Duty of confidentiality of CA under Code of Ethics

Ingredients of professional misconduct under clause (1) of Part I to the Second Schedule to the Chartered Accountants Act,1949

(i)A CA in practice discloses information acquired in the course of his professional engagement.  
(ii)Such disclosure is to any person other than his client so engaging him.  
(iii)Such disclosure is otherwise than as required by any law for the time being in force. 
(iv)Such disclosure is without the client’s consent. 

If all the above conditions (i) to (iv) are satisfied, disclosure of information by a CA in practice tantamount to professional misconduct. It does not matter whether disclosure is deliberate or unintentional. Also, it does not matter whether client’s interest is actually harmed or not.

One can see that duty of confidentiality is not an absolute on but a qualified one. If disclosure is "as required by any law for the time being in force", the CA cant be held guilty under Clause (1). So legal requirement to disclose(for example section 143(12) of the Companies Act,2013 is good defence in professional misconduct proceedings under clause (1)  especially when the legal requirement overrides the duty of confidentiality(eg section 143(13) of the Companies Act,2013)

Sub-sections (12) of section 143 casts a duty on auditor to report fraud  to the Central Govt if:

• in the course of the performance of his duties as auditor, 
• the auditor has reason to believe that an offence involving fraud is being or has been committed
• the fraud is against the company by officers or employees of the company 

Sub-sections (13) of section 143 provide as under:

• No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the Chartered Accountants Act,1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith. [Section 143(13)]

So if auditor reports fraud to Central Government in confirmity with Section 143(12) in good faith, he gets the benefit of protection of section 143(13) and cannot be held guilty of violating duty of confidentiality under clause (1) of Part I to the Second Schedule to the Chartered Accountants Act,1949

Auditor to attend Annual General Meeting

Under the 1956 Act, it was entirely up to the auditor whether to attend any general meeting of the company or not and whether or whom to depute as his representative at such meetings. Section 146 of the 2013 Act brings a sea change in this. Now, auditor shall, unless otherwise exempted by the company, attend any general meeting : (i) by himself or (ii) through his authorised representative who is qualified to be an auditor.

Section 146 deals with:

• Duty of company to forward notices of general meetings to auditors 
• Auditor’s duty to attend general meeting and right to be heard at general meeting

  

Notices of general meetings to be forwarded to the auditor of the company

The first limb of section 146 provides that all notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company. The forwarding of notices and other communications is required irrespective of whether the agenda for the meeting contains any item related to accounts or audit or auditors.

Auditor’s duty to attend general meeting and right to be heard at general meeting

The second limb of section 146 deals with auditor’s attendance at general meetings and auditor’s right to be heard at general meetings. The second limb of section 146 provides as under:

(A)he auditor shall, unless otherwise exempted by the company, attend any general meeting

(i)by himself, or

(ii)through his authorised representative who is qualified to be an auditor.

(B)The auditor shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

The following points are noteworthy:

• Section 146 makes auditor’s attendance at general meetings compulsory either by himself or authorized representative qualified to be an auditor. 
• Such attendance is compulsory whether or not any matter related to accounts or audit or auditors is scheduled in the agenda of the general meeting. 

'Quarantining’ audit from other serivces

Quarantining’ audit from other services - Services which auditor should not provide to the auditee-company-Section 144 of the Companies Act,2013

Section 144 stipulates what the Cadbury Report termed as ‘quarantining audit from other services’ but recommended against the same. Section 144 of the Act provides that an auditor appointed under this Act shall not directly or indirectly  provide any of the following “other services” (i.e. services other than statutory audit under the 2013 Act) to auditee-company or its holding company or subsidiary company :

• accounting and book-keeping services; 
• internal audit; 
• design and implementation of any financial information system; 
• actuarial services; 
• investment advisory services; 
• investment banking services; 
• rendering of outsourced financial services; 
• management services; and 
• any other kind of services as may be prescribed.

Services other than the above may be provided by the auditor to the company only if the services are approved by the Board of directors or the audit committee, as the case may be.

Transitional provisions

An auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this section shall comply with this section before the closure of the first financial year after the date of such commencement.

“Directly or indirectly”

The Explanation to section 144 defines the expression “directly or indirectly” as under :

(A) In case auditor being an individual

(B) In case of auditor being a firm (including LLP incorporated under the LLP Act)

The term “directly or indirectly” shall include rendering of services : either by himself or  through his relative  or  through any other person connected or associated with himself  through any other entity, whatsoever, in which such individual has significant influence or  through any other entity, whatsoever, in which such individual has control or  through any other entity whose name or trade mark or brand is used by such individual.

The term “directly or indirectly” shall include rendering of services: either by itself or  through any of its partners or  through its parent or  through its subsidiary or  through its associate entity or  through any other entity in which the firm has significant influence or  through any other entity in which the firm has control or  through any other entity whose name or trade mark or brand is used by the firm  through any other entity in which any partner of the firm has significant influence  through any other entity in which any partner of the firm has control  through any other entity whose name or trade mark or brand is used by any of its partners.

It may be noted that the expressions, ‘associate entity’, ‘associated person’, ‘connected person’ are used in the Explanation to section 144 but are not defined in the Act.

Compulsory Rotation of auditors

Concept of mandatory audit firm rotation

Mandatory audit firm rotation is defined in the Sarbanes-Oxley (SOX) Act as the imposition of a limit on the period of years during which an accounting firm may be the auditor.

Rationale of mandatory rotation of auditors - To enhance audit quality

The idea behind mandatory rotation of auditors is to enhance audit quality. Quality of an audit is a function of (1) the competence of the audit firm (i.e., the auditor’s ability to detect material omissions or mis-statements in the client’s financial statements), and (2) the level of actual threats to auditor independence (i.e., the probability the auditor will reveal material errors). The US Supreme Court has emphasized the importance of the connection between investor confidence and the appearance of independence of auditor “….Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. If investors were to view the auditor as an advocate for the corporate client, the value of the audit function itself might well be lost.” [United States v. Arthur Young & Co. 465 U.S. 805, 819 n.15 (1984)].

Companies to which provisions for compulsory rotation of auditor’s apply [Section 139(2)]

Provisions for compulsory rotation of auditors in section 139(2) shall apply to :

• listed companies
• a company belonging to such class or classes of companies as may be prescribed

Rule 5 of the Companies (Audit and Auditors) Rules, 2014 provides that for the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes of companies excluding one person companies and small companies:—

(a)all unlisted public companies having paid up share capital  of rupees ten crore or more;

(b)all private limited companies having paid up share capital  of rupees twenty crore or more;

(c)all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more

The provisions of section 139(5)/139(7) dealing with Government Companies and companies owned or controlled directly or indirectly by Government override only section 139(1) but not section 139(2). Therefore, provisions of section 139(2) shall also apply to Government companies and companies owned or controlled directly or indirectly by Government if such companies are listed companies or fall in prescribed class or classes of companies i.e. covered by Rule 5 above.

Provisions as to compulsory rotation of auditors

The following provisions may be noted:

No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint—

(a) an individual as auditor for more than one term of 5 consecutive years; and

(b) an audit firm (including LLP) as auditor for more than two terms of 5 consecutive years.

Cooling off period

The cooling off period is the minimum gap between expiry of maximum tenure and appointing the auditor again which is stipulated by law. The provisions in this regard are as under:

• An individual auditor who has completed his term as per (a) above shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his term; 
• An audit firm (including LLP) which has completed its term under (b) above, shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term.

Provisions cannot be circumvented by appointing partner of audit firm whose tenure is over - On the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of 5 years. The words ‘same company’ in section 139(2) of the 2013 Act are significant. It appears that there is no bar on appointing the rotated auditor (auditor/audit firm who has completed term) as auditor of holding company/subsidiary/co-subsidiary/associate of the company in question during the cooling-off period.

Every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, shall comply with the requirements of this sub-section within three yearsfrom the date of commencement of this Act.

The above provisions shall not prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company. [Section 139(2)]

The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors. [Section 139(4)]

Manner in which the companies to rotate their auditors on the expiry of term

Rule 6 of the Companies (Audit and Auditors) Rules, 2014 provides as under :

• The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent. 
• Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in annual general meeting. 
• For the purpose of the rotation of auditors—(i) in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as  auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be;(ii)the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms. 
• The term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control. 
• For the purpose of rotation of auditors,—(a) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation;(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.

Illustration explaining rotation in case of individual auditor

Number of consecutive years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]	Maximum number of  consecutive years for which the firm may be appointed in the same company (including transitional period)	Aggregate period which the firm would complete in the same company in view of columns I and II
I	II	III
5 years	3 years	8 years or more
4 years	3 years	7 years
3 years	3 years	6 years
2 years	3 years	5 years
1 year	4 years	5 years

Note: 1. Individual auditor shall include other individuals or firms whose name or trade mark or brand is used by such individual, if any.

2. Consecutive years shall mean all the preceding financial years for which the individual auditor has been the auditor until there has been a break by five years or more.

Illustration explaining rotation in case of audit firm

Illustration 2:—

Number of consecutive years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)]	Maximum number of  consecutive years for which the firm may be appointed in the same company (including transitional period)	Aggregate period which the firm would complete in the same company in view of columns I and II
I	II	III
10 years (or more than 10 years)	3 years	13 years or more
9 years	3 years	12 years
8 years	3 years	11 years
7 years	3 years	10 years
6 years	4 years	10 years
5 years	5 years	10 years
4 years	6 years	10 years
3 years	7 years	10 years
2 years	8 years	10 years
1 year	9 years	10 years

Note : 1. Audit Firm shall include other firms whose name or trade mark or brand is used by the firm or any of its partners.

2. Consecutive years shall mean all the preceding financial years for which the firm has been the auditor until there has been a break by five years or more.

Rotation of auditors to be factored in while appointing joint auditors

Rule 6(4) of the Companies (Audit and Auditors) Rules, 2014 provides that  where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year.

Enabling provision for rotation of audit partners

Rotation of auditor/audit firm is not to be confused with rotation of audit partner/team. The former is mandatory. The latter is optional. Moreover, rotation of auditor applies to auditor irrespective of whether auditor is individual/audit firm. Rotation of audit partner applies only when auditor is audit firm.

Subject to the provisions of this Act, members of a company may resolve to provide that in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members [section 139(3)(a)]

Duty of Auditor to report fraud to Central Govt

Backdrop
Sub-sections (12) to (14) of section 143 of the Companies Act,2013 are new provisions . There were no provisions along these lines in the Companies Act,1956

Duty of auditor/cost auditor/secretarial auditor to report fraud
Sub-sections (12) of section 143 casts a duty on auditor to report fraud  to the Central Govt if:

• in the course of the performance of his duties as auditor, 
• the auditor has reason to believe that an offence involving fraud is being or has been committed
• the fraud is against the company by officers or employees of the company 

Sub-sections (13) and (14) of section 143 provide as under:

• No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the Chartered Accountants Act,1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith. [Section 143(13)]
• The provisions of section 143 are applicable mutatis mutandis to cost auditor (section 148) and secretarial auditor (section 204).[Section 143(14)]

Only frauds against company by officers/employees to be reported .Frauds committed by the company (on outsiders/creditors/investors etc.) are outside the scope of reporting requirements under section 143(12). If auditor reports frauds committed by the company, he cannot avail the immunity under section 143(13) and would be liable for professional misconduct for breach of confidentiality under clause (1) of Part I of the Second Schedule to the CA Act, 1949.


Manner of reporting frauds to the Central Government
Rule 13 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of reporting to Central Government under section 143(12).

Rule 13 provides that  in case the auditor has sufficient 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 report the matter to the Central Government immediately but not later than sixty days of his knowledge and after following the procedure as under :

Draft Report to BOD/Audit Committee

• Auditor shall forward his report to the Board or the Audit Committee,as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;

Report to Central Govt. after considering reply/observation of BOD/ Audit Committee

• On receipt of such reply or observations the auditor shall forward hisreport and the reply or observations of the Board or the AuditCommittee alongwith his comments (on such reply or observationsof the Board or the Audit Committee) to the Central Governmentwithin fifteen days of receipt of such reply or observations;

If no reply within 45 days

• In case the auditor fails to get any reply or observations from theBoard or the Audit Committee within the stipulated period of fortyfivedays, he shall forward his report to the Central Government alongwith a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time.
• The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by registered post with acknowledgement due or by speed post followed by an e-mail in confirmation of the same.
• The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
• The report shall be in the form of a statement as specified in Form ADT-4.

The provision of  Rule 13 shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively.

Punishment for contravention of section 143(12)

• If any auditor, Cost Accountant or Company Secretary in practice do not report fraud committed or being committed as above, he shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000. [Section 143(15)]
• In addition to punishment under section 143(15), it would appear that the auditor of the company would also be liable to punishment under subsection (2) of section 147  since the said provision refers to contravention of ‘any provision of ....... section 143’.

Resignation of Auditors

Sub-sections (2) and (3) of section 140 of the Companies Act,2013 deal with resignation of statutory auditor . These are new provisions. There were no provisions like these in the Companies Act,1956

Obligation cast on auditor who resigns-Section 140(2)
Section 140(2)  requires that

• The auditor who has resigned from the company shall file a statement with the company as well as with the ROC 
• Statement shall be  in the prescribed form [Form No. ADT-3 - Rule 8 of the Companies (Audit and Auditors) Rules, 2014]indicating reasons and other facts as may be relevant with regard to his resignation 
• Statement shall be filed within 30 days of resignation
•  In case of companies referred to in section 139(5) ofthe 2013 Act (i.e. Government companies and companies owned orcontrolled directly or indirectly by the Central Government or by anyState Government(s) or partly by the Central Government and partlyby one or more State Governments), the auditor shall also file such statement with the CAG

Punishment-Section 140(3)
Section 140(3) provides that if the auditor does not comply with section 140(2) as above, he shall be punishable with a fine of not less  than Rs 50,000 but which may extend to Rs. 5,00,000.

Consolidated Financial Statements

Backdrop

The Companies Act,1956  was silent on consolidated financial statements. Section 129 of the Companies Act,2013 has made  consolidated financial statements mandatory  in cases where company has one or more subsidiaries or associates or joint ventures.

• Section 212 of the 1956 Act required  a holding company to attach to its balance sheet a statement showing holding company’s interest in subsidiary [See section 212(5) of the 1956 Act].  The 2013 Act omits this requirement.
• Instead the 2013 Act requires the holding company to attach with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary/ies, associate companies and joint ventures in Form No. AOC-1 of Companies (Accounts) Rules, 2014.
• The provisions relating to what should be the financial year of subsidiary [See section 212 of the 1956 Act] have also been omitted from the 2013 Act as the concept of uniform financial year of 1st April to 31st March has been made mandatory for companies under the 2013 Act.

Separate Financial Statements [Section 129(2)]

Section 129(2) of the Companies Act,2013 requires that "At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year".  Section 129(2) casts an obligation on every company. . In the context of a holding company, the financial statements referred to in sub-section (2) are commonly referred to as 'separate financial statements'


Consolidated Financial Statements

• Section 129(3) provides that where a company has one or more subsidiaries, it shall, prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own.
• The consolidated financial statements shall be in addition to its separate financial statements[ie .its financial statement under sub-section (2)]
• The  consolidated financial statements which shall also be laid before the annual general meeting of the company along with the laying of its separate financial statements[ie .its financial statement under sub-section (2)]
• The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed (ie in Form AOC-1).
• The Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.[See Rule 6 below]
• For the purposes of this sub-section [ie section 129(3)], the word “subsidiary” shall include associate company and joint venture.

Section 129(4) provides that the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).



Rules Prescribed by Central Govt for consolidation[Rule6]
Rule 6 of the Companies (Accounts) Rules, 2014 provides that

• The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards.
• In case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

 

Practical problems of Advanced Auditing and Professional Ethics-I

Comment on the following in the light of the provisions of Companies Act,2013
(1)PQR Ltd ,a  listed company, appoints R as its internal auditor. R is a member of Institute of Chartered Accountants of India but does not hold a certificate of practice
(2)ABC Ltd, a  listed company, proposes to appoint X& Co,a CA firm,as its internal auditor. X &Co are statutory auditors of  A Ltd. which is a subsidiary of ABC Ltd
(3)MNO Ltd,,a  listed company, appoints M as its internal auditor. M is a member of Institute of Cost Accountants of India but does not hold a certificate of practice
(4)ZLtd,a  listed company, contends that it is not required to appoint an internal auditor since its figures for preceding financial year were as under:
paid-up capital-Rs48 crores
turnover-Rs150 crores
outstanding loans or borrowings- Rs 90 crores
outstanding deposits-Nil
(5)PQR Pvt Ltd, had turnover of Rs. 180 crores and paid-up capital of Rs.60 crores  during the preceding financial year . Its outstanding loans or borrowings were Nil during the preceding financial year.  The company hasnt appointed any internal auditor

Mandatory internal audit for certain companies

Backdrop

• The Companies Act,1956 did not  cast a legal obligation on any company to have an internal audit.
• The MAOCARO,1988 and CARO,2003 orders issued by the Central Government under section 227(4A) of the said Act merely required statutory auditors of specified companies to comment in audit report whether company had an internal audit commensurate with the size and nature of its business. 
• The obligation was on the statutory auditor to report. If any specified company did not have an internal audit, it was not a violation of any statutory provision.
• The Companies Act,2013 brings a sea change in the position. Section 138 of the Companies Act,2013 titled 'Internal Audit' provides that such class or description of companies as may be prescribed  shall be required to appoint an internal auditor to conduct internal audit of the functions and activities of the company.

Companies or classes of companies which are required to appoint internal auditor

Rule 13(1) of the Companies (Accounts)Rules,2014 provides that  the following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:—
(a) every listed company;

(b) every unlisted public company having—

• (i) paid up share capital of fifty crore rupees or more during the preceding financial year; or
• (ii) turnover of two hundred crore rupees or more during the preceding financial year; or
• (iii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
• (iv) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having—

• (i) turnover of two hundred crore rupees or more during the preceding financial year; or
• (ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year:

An existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section.

Qualifications of internal auditor

 Internal auditor shall be

• a Chartered Accountant or 
• a Cost Accountant or 
• such other professional as may be decided by the Board.

 Explanation  to Rule 13(1) clarifies that —

• the internal auditor may or may not be an employee of the company;
• the term “Chartered Accountant” shall mean a Chartered Accountant whether engaged in practice or not.

Appointment of internal auditor shall be by Board resolution at a Board meeting
In view of section 179(3) of the Companies Act,2013 and Rule 8(4) of the Companies (Meetings of Board
and its Powers) Rules, 2014, the power of appointment of internal auditor shall be exercised by the Board of Directors by means of a resolution passed at a Board meeting . Appointment of internal auditor cannot be
made by means of a circular resolution. However, there is no bar in making the appointment at a Board meeting held through video conferencing or audio visual means

Scope, functioning, periodicity and methodology of internal audit
Rule 13(2) of the Companies (Accounts) Rules, 2014 provide that the Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate :
(i) the scope,
(ii) functioning,
(iii) periodicity, and
(iv) methodology
for conducting the internal audit.

Statutory auditor cant be internal auditor
A statutory auditor of a company cannot also be its internal auditor. Nor can he be the internal auditor of the company’s holding company or subsidiary company. [Section 144 of the 2013 Act].

Books of account in electronic mode

The second proviso to section 128(1) of the Companies Act,2013 provides that "the company may keep  books of account or other relevant papers in electronic mode in such manner as may be prescribed. Thus, under the Act, it is  not  compulsory to maintain books of account or other relevant papers in electronic mode. However, if a company opts to keep books of account or other papers in electronic mode, the company must comply with the rules prescribed in this regard ie Rule 3 of the Companies(Accounts) Rules,2013

Electronic Mode
"Electronic Mode"

• includes 'electronic form' as defined in section 2(1)(r) of the Information Technology Act,2000
• and also includes 'electronic record' as defined in section 2(1)(f) of the Information Technology Act,2000

Manner in which books of account are to be kept in electronic mode
Sub-rules(1) to (5) of  Rule 3 provide as under:

• The books of account and other relevant books and papers maintained in electronic mode shall:
• remain accessible in India so as to be usable for subsequent reference.
• be retained completely:
• in the format in which they were originally generated, sent or received, or 
• in a format which shall present accurately the information generated, sent or received 

• The information contained in the electronic records shall 
• remain complete and unaltered.
•  be capable of being displayed in a legible form 

• The information received from branch offices shall:
• not be altered and 
• be kept in a manner where it shall depict what was originally received from the branches.  

• There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate 
• Such records shall not be disposed of or rendered unusable, unless permitted by law. 
• The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.

Sub-rule (6) of Rule (3) provides that the company shall intimate to the Registrar on an annual basis at the time of filing of financial statement—

  (a)  the name of the service provider;

  (b)  the internet protocol address of service provider;

  (c)  the location of the service provider (wherever applicable);

  (d)  where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.

 

New concepts introduced by Companies Act,2013-Accounts & Audit

New provisions/concepts introduced by the Companies Act,2013 on Accounts (Chapter IX-Sections 128 to 138) and Audit and Auditors(Chapter X-Sections 139 to 148)
Are you prepared on these new concepts/provisions introduced by the Companies Act,2013?
Accounts of Companies(Chapter IX)
(i)Electronic books of account[2nd proviso to section 128(1)]
http://advancedauditingandprofessionalethics.blogspot.in/2014/11/books-of-accopunt-in-electronic-mode.html

(ii)Consolidated Financial statements[Section 129(3) to (5)] made compulsory for holding company
 http://advancedauditingandprofessionalethics.blogspot.in/2014/11/consolidated-financial-statements-quick.html

(iii)Corporate Social Responsibility[Section 135]

(iv)Internal audit made compulsory for certain classes of companies[Section 138]
 http://advancedauditingandprofessionalethics.blogspot.in/2014/11/consolidated-financial-statements-quick.html
http://advancedauditingandprofessionalethics.blogspot.in/2014/11/practical-problems-of-advanced-auditing.html

Audit and Auditors(Chapter X)
(v)Compulsory rotation of auditors for listed companies and other prescribed classes of companies[Section 139(2)]

(vi)Auditor to file statement in prescribed form with ROC in case he resigns[Section 140(2)/(3)]
 http://advancedauditingandprofessionalethics.blogspot.in/2014/11/resignation-of-auditors-quick-reviser.html

(vii)Power of National Company Law Tribunal to remove auditor in case he colludes with management[Section 140(5)]

(viii)Mandatory compliance by auditor with auditing standards[Sections 143(9)/(10)]

(ix)Duty of auditor to report fraud to Central Government[Section 143(12)]

(x)Auditor not to render certain services [Section 144]
(xi)Auditors to attend general meetings[Section 146]

Companies Act,2013 -Important definitions-Section 2

Sections 2(7),143(9)&143(10): Auditing Standards made mandatory

• Section 143(9): Every auditor shall comply with auditing standards 
• Section 2(7) read with section 143(7) define “auditing standards”

Section 2(12): “book and paper” or “book or paper”

• Recognises books/papers maintained in electronic form

Section 2(13)& Section 128: “books of account”

• Requires books of account to be maintained also for sales and purchases of services by company\
• Recognises that books of account maintained in electronic form

Section 2(14):Branch office

• In relation to a company, it means any establishment described as such by the company.
• Company totally at liberty to designate or undesignated any of its establishments as Branch Office
• Company  doesn’t have to comply with any Rules or apply to Central Govt for exemption from Branch audit. It can get exemption from audit of any of its branches by exercising choice on designating or undesignating its offices as branch offices

Section 2(18):Chief Executive Officer

• Means  an officer designated as CEO by the company

Section 2(19):Chief Financial Officer

uMeans  a person appointed as CFO by the company

Section 2(40):Financial Statement

• The term covers “statement of changes in equity” if applicable.  [Section 2(41)(iv)]
• So SOCIE  will be compulsory for companies to whom Ind ASs will be made applicable
• The term covers cash flow statement also.[Section 2(41)(iii) & proviso to section 2(41)]
• Cash flow statement made mandatory for all companies Except 
• (i)One person companies[Section 2(62)]
• (ii)Small companies[Section 2(85)]
• (iii)Dormant companies[Section 455]

Section 2(41): Financial Year

• To make financial statements of all companies comparable, companies have to adopt uniform financial year 1^St April to 31^st March
• The above rule subject to certain exceptions

Section 2(51): Key Managerial Personnel

The term covers

• CEO,
• MD
• Manager
• Company secretary
• Whole-time director
• CFO
• Such other officer as may be prescribed

Section 2(60): Officer in default

Section 2(60)(vii) brings within the ambit of OID the following third parties involved in issue /transfer of securities

• Share transfer agents 
• Registrars
• Merchant bankers to the issue or transfer

 Section 2(62):One person company

• It means a company with only one person as a member 
• Not to be confused with ‘One man company’ of Salomon v Salomon case
• OPC is also a ‘private company’ and must comply with conditions applicable to private company in section 2(68) except the condition to limiting maximum no. of members to 200.(This “ maximum 200 members” limit is meaningless to OPC as it has only one sole member)

Section 2(68):Private Company

• Private Company can have maximum 200 members as against 50 earlier  

Students advised to go through the supplementary study material &RTPs brought out by ICAI