be appointed – For 5 years.•Ratification at every AGM (ordinary resolution)
AppointmentExpiryIf not ratified:
• Removal of auditor
• New auditor to be
appointed
• Special resolution & CG
approval is required
Continued…
17
INDEPENDENCE OF AUDITORS
Enhanced Independence
Auditor to be appointed for a tenure of 5 years
Stringent provisions for removal of auditor before 5 years : Special resolution CG approval
18
NEW LAYER INTRODUCED AUDIT COMMITTEE
Evaluation of auditors’ competence by Audit Committee
Recommendation to Board
Evaluation of
experience and
qualification
Pending proceeding
s : profession
al misconduc
t
19
ROTATION OF AUDITORS - NEW CONCEPTS. 139(2)Tenure of
Auditor
Individual Firm
Consecutive years
Consecutive years
Transition period:Company to comply with this provision within 3 years of commencement of this Act
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Applicability
Listed Companies Unlisted Companies (Rule 5)
Public
Companies
having
share
capital ≥ 10
Crore
Private
Companies
having
share
capital ≥ 20
crore
All Companies
having
borrowing ≥ 50
crore
Continued..
22
Resignation (with reasons)
ROC CompanyCAG
(In case of Govt. Companies)
RESIGNATION BY AUDITORS. 140(2)
Penalty : 50,000 to 5,00,000
Impact:o Back dated resignationo Reasons
23
Tribunal
Either Suo moto Application by CG Application by person concerned
Satisfied that auditor of a Company has acted in
fraudulent manner directly or indirectly
REMOVAL OF AUDITOR NEW THREAT(S. 140(5))
Action against the auditor Not eligible for appointment in any Company for 5 years
Liable u/s 447 (Punishment for fraud)
Not
Notifie
d
24
Auditor needs to report:
1. Adequacy and effectiveness of Internal Financial Control
2. If fraud is being or has been committed against the Company by its own officers or employees, report to CG.
3. Effect of pending litigation, foreseeable losses for long term contracts and derivatives
INCREASE IN AUDITORS’ RESPONSIBILITY
25
INTERNAL CONTROL
As per Clause 4 of CARO, 2003 :
Is there an adequate internal control procedure commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods. Whether there is a continuing failure to correct major weaknesses in internal control.
As per Section 143(3)(i) of Companies Act, 2013:
Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.
26
REPORTING ABOUT FRAUD As per Section 143(12)–
Companies Act, 2013:
If an auditor of the Company in the course of performance of its duties as auditors has reason to believe that an offence involving fraud is being or has been committed against the Company by officers or employees of the Company, he shall immediately report the matter to the Central Government
As per Clause 21 of CARO, 2003:
Whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.
27
FRAUD Section 447 – Companies
Act, 2013 defines
“Fraud” as “any act, omission,
concealment of any fact or abuse of
position committed by any person
or any other person with the
connivance in any manner, with the
intent to deceive, to gain undue
advantage from, or to injure the
interests of, the Company or its
shareholders or its creditors or any
other person, whether or not there
is any wrongful gain or wrongful
loss.”
SA 240 – Auditor’s
responsibility relating
to fraud defines
“Fraud” as “an intentional act
by one or more individuals
among management, those
charged with governance,
employees or third parties
involving the use of deception
to obtain an unjust or illegal
advantage.”
28
AUDITOR, NOT TO RENDER CERTAIN SERVICES DIRECTLY/
INDIRECTLY (S. 144)
Accounting and book keeping services
Internal audit Actuarial services Design and
implementation of any financial information system
Investment advisory services
Investment banking services
Rendering of outsourced financial services
Management services
Continued..
29
MANAGEMENT SERVICES
Definition provided by ICAI Management Services
does not includeTax related services
Not defined in Companies Act,
2013
31
Relative is director or key managerial person
Auditor > 20 Companies (including Private Companies)
Convicted by court -Fraud
Providing specified services – Section 144
Business relationship not on arm’s length price
Person or his partner or relative: Holds any
security or interest
Indebted > 5 lakhs
Guarantee/ Security (Third person) > 1 lakh
NEW DISQUALIFICATIONS
(S.141)
32
CLASS ACTION (S. 245)
Who can file?• Members• Depositors
Against whom?• Auditor
Reason?• Improper/
Misleading statement in audit report
• Fraudulent or unlawful act
33
Same as Financial Year 2012-13
As per General Circular No. 08/2014 dated 4th April provisions related to:
Financial Statement Board’s Report Auditor’s Report
Applicable from Financial Year 2014-15
AUDIT FOR FINANCIAL YEAR 2013-14